TOWA Hi SYSTEMLTD's (TSE:4172) Shareholders Have More To Worry About Than Only Soft Earnings

A lackluster earnings announcement from TOWA Hi SYSTEM CO.,LTD. (TSE:4172) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for TOWA Hi SYSTEMLTD

The Impact Of Unusual Items On Profit

To properly understand TOWA Hi SYSTEMLTD's profit results, we need to consider the JP¥147m gain attributed to unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that TOWA Hi SYSTEMLTD's positive unusual items were quite significant relative to its profit in the year to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TOWA Hi SYSTEMLTD.

Our Take On TOWA Hi SYSTEMLTD's Profit Performance

As we discussed above, we think the significant positive unusual item makes TOWA Hi SYSTEMLTD's earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that TOWA Hi SYSTEMLTD's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 3 warning signs for TOWA Hi SYSTEMLTD you should be mindful of and 1 of them doesn't sit too well with us.

Today we've zoomed in on a single data point to better understand the nature of TOWA Hi SYSTEMLTD's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.