Nippon Shikizai's (TSE:4920) Strong Earnings Are Of Good Quality

Even though Nippon Shikizai, Inc.'s (TSE:4920) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

View our latest analysis for Nippon Shikizai

How Do Unusual Items Influence Profit?

To properly understand Nippon Shikizai's profit results, we need to consider the JP¥122m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Nippon Shikizai doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nippon Shikizai.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Nippon Shikizai received a tax benefit of JP¥111m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On Nippon Shikizai's Profit Performance

In its last report Nippon Shikizai received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Given the contrasting considerations, we don't have a strong view as to whether Nippon Shikizai's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into Nippon Shikizai, you'd also look into what risks it is currently facing. For instance, we've identified 4 warning signs for Nippon Shikizai (2 can't be ignored) you should be familiar with.

Our examination of Nippon Shikizai has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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 that insiders are buying 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.