MERF's (TSE:3168) Performance Is Even Better Than Its Earnings Suggest

The subdued stock price reaction suggests that MERF Inc.'s (TSE:3168) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

How Do Unusual Items Influence Profit?

For anyone who wants to understand MERF's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by JP¥97m due 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect MERF to produce a higher profit next year, all else being equal.

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

Our Take On MERF's Profit Performance

Because unusual items detracted from MERF's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that MERF's statutory profit actually understates its earnings potential! And the EPS is up 57% over the last twelve months. 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. If you'd like to know more about MERF as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 3 warning signs (2 can't be ignored!) that you ought to be aware of before buying any shares in MERF.

This note has only looked at a single factor that sheds light on the nature of MERF's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.