Shareholders Can Be Confident That Tomoegawa's (TSE:3878) Earnings Are High Quality

Investors were underwhelmed by the solid earnings posted by Tomoegawa Corporation (TSE:3878) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

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How Do Unusual Items Influence Profit?

For anyone who wants to understand Tomoegawa's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by JP¥170m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Tomoegawa 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 Tomoegawa.

Our Take On Tomoegawa's Profit Performance

Because unusual items detracted from Tomoegawa's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Tomoegawa's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 27% in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've found that Tomoegawa has 3 warning signs (1 makes us a bit uncomfortable!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Tomoegawa'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. 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.