We Like The Quality Of Nankai Chemical CompanyLimited's (TSE:4040) Earnings

Shareholders appeared to be happy with Nankai Chemical Company,Limited's (TSE:4040) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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How Do Unusual Items Influence Profit?

To properly understand Nankai Chemical CompanyLimited's profit results, we need to consider the JP¥169m expense attributed 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Nankai Chemical CompanyLimited 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 Nankai Chemical CompanyLimited.

Our Take On Nankai Chemical CompanyLimited's Profit Performance

Unusual items (expenses) detracted from Nankai Chemical CompanyLimited's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Nankai Chemical CompanyLimited's statutory profit actually understates its earnings potential! And the EPS is up 32% annually, over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Nankai Chemical CompanyLimited at this point in time. Case in point: We've spotted 2 warning signs for Nankai Chemical CompanyLimited you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Nankai Chemical CompanyLimited's profit. But there are plenty of other ways to inform your opinion of a company. 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 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.