Some May Be Optimistic About Sugai Chemical Industry's (TSE:4120) Earnings

The market for Sugai Chemical Industry Co., Ltd.'s (TSE:4120) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Sugai Chemical Industry

The Impact Of Unusual Items On Profit

To properly understand Sugai Chemical Industry's profit results, we need to consider the JP¥251m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. In the twelve months to September 2024, Sugai Chemical Industry had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker 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 Sugai Chemical Industry.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Sugai Chemical Industry received a tax benefit which contributed JP¥89m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Sugai Chemical Industry's Profit Performance

In its last report Sugai Chemical Industry 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. Based on these factors, we think that Sugai Chemical Industry's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Sugai Chemical Industry, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 3 warning signs with Sugai Chemical Industry, and understanding them should be part of your investment process.

Our examination of Sugai Chemical Industry 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 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.