Shareholders Will Be Pleased With The Quality of New Japan Chemical's (TSE:4406) Earnings

Investors were underwhelmed by the solid earnings posted by New Japan Chemical Co., Ltd. (TSE:4406) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

View our latest analysis for New Japan Chemical

The Impact Of Unusual Items On Profit

Importantly, our data indicates that New Japan Chemical's profit was reduced by JP¥198m, due to unusual items, over the last year. 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. If New Japan Chemical 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 New Japan Chemical.

Our Take On New Japan Chemical's Profit Performance

Unusual items (expenses) detracted from New Japan Chemical's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that New Japan Chemical's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To help with this, we've discovered 2 warning signs (1 is significant!) that you ought to be aware of before buying any shares in New Japan Chemical.

Today we've zoomed in on a single data point to better understand the nature of New Japan Chemical's profit. 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. 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.

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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.