Showa Chemical Industry's (TSE:4990) Shareholders Have More To Worry About Than Only Soft Earnings

The market wasn't impressed with the soft earnings from Showa Chemical Industry Co., Ltd. (TSE:4990) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

See our latest analysis for Showa Chemical Industry

The Impact Of Unusual Items On Profit

To properly understand Showa Chemical Industry's profit results, we need to consider the JP¥65m gain attributed to unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If Showa Chemical Industry doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

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

Our Take On Showa Chemical Industry's Profit Performance

We'd posit that Showa Chemical Industry's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that Showa Chemical Industry's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Showa Chemical Industry, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Showa Chemical Industry, and understanding this should be part of your investment process.

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