Earnings Troubles May Signal Larger Issues for Shinagawa Refractories (TSE:5351) Shareholders

The market wasn't impressed with the soft earnings from Shinagawa Refractories Co., Ltd. (TSE:5351) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

See our latest analysis for Shinagawa Refractories

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Shinagawa Refractories' profit received a boost of JP¥2.0b in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. If Shinagawa Refractories 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 Shinagawa Refractories.

Our Take On Shinagawa Refractories' Profit Performance

Arguably, Shinagawa Refractories' statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Shinagawa Refractories' true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. While earnings are important, another area to consider is the balance sheet. If you're interested we have a graphic representation of Shinagawa Refractories' balance sheet.

This note has only looked at a single factor that sheds light on the nature of Shinagawa Refractories' profit. But there are plenty of other ways to inform your opinion of a company. 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.