Tohoku Steel's (TSE:5484) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern Tohoku Steel Co., Ltd.'s (TSE:5484) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

Check out our latest analysis for Tohoku Steel

How Do Unusual Items Influence Profit?

To properly understand Tohoku Steel's profit results, we need to consider the JP¥413m 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. Assuming those unusual expenses don't come up again, we'd therefore expect Tohoku Steel 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 Tohoku Steel.

Our Take On Tohoku Steel's Profit Performance

Because unusual items detracted from Tohoku Steel's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Tohoku Steel's earnings potential is at least as good as it seems, and maybe even better! And we are pleased to note that EPS is at least heading in the right direction 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'd like to know more about Tohoku Steel as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Tohoku Steel (1 can't be ignored!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Tohoku Steel'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.