We Think You Can Look Beyond Nichia Steel Works' (TSE:5658) Lackluster Earnings

Shareholders appeared unconcerned with Nichia Steel Works, Ltd.'s (TSE:5658) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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How Do Unusual Items Influence Profit?

Importantly, our data indicates that Nichia Steel Works' profit was reduced by JP¥445m, 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. Assuming those unusual expenses don't come up again, we'd therefore expect Nichia Steel Works 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 Nichia Steel Works.

Our Take On Nichia Steel Works' Profit Performance

Unusual items (expenses) detracted from Nichia Steel Works' earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Nichia Steel Works' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Nichia Steel Works at this point in time. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Nichia Steel Works.

Today we've zoomed in on a single data point to better understand the nature of Nichia Steel Works' 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.