The Strong Earnings Posted By Nippon Chemiphar (TSE:4539) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that Nippon Chemiphar Co., Ltd.'s (TSE:4539) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

We've discovered 5 warning signs about Nippon Chemiphar. View them for free.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Nippon Chemiphar's profit was reduced by JP¥189m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 Nippon Chemiphar 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 Nippon Chemiphar.

Our Take On Nippon Chemiphar's Profit Performance

Because unusual items detracted from Nippon Chemiphar'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 Nippon Chemiphar's earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Nippon Chemiphar is showing 5 warning signs in our investment analysis and 3 of those are significant...

Today we've zoomed in on a single data point to better understand the nature of Nippon Chemiphar's 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.