AUTOWAVE (TYO:2666) Is Growing Earnings But Are They A Good Guide?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether AUTOWAVE's (TYO:2666) statutory profits are a good guide to its underlying earnings.

We like the fact that AUTOWAVE made a profit of JP¥202.0m on its revenue of JP¥7.09b, in the last year. Even though its revenue is down over the last three years, its profit has actually increased, as you can see, below.

View our latest analysis for AUTOWAVE

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article, will discuss how unusual items and a tax benefit have impacted AUTOWAVE's most recent bottom line results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AUTOWAVE.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that AUTOWAVE's profit received a boost of JP¥39m 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. AUTOWAVE had a rather significant contribution from unusual items relative to its profit to September 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that AUTOWAVE received a tax benefit of JP¥14m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On AUTOWAVE's Profit Performance

In the last year AUTOWAVE received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. For the reasons mentioned above, we think that a perfunctory glance at AUTOWAVE's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into AUTOWAVE, you'd also look into what risks it is currently facing. When we did our research, we found 3 warning signs for AUTOWAVE (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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