We Think That There Are Some Issues For Aeon Kyushu (TSE:2653) Beyond Its Promising Earnings

Aeon Kyushu Co., Ltd.'s (TSE:2653) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

View our latest analysis for Aeon Kyushu

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Generally speaking, operating revenue is a more reliable guide to the sustainable revenue generating capacity of the business. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, Aeon Kyushu had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from -JP¥484.7b last year to JP¥25.6b this year. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Aeon Kyushu.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that Aeon Kyushu'sprofit suffered from unusual items, which reduced profit by JP¥5.0b in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Aeon Kyushu took a rather significant hit from unusual items in the year to February 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

An Unusual Tax Situation

Moving on from the unusual items and the non-operating revenue, we note that Aeon Kyushu profited from a tax benefit which contributedJP¥1.2b to profit. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. 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.

Our Take On Aeon Kyushu's Profit Performance

In the last year Aeon Kyushu's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And on top of that, its profit was boosted by a tax benefit! But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think it's very unlikely that Aeon Kyushu's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing Aeon Kyushu at this point in time. At Simply Wall St, we found 3 warning signs for Aeon Kyushu and we think they deserve your attention.

Our examination of Aeon Kyushu has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying 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.