EDION's (TSE:2730) Earnings May Just Be The Starting Point

The subdued stock price reaction suggests that EDION Corporation's (TSE:2730) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

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The Impact Of Unusual Items On Profit

For anyone who wants to understand EDION's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by JP¥3.3b due to unusual items. 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect EDION to produce a higher profit next year, all else being equal.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On EDION's Profit Performance

Unusual items (expenses) detracted from EDION's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that EDION's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 12% in the 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. So while earnings quality is important, it's equally important to consider the risks facing EDION at this point in time. For example - EDION has 1 warning sign we think you should be aware of.

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