Investors Can Find Comfort In Watts' (TSE:2735) Earnings Quality

Soft earnings didn't appear to concern Watts Co., Ltd.'s (TSE:2735) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Watts

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Watts' profit was reduced by JP¥307m, 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. 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. If Watts doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

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

Our Take On Watts' Profit Performance

Unusual items (expenses) detracted from Watts' earnings over the last year, but we might see an improvement next year. Because of this, we think Watts' earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over 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 Watts at this point in time. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of Watts.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.