SAKAI HoldingsLTD's (TSE:9446) Weak Earnings May Only Reveal A Part Of The Whole Picture

The market rallied behind SAKAI Holdings CO.,LTD's (TSE:9446) stock, leading do a rise in the share price after its recent weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

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The Impact Of Unusual Items On Profit

For anyone who wants to understand SAKAI HoldingsLTD's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from JP¥103m worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

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

Our Take On SAKAI HoldingsLTD's Profit Performance

We'd posit that SAKAI HoldingsLTD's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that SAKAI HoldingsLTD's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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 SAKAI HoldingsLTD at this point in time. Case in point: We've spotted 5 warning signs for SAKAI HoldingsLTD you should be mindful of and 1 of these is a bit concerning.

This note has only looked at a single factor that sheds light on the nature of SAKAI HoldingsLTD's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.