Does Pacific Systems's (TYO:3847) Statutory Profit Adequately Reflect Its Underlying Profit?

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Pacific Systems' (TYO:3847) statutory profits are a good guide to its underlying earnings.

We like the fact that Pacific Systems made a profit of JP¥318.0m on its revenue of JP¥10.2b, in the last year. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

See our latest analysis for Pacific Systems

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will discuss how unusual items have impacted Pacific Systems' most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pacific Systems.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Pacific Systems' profit was reduced by JP¥167m, 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 that's hardly a surprise given these line items are considered unusual. If Pacific Systems doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Pacific Systems' Profit Performance

Unusual items (expenses) detracted from Pacific Systems' earnings over the last year, but we might see an improvement next year. Because of this, we think Pacific Systems' earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 4 warning signs for Pacific Systems and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Pacific Systems' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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