Kyosan Electric Manufacturing's (TSE:6742) Earnings Are Of Questionable Quality

Kyosan Electric Manufacturing Co., Ltd.'s (TSE:6742) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

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How Do Unusual Items Influence Profit?

To properly understand Kyosan Electric Manufacturing's profit results, we need to consider the JP¥461m gain attributed to 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. And that's as you'd expect, given these boosts are described as 'unusual'. 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 Kyosan Electric Manufacturing.

Our Take On Kyosan Electric Manufacturing's Profit Performance

Arguably, Kyosan Electric Manufacturing's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Kyosan Electric Manufacturing's true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 41% in the last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Kyosan Electric Manufacturing has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of Kyosan Electric Manufacturing'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.