Weak Statutory Earnings May Not Tell The Whole Story For Dkk-Toa (TSE:6848)

A lackluster earnings announcement from Dkk-Toa Corporation (TSE:6848) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

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How Do Unusual Items Influence Profit?

Importantly, our data indicates that Dkk-Toa's profit received a boost of JP¥258m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. 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 Dkk-Toa.

Our Take On Dkk-Toa's Profit Performance

Arguably, Dkk-Toa's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Dkk-Toa's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Dkk-Toa at this point in time. For example, we've found that Dkk-Toa has 2 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Dkk-Toa's 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 with high insider ownership.

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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.