Investors Can Find Comfort In Sigmakoki's (TSE:7713) Earnings Quality

Soft earnings didn't appear to concern Sigmakoki Co., Ltd.'s (TSE:7713) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Sigmakoki

The Impact Of Unusual Items On Profit

For anyone who wants to understand Sigmakoki's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by JP¥369m due to unusual items. 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 Sigmakoki 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 Sigmakoki.

Our Take On Sigmakoki's Profit Performance

Unusual items (expenses) detracted from Sigmakoki's earnings over the last year, but we might see an improvement next year. Because of this, we think Sigmakoki's 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. 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 Sigmakoki at this point in time. Case in point: We've spotted 4 warning signs for Sigmakoki you should be aware of.

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

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