Hwaseung R&A's (KRX:378850) Promising Earnings May Rest On Soft Foundations

Hwaseung R&A Co., Ltd.'s (KRX:378850) 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 Hwaseung R&A's profit results, we need to consider the ₩4.7b gain attributed to unusual items. 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. And that's as you'd expect, given these boosts are described as 'unusual'. If Hwaseung R&A doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hwaseung R&A.

Our Take On Hwaseung R&A's Profit Performance

Arguably, Hwaseung R&A's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Hwaseung R&A's true underlying earnings power is actually less than its statutory profit. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 2 warning signs with Hwaseung R&A, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Hwaseung R&A'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. 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.