Why Satrec Initiative's (KOSDAQ:099320) Shaky Earnings Are Just The Beginning Of Its Problems

The latest earnings report from Satrec Initiative Co., Ltd. (KOSDAQ:099320 ) disappointed investors. Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

Our free stock report includes 1 warning sign investors should be aware of before investing in Satrec Initiative. Read for free now.

The Impact Of Unusual Items On Profit

To properly understand Satrec Initiative's profit results, we need to consider the ₩701m expense attributed 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 that's hardly a surprise given these line items are considered unusual. If Satrec Initiative 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 Satrec Initiative.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Satrec Initiative received a tax benefit of ₩2.7b. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Satrec Initiative's Profit Performance

In the last year Satrec Initiative received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. But on the other hand, it also saw an unusual item depress its profit. Having considered these factors, we don't think Satrec Initiative's statutory profits give an overly harsh view of the business. If you want to do dive deeper into Satrec Initiative, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Satrec Initiative has 1 warning sign and it would be unwise to ignore this.

Our examination of Satrec Initiative has focussed on certain factors that can make its earnings look better than they are. 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. 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.