MegaStudy's (KOSDAQ:072870) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with MegaStudy Co., Ltd.'s (KOSDAQ:072870) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

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How Do Unusual Items Influence Profit?

To properly understand MegaStudy's profit results, we need to consider the ₩2.5b 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. Assuming those unusual expenses don't come up again, we'd therefore expect MegaStudy to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MegaStudy.

Our Take On MegaStudy's Profit Performance

Unusual items (expenses) detracted from MegaStudy's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that MegaStudy's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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 MegaStudy at this point in time. For example - MegaStudy has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of MegaStudy'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. 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.