M2NLtd's (KOSDAQ:033310) Problems Go Beyond Weak Profit

M2N Co.,Ltd's (KOSDAQ:033310) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

See our latest analysis for M2NLtd

How Do Unusual Items Influence Profit?

Importantly, our data indicates that M2NLtd's profit received a boost of ₩481m in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If M2NLtd 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 M2NLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that M2NLtd received a tax benefit which contributed ₩424m to the bottom line. This is meaningful because companies usually pay tax rather than receive 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 M2NLtd's Profit Performance

In the last year M2NLtd 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue M2NLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into M2NLtd, you'd also look into what risks it is currently facing. For example - M2NLtd has 3 warning signs we think you should be aware of.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.