Investors Shouldn't Be Too Comfortable With Fine Semitech's (KOSDAQ:036810) Earnings

Last week's profit announcement from Fine Semitech Corp. (KOSDAQ:036810) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

We've discovered 2 warning signs about Fine Semitech. View them for free.

An Unusual Tax Situation

Fine Semitech reported a tax benefit of ₩3.4b, which is well worth noting. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. And since it previously lost money, it may well simply indicate the realisation of past tax losses. 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. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. 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.

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

Our Take On Fine Semitech's Profit Performance

Fine Semitech reported that it received a tax benefit, rather than paid tax, in its last report. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Therefore, it seems possible to us that Fine Semitech's true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Fine Semitech.

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