Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Chichibu Railway (TYO:9012).
We like the fact that Chichibu Railway made a profit of JP¥110.0m on its revenue of JP¥5.31b, in the last year. The chart below shows that revenue has been flat over the last three years, while profit has actually declined.
See our latest analysis for Chichibu Railway
Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Chichibu Railway’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chichibu Railway.
How Do Unusual Items Influence Profit?
Importantly, our data indicates that Chichibu Railway’s profit was reduced by JP¥15m, due to unusual items, over the last year. 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, after all, that’s exactly what the accounting terminology implies. If Chichibu Railway doesn’t see those unusual expenses repeat, then all else being equal we’d expect its profit to increase over the coming year.
Our Take On Chichibu Railway’s Profit Performance
Because unusual items detracted from Chichibu Railway’s earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Chichibu Railway’s statutory profit actually understates its earnings potential! And the EPS is up 7.8% over the last twelve months. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. You can seeour latest analysis on Chichibu Railway’s balance sheet health here.
Today we’ve zoomed in on a single data point to better understand the nature of Chichibu Railway’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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January 17, 2020 at 08:39AM
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Does Chichibu Railway’s (TYO:9012) Statutory Profit Adequately Reflect Its Underlying Profit? - Simply Wall St
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