The most recent earnings report from Inspur Software Co., Ltd. (SHSE:600756) was disappointing for shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

The Impact Of Unusual Items On Profit

To properly understand Inspur Software's profit results, we need to consider the CN¥4.5m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. 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 Inspur Software 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 Inspur Software.

Our Take On Inspur Software's Profit Performance

Because unusual items detracted from Inspur Software's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Inspur Software's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Inspur Software at this point in time. In terms of investment risks, we've identified 2 warning signs with Inspur Software, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Inspur Software'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.