Investors Can Find Comfort In International Business Machines' (NYSE:IBM) Earnings Quality

Shareholders appeared unconcerned with International Business Machines Corporation's (NYSE:IBM) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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The Impact Of Unusual Items On Profit

To properly understand International Business Machines' profit results, we need to consider the US$3.5b expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If International Business Machines doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On International Business Machines' Profit Performance

Unusual items (expenses) detracted from International Business Machines' earnings over the last year, but we might see an improvement next year. Because of this, we think International Business Machines' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 7.3% annually, over the last three years. 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 5 warning signs that you should run your eye over to get a better picture of International Business Machines.

Today we've zoomed in on a single data point to better understand the nature of International Business Machines' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.