Investors were disappointed with the solid results of Merck & Co., Inc. (NYSE:MRK) recently. We did some analysis and found some reassuring factors behind the earnings numbers.

Check out our latest analysis for Merck

The impact of unusual items on profit

To properly understand Merck’s earnings numbers, we need to consider the $3.4 billion in charges attributable to unusual items. While deductions due to unusual items are disappointing to begin with, there is one silver lining. When we analyzed the vast majority of publicly traded companies worldwide, we found that significant unusual items often do not recur. And that is precisely what the accounting terminology implies. If these unusual charges are not recurring at Merck, all other things being equal, we would expect the company’s earnings to increase in the coming year.

You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability based on their estimates.

Our assessment of Merck’s earnings development

Unusual items (expenses) have hurt Merck’s earnings over the last year, but we could see an improvement next year. For this reason, we believe Merck’s earnings potential is at least as good as it seems, and maybe even better! And what’s more, earnings per share have grown at an extremely impressive rate over the past three years. Of course, we have only scratched the surface when analyzing earnings; one could also consider margins, forecast growth and return on capital, among other things. So, while the quality of earnings is important, it is equally important to consider the risks Merck is currently facing. In our analysis, we found that Merck 1 warning sign and it would be unwise to ignore this.

Today we’ve focused on a single data point to better understand the nature of Merck’s earnings. But there are plenty of other ways to form an opinion about a company. Some people consider a high return on equity to be a good sign of a high-quality company. You might want to check this out. free Collection of companies with high return on equity or this list of stocks with high insider ownership.

Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.