Shareholders appeared unconcerned with Tesco PLC's (LON:TSCO) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

We've discovered 1 warning sign about Tesco. View them for free.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Tesco's profit was reduced by UK£329m, due to unusual items, over the last year. 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. If Tesco 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 Tesco's Profit Performance

Because unusual items detracted from Tesco'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 Tesco's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 19% 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. So while earnings quality is important, it's equally important to consider the risks facing Tesco at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Tesco.

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