The market was pleased with the recent earnings report from Epsilon Energy Ltd. (NASDAQ:EPSN), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

How Do Unusual Items Influence Profit?

To properly understand Epsilon Energy's profit results, we need to consider the US$1.4m 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 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 Epsilon Energy 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 Epsilon Energy.

Our Take On Epsilon Energy's Profit Performance

Unusual items (expenses) detracted from Epsilon Energy's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Epsilon Energy's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 2 warning signs with Epsilon Energy, and understanding these should be part of your investment process.

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

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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.