We're Not Counting On Lavvi Empreendimentos Imobiliários (BVMF:LAVV3) To Sustain Its Statutory Profitability

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Lavvi Empreendimentos Imobiliários' (BVMF:LAVV3) statutory profits are a good guide to its underlying earnings.

While Lavvi Empreendimentos Imobiliários was able to generate revenue of R$259.1m in the last twelve months, we think its profit result of R$59.2m was more important.

View our latest analysis for Lavvi Empreendimentos Imobiliários

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what Lavvi Empreendimentos Imobiliários' cashflow tells us about the quality of its earnings. 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.

Examining Cashflow Against Lavvi Empreendimentos Imobiliários' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2020, Lavvi Empreendimentos Imobiliários recorded an accrual ratio of 0.47. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of R$35m, in contrast to the aforementioned profit of R$59.2m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of R$35m, this year, indicates high risk.

Our Take On Lavvi Empreendimentos Imobiliários' Profit Performance

As we have made quite clear, we're a bit worried that Lavvi Empreendimentos Imobiliários didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Lavvi Empreendimentos Imobiliários' underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 34% in the last year. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 1 warning sign for Lavvi Empreendimentos Imobiliários you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Lavvi Empreendimentos Imobiliários' 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. 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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