BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' (BVMF:AGRO3) Attractive Earnings Are Not All Good News For Shareholders

Despite posting strong earnings, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' (BVMF:AGRO3) stock didn't move much over the last week. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

We've discovered 4 warning signs about BrasilAgro - Companhia Brasileira de Propriedades Agrícolas. View them for free.

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from -R$12.8m last year to R$103.2m this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

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.

The Impact Of Unusual Items On Profit

Alongside that spike in non-operating revenue, it's also important to note that BrasilAgro - Companhia Brasileira de Propriedades Agrícolas'profit was boosted by unusual items worth R$56m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

An Unusual Tax Situation

On top of the spike and non-operating revenue and the unusual item, we can also see that BrasilAgro - Companhia Brasileira de Propriedades Agrícolas received a tax benefit of R$40m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. Of course, prima facie it's great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' Profit Performance

In its last report BrasilAgro - Companhia Brasileira de Propriedades Agrícolas benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may not be sustainable. And a tax benefit boosted its bottom line, too. The cherry on top was the unusual item. If these unreliable boosts don't persist, we'd expect profit to drop, all else being equal. On reflection, the above-mentioned factors give us the strong impression that BrasilAgro - Companhia Brasileira de Propriedades Agrícolas'underlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into BrasilAgro - Companhia Brasileira de Propriedades Agrícolas, you'd also look into what risks it is currently facing. To help with this, we've discovered 4 warning signs (2 are concerning!) that you ought to be aware of before buying any shares in BrasilAgro - Companhia Brasileira de Propriedades Agrícolas.

Our examination of BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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 with significant insider holdings to be useful.

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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.