We Think That There Are Issues Underlying Irani Papel e Embalagem's (BVMF:RANI3) Earnings

Despite posting some strong earnings, the market for Irani Papel e Embalagem S.A.'s (BVMF:RANI3) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Irani Papel e Embalagem's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from R$59m worth of unusual items. 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Irani Papel e Embalagem doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current 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.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Irani Papel e Embalagem received a tax benefit which contributed R$97m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its 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. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. 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 Irani Papel e Embalagem's Profit Performance

In its last report Irani Papel e Embalagem received a tax benefit which might make its profit look better than it really is on a underlying level. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue Irani Papel e Embalagem's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Irani Papel e Embalagem as a business, it's important to be aware of any risks it's facing. For instance, we've identified 4 warning signs for Irani Papel e Embalagem (2 are potentially serious) you should be familiar with.

Our examination of Irani Papel e Embalagem 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. 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.