São Carlos Empreendimentos e Participações's (BVMF:SCAR3) Earnings Are Growing But Is There More To The Story?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether São Carlos Empreendimentos e Participações' (BVMF:SCAR3) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months São Carlos Empreendimentos e Participações made a profit of R$85.5m on revenue of R$380.2m. At the risk of seeming quaint, we do like to at least examine profit, even when a stock is improving revenue and considered a 'growth stock'. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.

View our latest analysis for São Carlos Empreendimentos e Participações

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Therefore, we think it is well worth considering the impact that unusual items and a spike in non-operating revenue have had on São Carlos Empreendimentos e Participações' statutory profit result. 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.

Operating Revenue Or Not?

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. It's worth noting that São Carlos Empreendimentos e Participações saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue spiked from R$239.8m last year to R$380.2m this year. The high levels of non-operating are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

The Impact Of Unusual Items On Profit

Alongside that spike in non-operating revenue, it's also important to note that São Carlos Empreendimentos e Participações'profit suffered from unusual items, which reduced profit by R$46m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If São Carlos Empreendimentos e Participações doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On São Carlos Empreendimentos e Participações' Profit Performance

In its last report São Carlos Empreendimentos e Participações benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. But on the other hand, it also saw an unusual item depress its profit, suggesting the statutory profit number will actually improve next year, if the unusual expenses are not repeated, and all else stays equal. Having considered these factors, we don't think São Carlos Empreendimentos e Participações' statutory profits give an overly harsh view of the business. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that São Carlos Empreendimentos e Participações is showing 3 warning signs in our investment analysis and 1 of those is a bit concerning...

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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. 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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