Shareholders Can Be Confident That Locaweb Serviços de Internet's (BVMF:LWSA3) Earnings Are High Quality

Even though Locaweb Serviços de Internet S.A. (BVMF:LWSA3 ) posted strong earnings, investors appeared to be underwhelmed. We have done some analysis and have found some comforting factors beneath the profit numbers.

Check out our latest analysis for Locaweb Serviços de Internet

The Impact Of Unusual Items On Profit

For anyone who wants to understand Locaweb Serviços de Internet's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by R$159m due to unusual items. 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 that's hardly a surprise given these line items are considered unusual. Locaweb Serviços de Internet took a rather significant hit from unusual items in the year to September 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

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 Locaweb Serviços de Internet received a tax benefit which contributed R$14m to the bottom line. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. We're sure the company was pleased with its tax benefit. And since it previously lost money, it may well simply indicate the realisation of past tax losses. 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 Locaweb Serviços de Internet's Profit Performance

In the last year Locaweb Serviços de Internet received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think that Locaweb Serviços de Internet's profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about Locaweb Serviços de Internet as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Locaweb Serviços de Internet and you'll want to know about it.

Our examination of Locaweb Serviços de Internet has focussed on certain factors that can make its earnings look better than they are. 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 with high insider ownership.

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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.