Shareholders Shouldn’t Be Too Comfortable With Inversiones Agrícolas y Comerciales' (SNSE:IACSA) Strong Earnings

We didn't see Inversiones Agrícolas y Comerciales S.A.'s (SNSE:IACSA) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

Check out our latest analysis for Inversiones Agrícolas y Comerciales

How Do Unusual Items Influence Profit?

To properly understand Inversiones Agrícolas y Comerciales' profit results, we need to consider the CL$502m gain attributed to 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 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, after all, that's exactly what the accounting terminology implies. We can see that Inversiones Agrícolas y Comerciales' positive unusual items were quite significant relative to its profit in the year to December 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Inversiones Agrícolas y Comerciales.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Inversiones Agrícolas y Comerciales received a tax benefit which contributed CL$94m 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. Of course, prima facie it's great to receive a 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. 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.

Our Take On Inversiones Agrícolas y Comerciales' Profit Performance

In the last year Inversiones Agrícolas y Comerciales 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. For the reasons mentioned above, we think that a perfunctory glance at Inversiones Agrícolas y Comerciales' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Inversiones Agrícolas y Comerciales, you'd also look into what risks it is currently facing. Be aware that Inversiones Agrícolas y Comerciales is showing 3 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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. 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.