There May Be Underlying Issues With The Quality Of Sociedad Agrícola La Rosa Sofruco's (SNSE:SOFRUCO) Earnings

Despite posting some strong earnings, the market for Sociedad Agrícola La Rosa Sofruco S.A.'s (SNSE:SOFRUCO) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for Sociedad Agrícola La Rosa Sofruco

How Do Unusual Items Influence Profit?

For anyone who wants to understand Sociedad Agrícola La Rosa Sofruco's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CL$677m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. 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).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sociedad Agrícola La Rosa Sofruco.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Sociedad Agrícola La Rosa Sofruco received a tax benefit of CL$315m. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its 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. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Sociedad Agrícola La Rosa Sofruco's Profit Performance

In its last report Sociedad Agrícola La Rosa Sofruco received a tax benefit which might make its profit look better than it really is on a underlying level. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. Considering all this we'd argue Sociedad Agrícola La Rosa Sofruco's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Sociedad Agrícola La Rosa Sofruco at this point in time. For example, Sociedad Agrícola La Rosa Sofruco has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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 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.