IDT Australia's (ASX:IDT) Promising Earnings May Rest On Soft Foundations

By
Simply Wall St
Published
August 31, 2021
ASX:IDT
Source: Shutterstock

Investors were disappointed with IDT Australia Limited's (ASX:IDT) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors are concerning.

See our latest analysis for IDT Australia

earnings-and-revenue-history
ASX:IDT Earnings and Revenue History August 31st 2021

An Unusual Tax Situation

We can see that IDT Australia received a tax benefit of AU$1.1m. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its 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, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of IDT Australia.

Our Take On IDT Australia's Profit Performance

IDT Australia received a tax benefit in its last reported period, as we have mentioned already. Tax is usually an expense, not a benefit, so we don't think the reported profit number is a particularly good guide to the earning potential of the business. As a result, we think it may well be the case that IDT Australia's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 1 warning sign with IDT Australia, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of IDT Australia's profit. 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. 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.
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