Investors Shouldn't Be Too Comfortable With TPG Telecom's (ASX:TPG) Robust Earnings

By
Simply Wall St
Published
August 26, 2021
ASX:TPG
Source: Shutterstock

TPG Telecom Limited's (ASX:TPG) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

See our latest analysis for TPG Telecom

earnings-and-revenue-history
ASX:TPG Earnings and Revenue History August 26th 2021

An Unusual Tax Situation

We can see that TPG Telecom received a tax benefit of AU$561m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! 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, 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.

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.

Our Take On TPG Telecom's Profit Performance

TPG Telecom received a tax benefit in its last reported period, as we have mentioned already. Given that sort of benefit is not recurring, it's safe to say the statutory profit overstates its underlying profitability quite significantly. As a result, we think it may well be the case that TPG Telecom'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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 1 warning sign with TPG Telecom, 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 TPG Telecom's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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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