Are Hathway Cable and Datacom’s (NSE:HATHWAY) Statutory Earnings A Good Reflection Of Its Earnings Potential?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. This article will consider whether Hathway Cable and Datacom‘s (NSE:HATHWAY) statutory profits are a good guide to its underlying earnings.

We like the fact that Hathway Cable and Datacom made a profit of ₹616.3m on its revenue of ₹18.9b, in the last year. The chart below shows that revenue has improved over the last three years, and, even better, the company has moved from unprofitable to profitable.

View our latest analysis for Hathway Cable and Datacom

NSEI:HATHWAY Income Statement, January 18th 2020
NSEI:HATHWAY Income Statement, January 18th 2020

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Therefore, today we will consider the nature of Hathway Cable and Datacom’s statutory earnings with reference to its dilution of shareholders and the impact of unusual items. 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Hathway Cable and Datacom expanded the number of shares on issue by 77% over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Hathway Cable and Datacom’s historical EPS growth by clicking on this link.

A Look At The Impact Of Hathway Cable and Datacom’s Dilution on Its Earnings Per Share (EPS).

Hathway Cable and Datacom was losing money three years ago. And even focusing only on the last twelve months, we don’t have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Hathway Cable and Datacom’s earnings per share can increase, then the share price should too. But on the other hand, we’d be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical “share” of the company’s profit.

The Impact Of Unusual Items On Profit

Alongside that dilution, it’s also important to note that Hathway Cable and Datacom’s profit suffered from unusual items, which reduced profit by ₹4.3b in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that’s exactly what the accounting terminology implies. In the twelve months to December 2019, Hathway Cable and Datacom had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Hathway Cable and Datacom’s Profit Performance

To sum it all up, Hathway Cable and Datacom took a hit from unusual items which pushed its profit down; without that, it would have made more money. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, it’s hard to tell if Hathway Cable and Datacom’s profits are a reasonable reflection of its underlying profitability. Obviously, we love to consider the historical data to inform our opinion of a company. But it can be really valuable to consider what other analysts are forecasting. At Simply Wall St, we have analyst estimates which you can view by clicking here.

In this article we’ve looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 that insiders are buying to be useful.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.