Is There More To The Story Than Tattelecom's (MCX:TTLK) Earnings Growth?

By
Simply Wall St
Published
January 28, 2021
MISX:TTLK
Source: Shutterstock

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Tattelecom (MCX:TTLK).

It's good to see that over the last twelve months Tattelecom made a profit of ₽989.6m on revenue of ₽9.50b. In the chart below, you can see that its profit and revenue have both grown over the last three years.

See our latest analysis for Tattelecom

earnings-and-revenue-history
MISX:TTLK Earnings and Revenue History January 29th 2021

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. As a result, we think it's well worth considering what Tattelecom's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tattelecom.

Examining Cashflow Against Tattelecom's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Tattelecom has an accrual ratio of -0.24 for the year to June 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₽2.8b in the last year, which was a lot more than its statutory profit of ₽989.6m. Tattelecom's free cash flow improved over the last year, which is generally good to see.

Our Take On Tattelecom's Profit Performance

As we discussed above, Tattelecom's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Tattelecom's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that Tattelecom has 2 warning signs and it would be unwise to ignore these.

Today we've zoomed in on a single data point to better understand the nature of Tattelecom'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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