We Wouldn't Rely On Mobile Telecommunications Company Saudi Arabia's (TADAWUL:7030) Statutory Earnings As A Guide

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Mobile Telecommunications Company Saudi Arabia (TADAWUL:7030).

We like the fact that Mobile Telecommunications Company Saudi Arabia made a profit of ر.س329.0m on its revenue of ر.س8.08b, in the last year. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

Check out our latest analysis for Mobile Telecommunications Company Saudi Arabia

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. So today we'll look at what Mobile Telecommunications Company Saudi Arabia's cashflow and unusual items tell us about the quality of its earnings, as well as touching on how its recent share issues are impacting shareholders. 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.

Examining Cashflow Against Mobile Telecommunications Company Saudi Arabia's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2020, Mobile Telecommunications Company Saudi Arabia had an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of ر.س2.0b during the period, dwarfing its reported profit of ر.س329.0m. Mobile Telecommunications Company Saudi Arabia's free cash flow improved over the last year, which is generally good to see. Having said that, there is more to consider. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Mobile Telecommunications Company Saudi Arabia increased the number of shares on issue by 100% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Mobile Telecommunications Company Saudi Arabia's historical EPS growth by clicking on this link.

How Is Dilution Impacting Mobile Telecommunications Company Saudi Arabia's Earnings Per Share? (EPS)

Mobile Telecommunications Company Saudi Arabia was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 58%. Sadly, earnings per share fell further, down a full 58% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If Mobile Telecommunications Company Saudi Arabia's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Mobile Telecommunications Company Saudi Arabia's profit was boosted by unusual items worth ر.س139m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. 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).

Our Take On Mobile Telecommunications Company Saudi Arabia's Profit Performance

Summing up, Mobile Telecommunications Company Saudi Arabia's accrual ratio suggests that its statutory earnings are well matched by cash flow while its unusual items boosted the profit in a way that might not be repeated. Meanwhile, the dilution was a negative for shareholders. Based on these factors, we think that Mobile Telecommunications Company Saudi Arabia's statutory profits probably make it seem better than it is on an underlying level. If you'd like to know more about Mobile Telecommunications Company Saudi Arabia as a business, it's important to be aware of any risks it's facing. For example, Mobile Telecommunications Company Saudi Arabia has 5 warning signs (and 2 which shouldn't be ignored) 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 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. 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.

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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. 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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