Here's Why We Think Telechoice International's (SGX:T41) Statutory Earnings Might Be Conservative

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Telechoice International's (SGX:T41) statutory profits are a good guide to its underlying earnings.

While Telechoice International was able to generate revenue of S$260.7m in the last twelve months, we think its profit result of S$2.02m was more important. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for Telechoice International

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. As a result, we think it's well worth considering what Telechoice International'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 Telechoice International.

Examining Cashflow Against Telechoice International'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Telechoice International has an accrual ratio of -0.45 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 S$32m in the last year, which was a lot more than its statutory profit of S$2.02m. Notably, Telechoice International had negative free cash flow last year, so the S$32m it produced this year was a welcome improvement.

Our Take On Telechoice International's Profit Performance

As we discussed above, Telechoice International's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Telechoice International's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the 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. If you'd like to know more about Telechoice International as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Telechoice International (1 is potentially serious!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Telechoice International's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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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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