We Think AYO Technology Solutions's (JSE:AYO) Statutory Profit Might Understate Its Earnings Potential

By
Simply Wall St
Published
January 21, 2021
JSE:AYO
Source: Shutterstock

As a general rule, we think profitable companies are less risky than companies that lose money. 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. This article will consider whether AYO Technology Solutions' (JSE:AYO) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months AYO Technology Solutions made a profit of R21.3m on revenue of R2.89b. We know some investors love those high revenue growth stocks, but we do like to look at profit, even if it is, perhaps, a bit old fashioned. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

Check out our latest analysis for AYO Technology Solutions

earnings-and-revenue-history
JSE:AYO Earnings and Revenue History January 22nd 2021

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. This article will focus on the impact unusual items have had on AYO Technology Solutions' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AYO Technology Solutions.

The Impact Of Unusual Items On Profit

To properly understand AYO Technology Solutions' profit results, we need to consider the R55m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. In the twelve months to August 2020, AYO Technology Solutions had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On AYO Technology Solutions' Profit Performance

As we mentioned previously, the AYO Technology Solutions' profit was hampered by unusual items in the last year. Based on this observation, we consider it possible that AYO Technology Solutions' statutory profit actually understates its earnings potential! 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 4 warning signs for AYO Technology Solutions and you'll want to know about these bad boys.

This note has only looked at a single factor that sheds light on the nature of AYO Technology Solutions' 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. 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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