Should You Use Telkom SA SOC's (JSE:TKG) Statutory Earnings To Analyse It?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Telkom SA SOC (JSE:TKG).

It's good to see that over the last twelve months Telkom SA SOC made a profit of R845.0m on revenue of R43.2b. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

Check out our latest analysis for Telkom SA SOC

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will discuss how unusual items have impacted Telkom SA SOC's most recent profit results. 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.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Telkom SA SOC's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by R2.1b due 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, after all, that's exactly what the accounting terminology implies. In the twelve months to September 2020, Telkom SA SOC 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 Telkom SA SOC's Profit Performance

As we discussed above, we think the significant unusual expense will make Telkom SA SOC's statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that Telkom SA SOC's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Telkom SA SOC at this point in time. At Simply Wall St, we found 3 warning signs for Telkom SA SOC and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Telkom SA SOC'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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