Analysis Of Telstra Corporation And TPG Telecom Limited Financial Statements

Introduction to Telstra Corporation and TPG Telecom Limited

In the given assignment two companies have been selected which are Telstra Corporation and TPG Telecom Limited. Both the companies belong to the telecommunication sector and are strong competitors of each other. Both the companies are listed on the ASX.

Telstra Corporation is one of Australia largest companies in the telecommunication sector and is a leading provider of mobile phones, home phones, broadband connections and helps in providing and building telecommunication lines. The company works under two models, business to consumer and business and business and aims to provide software related issues solution to the companies. The company was originally founded in 1901, and now the overall revenue of the company is in millions and the company trades its share through the Australian Stock Exchange (Abdullah & Said, 2017).

TPG Telecom is one of the biggest Australian company and it specializes in IT related services for consumers and business-related services and provides mobile related services for the people. It operates the largest mobile virtual network for the companies (Alsagoff, 2010). The company is having thousands of mobile subscribers and they rely on the company for many of their solutions related to mobile services and other telecommunication needs.

Analysis

In the given case the annual reports of both the companies have been downloaded and analysed and important opinion on the various elements of the financial statements of the company are given below-

Shareholder’s Equity

Shareholders are the people who are investing their funds in the company and are dependent on the company to earn good returns from the company. It is the duty of the management that they should consider the needs of the shareholders on priority basis. It helps the company in raising funds which they can invest in their market. Shareholders equity is an important part of the financial statement of any company and stakeholders always to analyse the same to form an opinion whether they want to invest in the company or not (Antle & Smith, 1985). The main aim of the management is also to focus on shareholders wealth maximization. The various elements that are included in the shareholder’s equity are-

• Equity Share Capital –  The companies that have their names listed in the stock exchange then they can raise their funds from those sources. The companies allocate the shares at the nominal value and some shares are issued at a premium or discount. The aim of the management is that they can raise the funds that they need to run their business operations. It is also important that they are providing proper returns to the shareholders who are investing in the company(Boghossian, 2017). In case of Telstra Corporation, the company have an overall equity shareholding of $4,421 million shares and they have also bought back few shares and have also invested in some new shares. Thus, we see that there is a lot of change in the overall equity structure of the company and in case of TPG Telecom there is sale of equity investments that has boosted the cash flow of $124.5million, and the company has also bought back few of the shares. Total there is a lot of change in the equity structure of the company (Coate & Mitschow, 2017).

• Retained Earnings – Retained Earnings are the overall earnings that the company has accumulated over the years after paying of the equity and the preference shareholders of the company. These retained earnings can be used for variety purpose for the company and can also be used to issue more shares. It can also be seen that in case the retained earnings are negative the companies are not allowed to issue dividends. Retained Earnings are part of the equity share capital for the company(Dan, 1995). In case of Telstra retained earnings are inclusive of various elements like actuarial benefit on defined plans, income tax that is paid on actuarial gain that the company gets from defined actuarial gain, also cumulative benefits from investments that the company gets from equity investments at fair value. The overall retained earnings for the company is $10,225 million. In case of TPG Telecom the overall retained earnings for the company is $963.3 million. Out of the retained earnings, the shareholders are paid some amount of dividend and the rest is left off. Thus, it can be said retained earnings are the important point for the company.
• Non-Controlling Interests –  In case of normal terms, there are some shareholders who holds less than the total voting power for the company. In case of Telstra the company is having certain non-controlling interest as a part of that but in case of TGP there are no non-controlling interest on part of the company(Delone & Mclean, 2004). Thus, we see that Telstra has more business combinations and holdings that TGP is not having. So, we both the companies are having strong positions.

In case of Telstra Corporation, the company is having retained earnings and that has helped in improving their equity position and it also has reserves which the company has after paying of the dividend. But from 2016 and 2017, the overall equity shareholders have increased, and the company has also brought back the certain shares and that has reduced their equity position and thus affected the overall owners of the equity (Eddy, et al., 2004).

Analysis of Shareholder’s Equity

In case of TPG Telecom, the company has negative reserves in the current period and has issued new shares and that has increased their owner’s equity. The retained earnings of the company have also reduced and that has affected their equity position. It can also be seen that from 2016, to 2017, the equity share capital of the company has increased but negative reserves are a bad part of the capital structure as it shows that the company is having accumulated losses instead of profit and they will not be able to pay off their dividends.

2) The company can raise shares through various shares that includes both equity and debt. It depends upon the management of the company how much risk are they ready to take in lieu of the reward that they will get from the company (Eisemann, et al., 2017). In case of equity there is less risk and the overall return is also less but in case of debts the risk element is high but the return that they get is important. When we analyse the debt-equity structure of the company, we are analysing the overall liquidity position of the company. Liquidity is a position that shows how the companies are managing their funds and in case they are investing their funds in the company the shareholders should have good knowledge about that. In both the companies they are managing their debt-equity element and are trying to balance the overall liquidity position of the company.  Given below the equity-debt structure of the two companies (Gray, 2018).

In the given case the debt element was high in 2016 but in case of 2017, the company has tried to reduce that and has invested more in the equity, so that would balance the financial position of the company. The company has issued new shares and that has brought down the debt-equity ratio from 76 percent to 36 percent and that is extremely good for the company and for the investors also (Gullet, et al., 2018).

In case of Telstra Corporation, the financial position of the company is not that stable as the company is having very high percentage of borrowings in comparison to the equity element that they have (Kusolpalalert, 2018). It can also be seen that since 2016 the company is investing more in debt and is buy backing the old shares and that has brought the overall equity element low and in turn have increased the risk that the company was facing with respect to paying off the debts in case the need arises.

Analysis of Debt-Equity Position

There is a major difference in the debt-equity position of both the companies, where Telstra is having a very high debt element in comparison to TPG and thus when it comes to taking decisions based on the overall liquidity position the investors will try to invest in TPG Corporation and not in Telstra, as that would be a wiser decision on all fronts. The aim of the investors is to get return from the company that is on higher end and thus they want a more stable position which is not possible in all cases.

The cash flow statements show the flow of cash from the beginning of a financial period to the end of the financial period. It shows the position of the cash at the end of the financial period. The provision of the company is that there are relevant provision of the Australian Accounting Standards and the Corporations Act 2001. There are major segments of the cash flow statements which the companies need to consider and are helpful for the investors of the company in many ways (MORGAN, 1988)-

In case of operating activities, it covers the transactions that occurs between the companies in the ordinary course of business.  These activities form the major part of the business and can often lead to increase and decrease of the cash. There are few transactions which are part of this that includes collection of the debtors, payment to the creditors, expenses that are operating in nature and covered, payment of interest and other current liabilities are also covered in this. In case of Telstra the company has paid off to the suppliers and has received cash from the customers and has also received government grants and that forms the major part of their cash. The company has also paid taxes and that is considered as a part of the operating activities. In case of TPG Telecom operating activities includes cash collected from the debtors and paid to the creditors. It also includes the amount of income tax that is paid by the company. Thus, the net cash from operating activities is $722.7m (Sikka & Willmott, 2010)

In case of investing activities, it includes those transactions which the companies indulge in when they are wanting to expand their operations and invest in different assets for the company. The various kinds of investing activities include investing in property, plant, investing in securities, disposing of assets etc. It often forms the major chunk of the cash transactions that the companies indulge in. In case of TPG Telecom the company has indulged in many investing activities that includes purchase of property plant and equipment, purchase of intangible assets, purchase of investment, payment of contingent consideration etc. In case of Telstra the company indulges in variety of investing activities that includes, purchase of property plant and equipment and investment in intangible assets. So, we see that both the companies are trying to expand their overall operations (Vieira, et al., 2017).

• Cash flow from Financing Activities

Analysis of Cash Flow Statements

In case of financing activities, the companies aim to increase the overall capital of the company. Some example of these type of activities include issue of shares, issue of long-term debentures, payment of debt, taking loan etc. All these activities effect the company from the capital point of view. In case of Telstra Corporation, the companies have indulged in many financing activities, which includes taking loans, paying off loans, paying for the buy-back of shares, finance cost paid, dividend paid for equity shareholders etc (Yadao, 2018). In case of TPG Telecom the companies can indulge in many activities which are interest received, interest paid, dividend received, dividend paid, repayment of liabilities, issue of shares, payment of finance cost etc. Thus, we see that the company is indulging in many such activities that is affecting the overall cash flow of the company.

In the table that is given below a comparative analysis of the cash flow statement of the company for three years is given below:

Based on the overall analysis the cash flow position of TPG is not that great and the company needs to see that they are balancing the cash flow as that shows the liquidity position of the company. In case of Telstra from 2016 to 2017, there has been huge decrease in the overall cash position and the company has indulged in many such activities and thus that shows that they need to manage that (Richard & Stephan, 1995).

A statement of comprehensive income statement for both the companies have been stated below:

A statement of comprehensive income statement for the companies have been given in case of TPG, there are not many items that are affecting the company, the comprehensive statement includes some foreign exchange transactions, change in the fair-value of the assets, net loss on the flow of hedges undertaken by the company. In 2017, the total income in comprehensive statement is $355.9m. In case of Telstra there are many activities that is affecting the income position of the company that includes fair value transactions, transactions related to the foreign exchange transactions and it also include hedge funds treatment etc., thus in 2017 the company has an income of $7m, which is very less and thus the company needs to take important steps so that they can provide better returns to the minority

Treatment related to Corporate Tax:

In the given cases TPG Telecom has paid more taxes in comparison to Telstra Corporation and has made specific disclosures with regards to that. The overall rate of taxations has changed over the years and that has also affected the overall amount that the company is paying off to the government.

Conclusion

Based on the overall analysis the investors can decide which company they want to invest in which includes many points like the level of liquidity, level of equity, cash flow and all that has been discussed in the given assignment.

References

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Alsagoff, N., 2010. Microsoft Excel as a tool for digital forensic accounting.

Antle, R. & Smith, A., 1985. Measuring Executive Compensation: Methods and an Application. Journal of Accounting Research , 23(1), pp. 296-325.

Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.

Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. s.l.:s.n.

Dan, S., 1995. The benefits of activity-based cost management to the manufacturing industry. Journal of Management Accounting Research, Volume 7, p. 167.

Delone, W. & Mclean, E., 2004. Measuring e-Commerce Success: Applying the DeLone & McLean Information Systems Success Model. International Journal of Electronic Commerce, 9(1).

Eddy, C., F. & Warlop, L., 2004. The Value of Activity-Based Costing in Competitive Pricing Decisions. Journal of Management Accounting Research, Volume 16, pp. 133-148.

Eisemann, T., Parker, G. & Alstyne, M., 2017. STRATEGIES FOR TWO SIDED MARKETS. [Online].

Gray, D., 2018. ‘Extraordinary turnaround’: Big miners pushing ASX towards 10-year high. The Sydney Morning Herald.

Gullet, N., Kilgore, R. & Geddie, M., 2018. USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).

Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery period and financial crisis. AU Journal of Management, 11(1).

MORGAN, G., 1988. ACCOUNTING AS REALITY CONSTRUCTION:TOWARDS A NEW EPISTEMOLOGY FOR ACCOUNTING PRACTICE. Accounting, Organizations and Society, 13(5), pp. 477- 485.

Richard, B. & Stephan, H., 1995. The negative effect of an accounting standard on employee welfare: the case of McDonnell Douglas Corporation and FASB 106. Accounting, Auditing & Accountability Journal, 8(3), p. 12.

Sikka, P. & Willmott, H., 2010. The dark side of transfer pricing: Its role in tax avoidance and wealth. Critical Perspectives on Accounting, pp. 342-356.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).

Yadao, J., 2018. Forensic accountants and big data.

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