Key ratios and profitability
One of the most efficient and renowned company in Australia in the field of the telecommunications industry is said to be Telstra Corporation Limited. It has been noticed that the major changes in the industry take place because of this organization as it conducts large-scale operations on networks and mobile services, pay television products and many other customer services. With the allocation of the new CEO in the company, Telstra Corporation Limited has been noticed to privatize its organization and also make certain changes in the system (Telstra, 2017). The main objective of the firm has also shifted from production to customer satisfaction as a result of the increasing demands and wants of customers.
There have been many changes, made by the Federal Government in the field of the national broadband network which has forced the people at the Telstra Corporation Limited to make changes in their system in order to work in accordance to the new principles. The firm is said to have large connections with customers as it has more than 17.6 million retail mobile services, 5.1 million retail fixed voice services and also the broadband services which amount to 3.5 million which have helped them to spread their arms around the world. The organization has targeted to merge with NBN holding company and then sell the Copper and HFC networks so as to compete in the telecommunications market of the country (Telstra, 2017).
The major changes and the innovations in the field of the technology and solutions have helped a lot the population in order to make their lives easier and simple on a day to day basis. The company is also planning to make the population aware from new and variety of products which will help them to undertake the market and become the fastest growing and largest mobile network in Australia (Madura & Fox, 2011).
The high competitiveness and the huge operations carried out by the Telstra Corporation Limited have helped them to increase their total income, EBITDA, and the NPAT. It has been clearly noticed that the operations undertaken by the organization have shown a total increase of 4.3 percent in the total income and also the EBITDA had an increase of 2.0 percent. Leaving the sales to proceed of the Autosome in the FY16, the NPAT had shown an increase of 1.1 percent on the basis of the continued operations. The board has also said to provide the shareholders a dividend of 15.5 percent per share which have added up to a total of 31.0 percent dividend for the year. A total of $5.2 billion was observed to be paid to the shareholders in the FY17 (Telstra, 2017).
Liquidity and efficiency
An announcement was also made by the Telstra Corporation Limited regarding the outcome of the capital allocation project carried out by the company in November 2016. The amount also included the price paid for the change in the dividend policy and also new capital management’s framework which should be clearly noticed while auditing (Libby et. la, 2011).
The probability ratio of the Telstra Corporation Limited can be understood as the ability of the organization to generate earnings in comparison to the expenses and the other costs that may have been incurred by the firm in the specific time period of conduction of business (Madura & Fox, 2011). By understanding the value of the most ratios it can be clearly analyzed that the company is doing well because of the indication that the ration is higher than the values of other competitor’s ratio (Gibson, 2012). Other ratios termed as the Gross Profitability Ratio (GPM), Operating Margin (OM), Return on Assets (ROA), Return on Equity (ROE), Return on Sales (ROS) and the return on Investments (ROI). As the name suggests, the profitability ratios have their total relationship with the ultimate profits earned by the company during the year which are compared with different parameters and a final comparison is done with the previous year ratios to assess the growth of the company in terms of profits.
- Return on Assets- This ratio analyses that how efficiently the company is using its assets to generate and increase its sales or revenue. The profits are compared with the assets of the company. The Year 2016 had a better return on assets by nearly 4% increase as compared to the year 2017 which was approx 9%. This shows that the company was able to get a better return on their investments as the profit percentage was better than 2017 (Leo, 2011).
- Return on Equity- This ratio is of major concern for the shareholders of the company as this ratio indicates the returns earned on their equity investments. The shareholders were able to get a better return on their investment which was up to 36% in the year 2016 which was nearly more than 10% better than the year 2017. So, a prudent shareholder will not likely remain invested in the company if this decreasing trend continues in the coming years as well.Net profit & Gross Profit Margins- The profit margin ratios are measurement of profits earned in comparison with the actual sales or revenue during the year. Although the G.P margins have not changed much, but the N.P margins have dipped by 8% in the year 2017 which was nearly 14%.
Expense Ratio- the expenses have also remained at the same ratio as there had been not much increase in both the years.
- EPS- the shareholders have a reason to cheer also as the EPS has increased from $31.6 per share to $32.5 per share in the year 2017, but the dividend per share has remained same in both the years. Even the Earning Yields have increased by almost 32%.
- Cash return on sales- the net cash flows from the operations were 30% nearly in the year 2016 which have slightly dipped to 28% in the year 2017. This shows that the company’s cash flows have slightly dipped, but this is a not a sharp fall and the company can maintain its returns if it employs corrective measures (Gibson, 2012).
The obligation of the Telstra Corporation Limited in order to meet the short-term financial commitments that have been made by them earlier can be easily defined by the liquidity ratio. The liquidity of the business can be clearly understood by the current ratio which is also known as a working capital ratio as it helps the firm to find out the solvency of the business. This ratio normally helps the organizations in order to find out whether they are the financial power to fulfil the short-term obligations or the liabilities with the help of the current assets (Matthew, 2015). Current ratio in which for every liability the value of the current asset is double is said to be the healthiest and desirable ratio for the business. Every other business and industry is having a different type of external environment features because of which the favorable ratio may change (Fields, 2011). A high current ratio may signify that the organization is not using its resources in a desirable manner, at the money invested in the current assets can be used for them to generate income. A low current ratio signifies that the company will not be able to fulfill the short-term obligations or the liabilities, thus making it difficult for it to stand alone in the hard times (Fields, 2011). The use of quick ratio is also very important for the organization as it will help the firm to know about the assets that can be quickly converted into cash and thus can further be used to meet the short-term obligations promised by the firm. These ratios help to determine whether or not the company will be able to meet out its current liabilities or obligations through its current assets without opting for external sources of finance (Merchant, 2012). The company had very low liquidity ratios in the year 2017 and it should increase its value of current assets.
- Current Ratio – The current ratio is a matter of worry because the current assets are not able to fully cover the current liabilities. In the year 2017, the current ratio has fallen down from 1.02 in the year 2016 to 0.86 times in the year 2017. The company needs to take immediate action to correct this ratio otherwise the company will be in danger of getting insolvent or it will have to sell its fixed assets to pay off its operating liabilities (Northington, 2011).
- Quick ratio- the company also does not have enough liquid funds to pay off its current liabilities even. This shows that the company’s funds in a liquid state like cash and short-term assets are not fully capable of paying its debts. The ratio has dipped from 0.96 times to 0.76 times.
Debt and equity structure
Receivable Turnover Ratio- the funds occupied by the debtors in terms of receivable turnover has increased from 80 days to 88 days. This shows that funds with debtors or the receivables collection have increased in a number of days by 8 days. This will lead to increased use of working capital.
The efficiency ratios are generally used to find out the receivables, the repayment of liabilities and the quantity and uses of equity, inventory, and machinery in the organization. This ratio helps the organization to compare it to the other companies so that it can improve its working skills and complete in the industry (Deegan, 2011). Some different type of ratios are accounts receivable turnover ratio, fixed asset turnover ratio, sales to inventory ratio, sales to net working capital ratio, stock turnover ratio and accounts payable to sales ratio. These ratios help to analyze the ability of the company to utilize its assets to generate profits. For this purpose, the efficiency ratios take into consideration various aspects such as fixed assets, current assets, total turnover during the year, etc.
- The asset turnover ratios have been divided into 2 ratios- total assets turnover and fixed assets turnover. Both the ratios primarily depicts the effects of assets against the total sales of the company. The asset turnover ratio has slightly increased from 0.65 times to 0.67 times in the year 2017.
- Cash flow return from assets- the net cash flows from operating activities which was 0.19 times in the year 2016 were 0.18 times in the year 2017. There is a negligible fall by 0.01 times which needs not to be worried about.
Fixed Assets Turnover ratio has increased slightly from 0.80 times to 0.83 times.
These ratios measure the degree to which the activities and operations of the company are funded by equity capital and external borrowings. The companies which have high gearing ratio have a higher leverage which means that the debt of the company is more than its own equity resources (Deegan, 2011). The companies with higher leverage are more susceptible to downturns. The gearing ratios are used by various financial users such as financial institutions for sanctioning of loans, internal management for assessing the leverages, lenders, investors, etc. Hence these ratios are a good indicator of owned and borrowed funds of a company.
- Debt to Equity Ratio- The debt of the company has outcrossed its equity as in both the years 2016 & 2017, the debt has surpassed the equity and the ratio has increased from 1.08 times to 1.18 times in the year 2017. The company should try to reduce this ratio to below 1 times for a better financial health (Palepu, 2007).
Debt to Assets Ratio- The debt to assets is around 40% which is a good sign because the company’s assets are able to cover its total debt by quite a good margin. The ratio has remained constant in the year 2017.
The company is advised to increase its profits as a whole so that the overall ratios can improve. This can be achieved through an increase in turnover, reduction in overall expenses, reducing the debts and borrowings, reducing the debtor’s collection period, increase in prices of products, launching of new products in the market and introducing new marketing strategies for the existing products of the company (Parrino et. al, 2012). The ratios show that the margins are on the decline so that the company should improve its overall performance.
External factors and ethical considerations
The company should try to improve its liquidity ratio so that in case of any contingency, the current assets can be realized to pay off the liabilities in time. The current ratio and liquidity ratio are quite low so the working capital of the company is less. The company is in danger of losing big sales order because they do not have liquid funds to keep the company operations keep going.
The company debt as compared to equity is quite high, so the company is expected to raise its equity capital. The debts have surpassed its equity capital which is a negative factor. However, the company total assets are sufficient enough to cover all its debts. The company has invested in its assets which shall have long-term good effects. The company should now try to focus on its profitability (Peirson et. al, 2015).
The company should try to raise its equity share capital so that it can improve its gearing ratios. The company till the year 2017 had high debt-equity ratios which were higher than 1 which means that debts are more than the owned capital. Hence the company should try to improve its gearing ratios so that it will be able to avail further loans easily in case it wants to expand its business further.
The company needs to focus on the shareholders’ return as well. This needs to be done because of the fact that more shareholders would invest in the company only when they have a clear picture of the return being earned by the shareholders from the investment done by them. This ultimately requires and increases in the distributable profits of the company. Either the company needs to increase its turnover or cut down its costs effectively so as to achieve an enhanced profitability (Samaha & Dahaway, 2010). The company is a growing concern and just needs to increase its efforts towards achieving better turnover and better profitability.
The ethical factors which should be kept in mind in case of insolvency are mainly trust and reputation. The company should attempt to pay off its maximum outside liabilities after settlement from the arbitrator or liquidator. The company has its obligation towards its shareholders as their hard earned money is with the company (Telstra, 2015). The company director is having entrusted with the responsibility to increase its shareholders’ funds. The company directors should try to maximize the funds receivable to shareholders after paying off its outside liabilities. The company reputation is at stake because the company liquidation affects the company reputation very badly. The employees should be well informed about this decision so that they can look out of other career options with other options.
Recommendation
This will have a positive impact on the business environment which will affect the entire industry as a whole. The company by large will be affected as well. The political environment, if it has placed an anti-business like anti-profiteering policies, will be greatly appreciated as it will give ample place to all the companies to survive and grow. The smaller companies will not be sidelined by the cartel or group of companies. This also provides uniformity and evenness among the companies. On the contrary, if the companies do not have political competitive environment it will gradually slow down and finally finish also. The political environment is a major factor in company growth and survival.
The company should have a futuristic approach which should be analyzed after keeping in mind the product/services in which they are dealing and whether it fulfills all the parameters like government requirement, society needs and habit trends and competition it faces from its peers. Like in case if a company deals in computers, it should keep in mind factors like government policies on computer manufacturing and marketing, Requirements of the public at large and products and their features and the competition it faces from its competitors.
These factors can affect the continuity and going concern of the company (Deegan, 2011). The company could be forced to halt its operations in case the government introduces any law which prohibits its operations so the company should try to fulfill social, political and environmental needs of the society.
The company EPS and DPS are good enough but with a word of caution to improve its profitability ratios in the long run. The company has its investors interested in the returns on equity have delivered well. So we would like to invest in the company. The company assets base is also good. On a critical note, the company profitability ratios have taken a dip otherwise it is a good company to be remain invested. The company has hugely invested in its fixed assets which are a major good factor and has fully covered its debts which increase the shareholder’s interest in the company and its operations and its managerial decisions.
Telstra is a leading telecommunications and technology company in Australia. The company is progressing as a whole, but if we compare the financial position in context of different ratios, the company’s performance has shown a downfall in the year 2017 in comparison to the year 2016.
References
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Samaha, K. & Dahaway, K. (2010). Factory influencing corporate disclosure transparency, in the active share trading firms: An Explanatory study. Research in Emerging Economies, vol. 10, 87-118.
Telstra (2015). Telstra Our company. Retrieved October 29, 2016 from https://www.telstra.com.au/aboutus/our-company/
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