Financial Analysis Of Telstra Corporation Ltd. 2017-2018

Comparison of Financial Results

With the help of vertical analysis^, we can identify how much of the revenue (excluding finance income) each individual item make up does for both the year (Gildersleeve, 1999).

On analysis, we see:

• Rise in the percentage contribution of the head other income to 11.65% from 8.42%
• Overall there is rise in total revenue from year 2017 to 2018. Total revenue rises from 108.42% to 111.65%. However, there is a fall in the profit. The profit has fallen by 1.32%. This is due to the fact that total expense has has risen to 72.74% from 67.37%.
• To analyse the reason for the rise in the total expense we dive further into the details, we see that good purchased expense and other expenses have increased by 4.18% and 1.84% respectively.
• There is a minute decrease in the labour expense, from 19.82% to 20.68%.
• There is rise in EBITDA by 2.14% which also adds to increase in profit.

Here we see that even though there is a rise in the total revenue by 3.22%. On the other hand, there is also a significant rise in the expenses. Therefore we can say that the rise in profit   is dominated by the rise in expenses since the expenses have increased much more. It is for this reason that the profit for the year has fallen by 1.32% in 2018.

With the help of the horizontal analysis, we get a visual representation of the changes that have taken place. A fall or reduction from the previous year is by represented by negative sign whereas positive sign denotes increase. (Horngren. 2017) Horizontal analysis represents absolute change and percentage change of each individual item taking 2017 as the base.

 On analysis we find out:

• The revenue has decreased by 1% in 2018. That means the sales of the company have fallen. Whereas other income has risen, thus a positive 38.28% is shown on the chart.
• Overall, there is a rise in the total income of Telstra corporation in the year 2018 by 2.97%
• Again, we see that the expenses have risen by 7.96% in 2018 compared to 2017.
• Finally, the profit has a negative value, which means there is a fall in profit in 2018 by 8.97%.

The reason for a rise in profit is because the fall in sale is less compared to the fall in expenses. Thus, Telstra corporation ltd. have a rise in their profit.

A ratio analysis is an analysis of any company’s financial statements. (Hansen & Palmer, 1997). It is used to see the performance of the company such as profitability, liquidity solvency etc. (Bragg & Bragg, 2019)

• Object

Quick ratio is a measurement to check a company’s liquidity or how a company meets its short-term financial liabilities. It is also called Acid-test ratio. (Balasundaram, 2012)

• Formula To Calculate Quick Ratio

(Current Assets-Inventory-Prepaid Expenses)/ (Current Liabilities- Bank Overdraft)

Or

(Cash+Marketable Securities+Accounts Recievable)/ (Current Liabilities- Bank Overdraft)

• Ideal Quick Ratio= 1:1 
• Quick Ratio Of Telstra Corporation

2017- 1.1808 : 1

2018- 0.9315 : 1

• Analysing Fall In The Quick Ratio

A Quick ratio shows whether the company has enough cash to meet its short-term day to day liabilities such as accounts payable, interest, other bills, etc. The greater the ratio is, the more the company is finally secure to pay its debt in short term. Here, we see, the quick ratio is decreasing from 1.1808:1 in 2017 to 0.9315:1 in 2018. This tells us that the company does not have enough liquid asset to take care of its day to day activity. This may also tell us that company’s balance sheet is over-leveraged or the company’s sales are falling down or the debtors are not paying off their debts etc.

• Object

A Current Ratio calculate the ability by a company to pay its short term and long term debts both short and long term. (“Ratio Analysis: Using Financial Ratios”, 2019)

• Formula To Calculate Current Ratio

Vertical and Horizontal Analysis

 Current Assets/ Current Liabilities

• Ideal Current Ratio = 2:1
• Current Ratio Of Telstra Corporation

2017- 0.8584: 1

2018- 0.8027: 1

• Analysis Telstra Corporation’S Current Ratio

Current Ratio shows how liquid a company is. Therefore, for any company that is in line with the ideal current ratio i.e. 2:1 or slightly higher is considered to be ideal. Here, we see, Telstra corporation’s current ratio is not only slightly falling from  2017 to 2018 but is also way to less compared to the industry average. Thus, it indicates a high risk of default and fall in its capacity to clear off its liquid debts. The reason for such fall maybe problems of inventory management, ineffective methods of collecting debts and receivables or high cash burn rates.

• Object

Debt-Equity ratio is also known as risk ratio. It is a leverage ratio that calculates the weight of total debt compared to the total shareholder’s fund. (Morley, 1985)

• Formula To Calculate 

Long-Term Liabilities/ Shareholder’S Fund

• Ideal Current Ratio= 1:1
• Debt- Equity Ratio Of Telstra Corporation

2017- 1.0184: 1

2018- 1.0192: 1

• Analysis Of The Ratio

Debt-Equity ratio affects the financial risk of an organisation. Here, the Debt-Equity ratio is higher than an ideal ratio. This means that the company is liquidated which is not good for and lenders because the risk rises.

• Object

This ratio helps to measure the financial leverage of a company.

• Formula To Calculate

Total Debt/ (Shareholder’S Fund + Total Debt)

• Debt-Equity Ratio Of Telstra Corporation

2017- 0.5045

2018- 0.5047

• Analysis Of The Ratio

Through analysis we see that the Debt to capital ratio of Telstra ltd. for both 2017 and 2018 are almost similar and has not made much of a difference.

• Object

Interest Coverage Ratio measures the company’s ability to pay its interest expenses on outstanding debt. (Landree, 2009)

• Formula To Calculate

Net Profit Before Tax And Interest/ Interest

• Ratio Of Telstra Corporation

2017- 7.4976

2018- 7

• Analysis Of The Ratio

Lower ratio shows the company is burdened by its debts. Telstra’s Interest Coverage Ratio is seen to be falling in 2018 compared to 2017. This declining ratio may make the investors worry that Telstra may not be able to pay of its outstanding debts in future if the ratio keeps falling.

• Object

Fixed Charge Coverage ratio is calculated to see how a company’s earnings can cover its fixed charges, taking additional charges such as lease payment. (Gates, 1993)

• Formula To Calculate

(Ebit+Lease Payments)/ (Interest + Lease Payment)

• Ratio Of Telstra Corporation

2017- 4.4743

2018- 3.6237

• Analysis Of The Ratio

Here, we see, the Fixed Charge Coverage Ratio is falling in 2018 to 3.6237 from 4.4743 in 2017. Therefore, we can determine from this that the company’s capacity to cover its charges is decreasing. This is not a favourable situation for the company.

• Object

Inventory turnover ratio evaluates the liquidity of company’s inventory. (Sanzo, 2005)

• Formula To Calculate

Ratio Analysis

Cost Of Goods Sold/ Average Inventory

• Ratio Of Telstra Corporation

2017- 3.6809 Times

2018- 4.4332 Times

• Analysis Of The Ratio

The inventory turnover ratio is seen to rise from 2017 to 2018. The rise in the ratio signifies Telstra is moving fast.

• Object

This ratio calculates the number of times that any business collects its Average Accounts Receivable Annually. (“Receivables Turnover Ratio”, 2019)

• Formula To Calculate

(Accounts Receivable/ Credit Sales)* 365

• Ratio Of Telstra Corporation

2017- 2726.5301 days

2018- 1876.6086 days

• ANALYSIS OF THE RATIO

In this company we see accounts receivable turnover falls drastically. This shows that Telstra’s financial and operational performance is falling down and that the company is extending its credit policy for very long.

• Object

It is a comparison between a company’s net credit purchases to the average accounts payable during a period. (“Accounts Payable Turnover Ratio”, 2019)

• Formula To Calculate

(Accounts Payable/ Credit Purchase) * 365

• Ratio Of Telstra Corporation

2017- 0 days

2018- 42018.4524 days

• Analysis Of The Ratio

In case of Telstra ltd. we see that the accounts payable days have risen.

• Object

Total Assets Turnover Ratio measures a company’s capability to generate sales from its assets by comparing net turnover with total assets. (“Asset Turnover Ratio | Analysis | Formula | Example”, 2019)

• Formula To Calculate

Total Turnover/ Total Assets

• Ratio Of Telstra Corporation

2017- 0.6174

2018- 0.6067

• Analysis Of The Ratio

The company Telstra’s total asset turnover ratio has not changed much.

• Object

It is a measurement of the ability of management to use a company’s net assets to generate sales revenue. (“Asset Turnover Ratio | Analysis | Formula | Example”, 2019)

• Formula To Calculate

Total Turnover/ Average Total Assets

• Ratio Of Telstra Corporation

2017- 1

2018- 0.6120

• Analysis Of The Ratio 

Here we can see that the net asset turnover ratio of Telstra Company has fallen down. This shows that the firm’s ability to use its net asset in generating sales is not good.

• object

The measures of how profitable a company is and the efficiency with which its capital is employed is known as Return on capital employed (ROCE). It is a financial ratio.

• Formula To Calculate

Ebit/ Capital Employed

• Ratio Of Telstra Corporation

2017- 0.1892

2018- 0.1659

• Analysis Of The Ratio

The higher the ratio is the more profitable is the firm. In case of Telstra Corporation, we see that ratio does not change much.

• Object

Gross Profit calculates the ratio of profit left of sales after deducting  cost of sales.

• Formula To Calculate

(Gross Profit/ Net Sales)*100

• Ratio Of Telstra Corporation

2017- 87.3640%

2018- 86.3481%

• Analysis Of The Ratio

The gross profit is higher in year 2017, in 2018 it falls. This shows that the company has not been able to manage its cost of sales well.

• Object

The Net Profit Ratio Is a Percentage Of After-Tax Profits To Net Sales

• Formula To Calculate

(Net Profit/ Net Sales)*100

• Ratio Of Telstra Corporation

2017- 15%

2018- 14%

• Analysis Of The Ratio

Net profit ratio is used to measure the overall profitability.  In case of Telstra’s Net Profit ratio, it is seen there is a fall from 2017 to 2018. If it continues to fall, then the profitability of the firm also falls.

Quick Ratio

Ratio Analysis Conclusion:

The Ratio Analysis above stated will help Telstra Corporation Ltd. to approve or disprove the operating, financing and investment decisions. It will help the management to compare the financial position of the company and make decisions accordingly. Ratio analysis will also help to identify problem areas and bring attention of the management to such areas. 

On analysing the summary of the cash flow statement provided in the annual reports, we see the changes in the income and expenditure pattern for the two years. The net cash provided by the operating activities has increased by 10.7% and $831 million in absolute terms. The increase in the cash from operating activities is a positive sign, as operating activities corresponds to the day to day activities of company or to the main business of the company.

Next, we see the fall in the cash outflow from the investing activities. The fall is 8.6% in percentage terms and $368 million in absolute terms. This fall if we analyse is due to fall in the capital expenditure made. Receipts in form of other investing activities has fallen by 2% and $41 million in absolute terms.

The third head under cash flow is financing. We witness a fall in the cash outflow under financing activities. The fall is 17.8% in percentage terms and $1089 in absolute terms. Where the fall in cash outflow is positive or negative, we will understand that on analysing a more detailed cash flow.

On detailed analysis of the cash flow, we see fall in the receivables and inventories whereas account payables have increased. We can interpret is ass such that fall in the blockage of asset and longer credit period which overall had the effect of fall in the working capital requirements.

Coming to detailed investment activities section, we see not only is there a fall in the capital expenditure, there is increase in income by sale of assets whereas purchase of investments has remained constant. Thus, overall the effect was fall in the cash outflow via investing activities. (Jury, 2012)

Lastly, we analyse the financing activities, we see fall in the cash dividend, on further analysis we see the reason for the fall. There is buyback of stocks in the year 2018 and hence the fall in the cash dividend paid out. This is a positive effect as buyback of stocks good financial position of a company. Next is the cash outflow in form of payment for clearing out the debt. Thus, the company managed to reduce its long-term borrowings and hence the liabilities, which is also a positive sign. Thus, we see the fall in the cash outflow from the financing activities was indeed positive.

References:

Accounts Payable Turnover Ratio. (2019). Retrieved from https://www.investopedia.com/terms/a/accountspayableturnoverratio.asp

Asset Turnover Ratio | Analysis | Formula | Example. (2019). Retrieved from https://www.myaccountingcourse.com/financial-ratios/asset-turnover-ratio

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Fundamental Analysis: The Cash Flow Statement. (2019). Retrieved from https://www.investopedia.com/university/fundamentalanalysis/fundanalysis8.asp

Gates, S. (1993). 101 business ratios. Scottsdale, Ariz.: McLane Publications.

Gildersleeve, R. (1999). Winning business. Houston, Tex.: Gulf Pub. Co. / Cashman Dudley.

Hansen, B., & Palmer, A. (1997). FRAN, Financial Ratio ANalysis and more. Radnor PA (5 Radnor Corp CTR Suite 200, Radnor 19087-4585): U.S. Dept. of Agriculture, Forest Service, Northeastern Forest Experiment Station.

Horngren. (2017). Business Reporting and Analysis (Custom Edition eBook). Melbourne: P.Ed Custom Books.

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Ratio Analysis: Using Financial Ratios. (2019). Retrieved from https://www.investopedia.com/university/ratio-analysis/using-ratios.asp

Receivables Turnover Ratio. (2019). Retrieved from https://www.investopedia.com/terms/r/receivableturnoverratio.asp 

Return on Capital (ROC) Definition & Example | InvestingAnswers. (2019). Retrieved from https://investinganswers.com/financial-dictionary/ratio-analysis/return-capital-3054

Sanzo, R. (2005). Ratio analysis for small business. New York: Books for Business

Temte, A. (2004). Financial statement analysis. La Cross, WI: Schweser Study Program.