Income statement
Telstra Corporation Limited is an Australian based telecommunication company operating and expanding its business all over the country. The core activities of the company include establishment and distribution of communication services like mobile services, internet access and many others. It provides 17.7 million retail mobile services, 3.6 million retail fixed broadband services and 4.9 million retail fixed voice services. The main objective of Telstra is to offer quality services to its customers and make efforts to connect more and more people across the world. In order to achieve its goals, the firm produces easy technologies and content solutions which are user friendly (Telstra. 2018).
Telstra is recognized as the leading communication company of Australia having four major segments operating across the country. Initially, it was incorporated as a government entity named as Australia Post but later on the company was fully privatized. It got listed on ASX and is traded with a ticker symbol ASX: TLS. The CEO of the firm is focused on making Telstra more consumers oriented by undertaking a change program. After getting privatized, the share price of the company rose to $5 per share in December 2013 to $6 per share in the same month of 2014 (Telstra. 2018).
As far as its financials are considered, it earned a net profit of $3.5 billion in 2018 and revenue worth $29 billion during the same year. As of 2017, the company’s assets were reported at $42.8 billion along with the equity amounted to $15 billion. There were approximately 32000 employees working in the organizations in 2017 and 150 subsidiaries owned by Telstra. Overall, the company is making efforts and is focused on experiencing growth and success in the coming future (Telstra. 2018).
It is one of the financial statements prepared by the company at the end of the accounting period. It reflects the operating performance of the entity by taking into account the figures such as total revenue generated, net profit earned, operating profit made and many others. The analysis of statement of performance provides insights to the investors about the profitability position of the company. The amount of net profit shown is basically the excess of total revenues over total expenses incurred during the year. However, if the difference turns out to be negative then it is considered as net loss and the same reflects the decrease in owner’s equity. The term income is defined as the earnings made from the increase in assets and decrease in liabilities. The following section shows the overall analysis of Telstra’s income statement for the past four years (Agtarap-San Juan, 2007).
Balance sheet
Figure 1: Net income for 2015-2016
Referring to the appendix 1 as well as figure 1, it can be interpreted that the net profit or income of Telstra has reduced after 2016. During the first two years, an increase of 36.61% was there in the company’s net profit. However, the trend got reversed and the net income started declining and continuously falls till 2018. In 2016, the profit was highest at $5780 million which fall to $3563 million in the recent year. This reflected a deteriorating performance of the entity. In contrast, Queste Communications has made losses in past years. In 2016, the company reported a loss of $896,730 which increased to $2,248,319 in 2017 (Queste. 2017).
Figure 2: Comparison of sales revenue, COGS and Gross margin
Generally, the company is considered to be profitable when its percentage increase in sales is more than the percentage increase in its cost of revenue. Referring to Appendix 1.2 and above figure, it is observed that the revenue has shown a % change from -0.04% to 0.26% in 2017. However, the same decline by -0.69% in 2018. On the other side, the COGS have reported a huge upsurge in 2017 that is from 5.49% to 59.51% and it further increased by 79.17% in 2018. Due to such significant hike in company’s cost of revenue, the gross profit continuously reduces in the past three years.
The below figure reflects the results from vertical analysis of the Telstra’s income statement. The calculations done in Appendix 1.3 and the graph indicate that the gross profit reduced constantly over the period of four years. In 2015, it was 73.42% of total sales which reduced to 52.04% in 2018. This reduction was due to the increase in company’s administrative cost and other operating expenses, comprising of 31.26% and 18.47% of total sales respectively. The percentage further increased in case of operating expenditure.
The net income of Telstra was highest in 2016 at 22.37% and after that it falls to 15.02% and 13.88% in 2017 and 2018 respectively. The major contributing factor for the fall in entity’s profit was the continuous increase in its cost of revenue over the past years. In 2018, the COGS is 47.96% of total sales and the same was once reported at 26.58% of the revenue. Overall the profitability of Telstra has reduced during the years.
Figure 3: Factors as percentage of sales
Cash flow statement
It is also known as statement of financial position which provides the snapshot of company’s all assets, liabilities and equities. It reflects the financial situation and condition of the entity in a summarized form. The balance sheet is also prepared at the end of a specific financial year and the balances of all the assets and liabilities are reported in the statement at that date. On a whole, it clearly showcases the company’s position in all the aspects including solvency, liquidity and profitability (Makoujy, 2010). Generally, investors look up to such statements to gather the information about the amount of assets owned by the firm and the extent of liabilities owed by it. The following section provides the horizontal and vertical analysis of Telstra’s balance sheet for the past four years.
Figure 4: Comparison of total assets, total liabilities and equity
From the above graph, it can be seen that the total assets of Telstra has reduced after 2016 and were highest in that year only. In 2015, they were reported at $40,445 million which increased to $43,286 million in 2016. However, the trend got reversed in 2017 and the assets fall to $42,133 million. On the other side, liabilities had constantly increased over the years. They were at $26,342 million in 2015 which increased to $27,843 million. Along with this, the stockholder’s equity also rises in 2018 at $15,027 million from $14,541 million (Appendix 1.4). On the other hand, the total assets of Queste were much higher than that of Telstra. Though, they have reduced during the past years. In 2016, Queste has assets worth $8,038,176 million which reduced to $5,677,929 million in 2017. However, the reverse trend was there in company’s total liabilities as they rise from $375,795 million to $539,149 million in 2017. The amount of equity had shown a significant decline in the years (Queste. 2017).
Figure 5: Selected factors as % of total assets
In 2015, the current assets were 17.23% of the total assets which increased to 18.66% in 2017. However, the same reduced to 16.51% in 2018. On other side, the non-current assets made up 82.77% of total assets which further increased to 83.49% in the recent year. The reason for such upsurge is the overall increase in Telstra’s property, plant and equipment and goodwill. As far as total liabilities are concerned, they have shown a slightest reduction of 64.95% from 65.49% in 2018. The reasons for such increase were the rise in company’s current liabilities and its short term borrowings (Appendix 1.5).
Figure 6: Selected factors as % of total assets
It is another financial statement which every listed company is required to provide in its financial reports along with the other statements. It basically shows the inflow and outflow of cash within the business. CFS generally reflects the movement of cash in three main activities named as operating, investing and financing. The analysis of this is also necessary as to evaluate the position of cash in the company and identify the issues related to it, if any (Jury, 2012).
Cash flows from operating activities
It can be observed that the cash generated from operating activities has increased from $7775 million to $8606 million in 2018. However, in the starting the same had shown a declining trend which can be identified by the cash flow in 2015 and the same in 2017. It reduced from $8311 million to $7775 million. Overall, the figures remain positive in all the four years (Refer appendix 1.6). In contrast, the operating cash flow of Queste was more than Telstra but the same reduced to $46,220 million from $92,641 million in 2017 (Queste. 2017).
Investing activities show the overall cash used in them. In 2015, it was $5692 million which reduced to $3911 million in 2018. However, some fluctuations are noticed in between and they were due to the investments made in PP&E and purchase of intangibles. On a whole, the cash used in investing activities in year 2018 is comparatively less than amount used in 2017 and 2015 (Refer appendix 1.6). The overall net cash used in investing activities of Queste was $1783 million in 2017. The figure was lower than the cash utilized in Telstra’s activities.
Cash flows from financing activities
It also showed the negative cash flow but the amount was less in 2018 as compare to other periods. In 2015, the net cash used was $6882 million which reduced to $5015 million in the recent year. This was due to the repayments of company’s debt and the dividends to the shareholders. Some cash was also used in other financing activities (Refer appendix 1.6).
Overall, the net cash flow from all the three activities turned out to be positive in the four years, though declining. In 2015, it was $3209 million which increased to $3939 million in 2016. However, the same reduced to $2454 million in FY2017 but again the trend got reversed and the cash flow shows a hike at $3674 million in the current year. In a nutshell, Telstra has improved its cash position in the past years. In 2017, the overall increase in competitor’s net cash was $44,437 million (Queste. 2017).
Figure 7: Telstra’s liquidity ratio
Figure 8: Queste’s liquidity ratio
From the above liquidity ratios, it can be seen that the current ratio of Queste is way more than that of Telstra. It was 3.75 in 2016 which reduced to 1.63 in 2017. On Other hand, Telstra reported CR at 1.02 in 2016 and the same declined to 0.86 in 2017, below the industry average. The same trend was followed by the quick ratio. As Queste does not have any inventories in past two years so it’s quick and current ratios were same. Telstra’s QR also reduces from 0.91 to 0.70 along with its cash flow to sales ratio. Overall, the liquidity position of Queste is was much better than Telstra in last two years (Saleem&Rehman, 2011).
The below graph shows that Telstra has better profitability position than its competitor Queste Telecommunications. Although the profits have been declined in 2017 as compare to 2016 but the company has not incurred any losses like its competitor. In 2016, its ROA was 13.81% which reduced to 9.11% because of the fall in company’s net income. On the other hand, the ROA of Queste was -10.39% and -32.785 in 2016 and 2017 respectively. This was due to the net loss made by the company in past two years. As far as return on equity is concerned, it has also reduced in case of Telstra from 38.57% to 25.59% and the ratio remains negative for Queste (Vogel, 2014).
Figure 9: Profitability ratios of Telstra
Figure 10: Profitability ratio of Queste
The asset turnover ratio of Telstra has reduced from 0.62 times to 0.61 times in 2017. This was because of the slightest change in company’s revenue. However, it indicates that the efficiency of Telstra has reduced in 2017 but still it is more efficient than its competitor whose ATR was 0.01 in 2017 (Figure 11).
Telstra’s inventory turnover shows an upward trend as it increased from 13.83 times to 15.11 times in 2017, indicating that the company is capable of generating more revenue from its stock. It’s DTR and CTR has also increased during the past two years. Comparatively, Queste has low Debtor and creditor turnover ratios and the company also does not have any sort of inventory in past two years. This proves that Telstra is more efficient than Queste(Tracy, 2012).
Figure 11: Efficiency ratios of Telstra
Figure 12: Efficiency ratios of Queste
Figure 13: Capital structure ratio of Telstra
Figure 14: Capital structure ratio of Queste
The above graphs and figures show the gearing ratios of both the companies. It is observed that Telstra had high debt to equity ratio with 90.59% in 2016 and 100.23% in 2017. On other hand, Queste has no borrowings which makes its D/E ratio nil in both the past years. In addition, the debt ratio of Telstra was also higher than its competitor reported at 65.49% in 2017 whereas Queste had 9.50% in the same year. However, the ICR of Queste was much higher than Telstra along with its equity ratio. So, it can be interpreted that Telstra had high financial risk due to huge borrowings as compare to Queste (Jenter&Lewellen, 2015).
Conclusion
The overall report concludes that financial performance of Telstra is much better than Queste. Its revenue has increased along with the growth in its cost of sales. Although the profitability position of the company has reduced during the years but is was far better than its competitor. Moreover, the company is efficient enough to generate revenue from its assets and resources. However, it needs to focus on improving its liquidity positing and reducing its debt and borrowings in order to eliminate the financial risk. Overall, it can be said that Telstra is performing quite well as compare to Queste.
References
Agtarap-San Juan, D. (2007). Fundamentals of Accounting: Basic Accounting Principles Simplified for Accounting Students. Bloomington: AuthorHouse.
Makoujy, R. (2010). How to Read a Balance Sheet: The Bottom Line on what You Need to Know About: Cash Flow, Assets, Debt, Equity, Profit… and how it All Comes Together. United States: McGraw-Hill.
Jenter, D., &Lewellen, K. (2015).CEO preferences and acquisitions.The Journal of Finance, 70(6), 2813-2852.
Jury, T. (2012). Cash flow analysis and forecasting: the definitive guide to understanding and using published cash flow data (Vol. 653). UK: John Wiley & Sons.
Saleem, Q., &Rehman, R. U. (2011).Impacts of liquidity ratios on profitability.Interdisciplinary Journal of Research in Business, 1(7), 95-98.
Telstra.(2018). Telstra.com.au. Retrieved 13 January 2018, from https://www.telstra.com.au
Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis.net.
Queste (2017). Annual Report. Retrieved from https://www.queste.com.au/sites/default/files/20171031%20QUE%20ASX%20Annual%20Report%20-%202017.pdf
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. United Kingdom: Cambridge University Press.
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