Financial Analysis of TPG Telecom Ltd for Investment Recommendation

Running Head: Business Finance
Business Finance
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Business Finance
Abstract
This report is on the investment recommendation to an international investor that is
interested in making an investment in the Australian market. TPG Telecom Limited is the
company analysed in this report using last two years financial data from the company’s
annual report. Analysis of two groups of ratios: profitability ratios and operating efficiency
ratios is done. On the basis of this ratio analysis it is seen that most of these ratios for TPG
deteriorated in last two years. This document also analysed the share price movement of
TPG to found that its volatility of 11% is lot higher as compared to the 3% volatility of the
All Ordinaries index price. It is also noted that the company’s share price is positively
correlated to the index price as its correlation coefficient is calculated to be 0.395. This
report used Gordon growth model and calculated the TPG’s cost equity to be 4.72%. The
capital structure of the firm has only equity and debt but no preferred shares. So, the debt
to equity ratio of 47.37% is used to calculate the company’s WACC at 4.34%. Based on
the financial analysis, the report does not recommended investing in TPG Telecom Ltd.
The reasons for this investment decision are the company’s lack luster business
performance in the last two years and the increased uncertainty over the company’s future
depending upon the result of its potential merger with Vodafone.

Business Finance
Contents
1) Introduction......................................................................................................................1
2) Financial Analysis of TPG Telecom Ltd..........................................................................2
2.1. Description of TPG Telecom Ltd.................................................................................2
2.2. Analysis of financial ratios...........................................................................................3
2.2.1. Profitability Ratios:................................................................................................3
2.2.2. Efficiency Ratios:...................................................................................................4
2.3. Analysis of share price movement of TPG Telecom Ltd.............................................5
2.4. Calculation of cost of equity of TPG............................................................................8
4. Conclusion.......................................................................................................................12
5. References.......................................................................................................................13

Business Finance
1) Introduction
This consulting report performs the financial analysis of the business performance of TPG
Telecom Limited in the last two years to make an investment recommendation to an
international investor, interested in investing in the Australian market. TPG Telecom Ltd is
one of the largest telecom services providers in Australia. The company provides
consumer, wholesale and corporate telecommunication services. This report uses last two
years financial data from the company’s annual report to perform the ratio analysis of TPG.
The ratios this report uses are the profitability and operating efficiency ratios. The
profitability ratios that are used are net income margin, operating profit margin, return on
equity, return on assets and return on invested capital. The efficiency ratios used are
receivables turnover, payables turnover, total asset turnover and fixed-asset turnover.
This report also analyses the movement in the share price of the TPG to compare its
volatility with that of the index. The correlation in the movement of the stock price and its
riskiness in comparison to the general market is also measured. Then, the report uses
Gordon growth method to calculate TPG’s cost of equity. The capital structure of the firm is
also analysed to measure the proportion of debt and equity and to calculate the weighted
average cost of capital. Based on this financial analysis the report gives an investment
recommendation that whether or not the client should make an investment in TPG
Telecom Limited.
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