Financial Analysis of Telecommunication Companies in Australia

This report analyzes the financial performance of Telstra Corporation Limited and Total Peripherals Group (TPG) Telecom Limited in Australia. It covers key ratios, explanations on ROA, ROE, and their relationships, providing insights for stakeholders.

HI5002 Finance for Business Assignment
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Prepare a brief description of the company, outlining the core activities...................................4
Task 2...............................................................................................................................................5
1.1 Calculate the key ratios for the past 4 years......................................................................5
1.2 Explain the phenomenon behind the variable Total Assets/Ordinary Equity and its
implication on the relationship between ROA and ROE.............................................................8
1.3 Explain why ROE is significantly greater than or less than the ROA...................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
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Introduction
The report aims to cover key turnover ratios of two telecommunication service provider
operating in Australia namely, Telstra Corporation Limited and Total Peripherals Group (TPG)
Telecom Limited. As such, this report provides a glimpse and brief of working and
organizational structure of corporates engaged in the telecommunication sector. Apart from this,
report covers the calculation of major financial parameters which is a prerequisite for the
determination of financial ratios. Both these corporations are multinational organizations since
they operate in multiple countries. An analysis, understanding, and interpretation of major ratios
have been explained. Various conclusions and recommendations have been drawn and cited at
appropriate places throughout the report.
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Task 1
Prepare a brief description of the company, outlining the core activities.
Telstra is an Australian based company which is engaged in telecommunications and technology
sector providing several types of communication services in the telecommunication market. It
has its operations in about 22 countries besides Australia. The company mainly focus its
operations on Asia-Pacific region. According to Delen, et. al., (2013), the success of its
operations can be figured out from the fact that it provides services to both governmental
organizations as well as the public. Telstra also provides cloud services and its associated
services namely cloud management and cloud consulting. It manages and operates both public
cloud, private cloud and hybrid cloud. Besides providing services, it also deals intangible goods.
It sells mobile phones, pre-paid mobiles, mobile broadband and related services. Likewise, it
provides mobile phone, tablets, a fixed line telephone, broadband, SIM only plans and similar
goods to small businesses.
Total Peripherals Group (TPG) is another Australian company which started its operations in
1986. According to Baki, et. al., (2014), it provides a wide range of communication services for
commercial purpose as well as domestic use since its main purchasers are big corporates, non-
profit organizations, residential users and various government departments. The main products of
TPG are internet services, mobile communication services, different types of bundled services,
and similar services. Besides these services, the concerned company also provides cloud services
business corporate and governmental organizations. The major proportion of the revenue comes
from the broadband services followed by the fixed voice services, mobile telecommunication
services, and other services.
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Task 2
1.1 Calculate the key ratios for the past 4 years.
Telstra Corporation Limited
Particular($) 2017($
m)
2016($
m)
2015($
m)
2014($
m)
Net profit after
tax
3,874 5,849 4,305 4,345
Total assets 42,133 43,286 40,445 39,360
Total liabilities 16,218 16,009 14,962 16,048
Ordinary
Equity
14,560 15,907 14,510 13,960
Ratios:
Return on
assets
0.09 0.135 0.11 0.11
Return on
equity
0.27 0.37 0.30 0.31
Debt ratio 0.38 0.37 0.37 0.41
¿ EBIT
TA X NPAT
EBIT X TA
OE = NPAT
OE
6238
42133 X 3874
6238 X 42133
14560 = 3874
14560
The given equation has been proved. The figures used in the equation are from the year 2017
annual report.
From the calculation of the ratios done above, it can be analyzed and interpreted that return on
assets of last 4 years is showing a fluctuating trend. It is neither increasing nor decreasing. This
is due to the fact that net profit after tax is fluctuating. ROA of the recent year 2017 has
decreased from 13.5% to 9%. As such, the organization needs to modify and accordingly amend
its strategic policies. Likewise, return on equity is also showing an unusual trend. ROE is
decreasing from 2015 to 2017. According to Baki, et. al (2014), such decline is mainly due to the
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continuous declination in the net profit assets. On the other hand, increase in the equity shows
that the concerned company is increasing its capital base on the issue of shares.
Total Peripherals Group (TPG) Telecom Limited
Particular($) 2017($
m)
2016($
m)
2015($
m)
2014($
m)
Net profit after
tax
413.80 379.60 224.10 171.70
Total assets 3911.0
0
3771.0
0
1653.8
0
1489.6
0
Total liabilities 944.10 1477.9
0
392.50 419.00
Ordinary
Equity
2399.3
0
1779.2
0
1003.2
0
832.40
Ratios:
Return on
assets
0.11 0.10 0.14 0.12
Return on
equity
0.17 0.21 0.22 0.21
Debt ratio 0.24 0.39 0.24 0.28
EBIT
TA X NPAT
EBIT X TA
OE = NPAT
OE
= 646.4
39110 X 415.7
646.4 X 39110
2399.3 = 415.7
2399.3
Hence the equation has proved and the figures takn for the same is from annual report 2017 of
TPG group.
The above table depicts the calculation of financial parameters as well as some key profitability
and turnover ratios. According to Delen, et. al., (2013), this corporate is also facing the position
akin to the aforementioned organization. For instance, Return on Assets is showing an informal
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trend. However, it is showing a nominal change over the past 4 years. In the recent year, it has
decreased from 0.11$m to 0.10$m in comparison to the previous financial year 2016. Similarly,
ROI is also not following any pattern or trend.
From the above table depicting the calculation of TPG Telecom Limited, it can be observed that
there is a wide level of fluctuation in the net profit after tax during the period of 4 years. such
variation is responsible for the unusual pattern in ROE as well as ROA.
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1.2 Explain the phenomenon behind the variable Total Assets/Ordinary Equity and its
implication on the relationship between ROA and ROE.
The key financial variable Total assets/Ordinary Equity requires the determination and
calculation of two factors namely, total assets and ordinary equity. In the words of Baki, et. al.,
(2014), both these financial parameters are very crucial for every organization since it depicts the
financial perspective of the organization towards the future. An organization whose total assets
are increasing implies the increase in the net worth of the organization. Similarly, an increase in
the share capital of any business enterprise denotes that the concerned company has some future
plans for expansion and growth. Since the company requires funds for expansion and growth, it
has acquired funds by issuing share capital.
According to Delen, et. al., (2013), there is direct as well as the indirect relationship between
total assets and ROA. An increase in total assets will increase ROA, other things remaining
constant. Likewise, equity has both direct and indirect impact on ROE. There is a linear
relationship between equity and return on equity. Both total assets and equity also have an
indirect impact on ROA and ROE since an increase in any one of them will influence the net
profit after tax, which is the denominator of ROA and ROE.
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1.3 Explain why ROE is significantly greater than or less than the ROA.
There is no relationship between ROE and ROA. As such, ROE can be greater or lesser than
ROA. Before understanding the reason behind the non-relationship between these two variables,
it is imperative to understand the components of both ROE and ROA. Both these financial
variables have common numerator namely, net profit after tax. However, the denominator of
both the key financial parameter differ. According to Rahman & Dalabeeh, (2013), ROE
considers ordinary equity while ROA involves total assets. As a result, there can be a varying
amount of difference between total assets and equity. It may be possible that assets in total may
increase while equity may show a decline. Consequently, ROE may be greater or higher than
ROA and vice versa. If the amount of total asset is significantly greater than the value of equity,
then ROA will be greater than ROE. On the other hand, if equity is greater than the total assets,
then the ROE will be significantly greater than ROA (Rahman & Dalabeeh, 2013).
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Conclusion
From the discussion throughout the report, it can be concluded that an analysis of major and key
ratios will help to get a better understanding of the financial position of any business
organization. For the ease of the understanding, an instance of two corporates operating in
telecommunication and technology sector has been covered in the report. A comparative analysis
of ratios of recent 4 years has been taken. Thus, it can be concluded that a detailed comparative
analysis of more than 2 years will help the stakeholders to interpret the financial performance in
a better way. Accordingly, better and accurate decisions can be taken by all the persons
associated with the operations of the concerned enterprise.
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References
 Baki, A. Z., Uthman, B.A., & Sanni. M., 2014. Financial ratios as performance measure.
University of Nigeria, vol.13, no. 1, pp. 82–97.
 Delen, D., Kuzey, C., & Uyar, A., 2013. Measuring firm performance using financial
ratios: A decision tree approach. Department of Management Science and Information
Systems, Spears School of Business, Oklahoma State University, United States.
 Ongore, V.O., Peter, O.K., Ogutu, M. and Bosire, E.M., 2015. Board composition and
financial performance: Empirical analysis of companies listed at the Nairobi Securities
Exchange. International Journal of Economics and Financial Issues, 5(1), p.23.
 Rahman. A., & Dalabeeh, E., 2013. The Role of Financial Analysis Ratio in Evaluating
Performance. Interdisciplinary journal of contemporary research in business. vol.2, no.2. Ranti,O,.2013. Determinants of Dividend Policy: A study of selected listed Firms in
Nigeria. Change and Leadership,
 Soondur. S.A.K,. 2016. Determinants of the Dividend Policy of Companies Listed on the
Stock Exchange of Mauritius. Conference on Global Business, Economics, Finance and
Social Sciences, Paper ID: M619 .
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