Financial Analysis of the Annual

This document provides a detailed financial analysis of Telstra Corporation Ltd.'s annual report. It includes a vertical analysis of the income statement, ratio analysis, DuPont analysis, and an overview of the cash flow statement. The analysis helps in understanding the company's financial performance and making informed investment decisions. The document also highlights the factors that should be evaluated before making investment decisions.

FINANCIAL ANALYSIS OF THE ANNUAL REPORT OF TELSTRA CORPORATION LTD FOR THE FINANCIAL
YEAR 2016 2017 AND 2018

CONTENTS
A.VERTICAL ANALYSIS OF INCOME STATEMENT:............................................................2
B. RATIO ANALYSIS:...................................................................................................................2
1. QUICK RATIO........................................................................................................................2
2. CURRENT RATIO................................................................................................................2
3. DEBT-EQUITY RATIO.........................................................................................................2
4. DEBT-CAPITAL RATIO.......................................................................................................2
5. INTEREST COVERAGE RATIO.........................................................................................2
6. INVENTORY TURNOVER RATIO......................................................................................2
7. ACCOUNTS RECEIVABLE TURNOVER RATIO..............................................................2
8. ACCOUNTS PAYABLE TURNOVER RATIO.....................................................................3
9. TOTAL ASSETS TURNOVER RATIO.................................................................................3
10. NET ASSETS TURNOVER RATIO....................................................................................3
11. RETURN ON CAPITAL EMPLOYED RATIO..................................................................3
12. GROSS PROFIT RATIO.....................................................................................................3
13. NET PROFIT RATIO..........................................................................................................3
RATIO ANALYSIS CONCLUSION:...........................................................................................3
C. DUPONT ANALYSIS................................................................................................................4
D. CASH FLOW STATEMENT OVERVIEW AND ANALYSIS:................................................4
REFERENCES:....................................................................................................................................5
ANNEXURE 1.....................................................................................................................................5

1. NAME OF THE COMPANY AND YEARS TAKEN FOR THIS
ANALYSIS
The company chosen for the analysis is “TELSTRA CORPORATION LTD.”. Analysis is
made on its financial data for the years 2016, 2017 and 2018
2. ANNUAL FINANCIAL REPORTS
The annual Financial Report of Telstra Corporation for 2016, 2017 and 2018 have been
attached in the excel file
3. BASIS OF CALCULATION
All calculations are done using real numbers. The figures have been taken from official
website of the company Telstra Corporation Ltd. No figures from any other sources have
been used.
4. COLLECTION OF STOCK DATA
The collection of stock data has been attached in the excel sheet. The data has been collected
from Yahoo Finance website.
5. RATIO ANALYSIS:
A ratio analysis helps to the performance of the company such as profitability, liquidity and
solvency etc. (Bragg & Bragg, 2019).
1. QUICK RATIO
Here, the quick ratio is decreasing from 2016 to 2018. This tells us that the company
does not have enough liquid asset to take care of its day to day activity.
2. CURRENT RATIO
Any company that is in line with the ideal current ratio i.e. 2:1 or slightly higher is
considered to be ideal ("Ratio Analysis: Using Financial Ratios", 2019). Telstra
Corporation’s current ratio is falling from 2016 to 2018 indicating a high risk of
default and fall in its capacity to clear off its liquid debts.
3. DEBT-EQUITY RATIO
The ratio increases from 2016 to 2018 and is higher than the ideal ratio of 1:1. This
means that the company is liquidated which is not good for lenders because the risk
rises.

4. DEBT-CAPITAL RATIO
This ratio helps to measure the company’s financial leverage. The analysis show that
the Debt to capital ratio for both 2017 and 2018 are almost similar but is higher than
2016.
5. INTEREST COVERAGE RATIO
Low Interest Coverage Ratio shows the company is burdened by its debts (Landree,
2009). Telstra’s Interest Coverage Ratio rises from 2016 to 2017 then falls in 2018.
6. INVENTORY TURNOVER RATIO
Inventory turnover ratio evaluates the liquidity of company’s inventory. The inventory
turnover ratio at first falls in 2017 from 2016 then rises in 2018. The rise in the ratio
signifies Telstra is moving fast.
7. ACCOUNTS RECEIVABLE TURNOVER RATIO
In this company we see accounts receivable turnover increases then falls drastically.
This shows that Telstra’s financial and operational performance at present is falling
down.
8. ACCOUNTS PAYABLE TURNOVER RATIO
It is a comparison between a company’s net credit purchases to the average accounts
payable during a period. In case of Telstra ltd. we see that the accounts payable days
have risen.
9. TOTAL ASSETS TURNOVER RATIO
Total Assets Turnover Ratio measures a company’s capability to generate sales from
its assets. Telstra’s total asset turnover ratio has risen in 2016. After that is has not
changed much.
10. NET ASSETS TURNOVER RATIO
It measures the management’s ability to use company’s net assets to produce revenue
from sales. The net asset turnover ratio of Telstra Company rose in 2017 and then fell
2018. This shows that the firm’s ability to use its net asset in generating sales is not
good.
11. RETURN ON CAPITAL EMPLOYED RATIO
The profitability of a company and the efficiency with which its capital is employed is
known as Return on capital employed (ROCE). The ROCE ratio means almost same
in 2016 and 2017 then falls in 2018.
12. GROSS PROFIT RATIO
The gross profit remains uniform in 2016 & 2017, in 2018 it falls. This shows that the
company has not been able to manage its cost of sales well.
13. NET PROFIT RATIO
In case of Telstra’s Net Profit ratio, there is a huge fall from 2016 to 2018. If it
continues to fall, then the profitability of the firm also falls.

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 for comparing
its financial and make decisions accordingly. Ratio analysis will also help to identify areas of
problem and make these areas noticeable to the management.
6. COMMON-SIZE STATEMENT ANALYSIS OF THE INCOME
STATEMENT:
With the help of vertical analysis, we can identify how much of the revenue (excluding
finance income) each individual item make up for the 3 years (Balasundaram, 2012).
There is a rise in the total revenue by 7.25%. 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 1.22% in 2018.
7. DUPONT ANALYSIS
A DuPont analysis evaluates the company's return on equity (ROE) (Horngren. 2017).
On analysing the DuPont Equation of the 3 years, it can be seen that the net profit margin
reduces over the years, whereas the leverage or the equity multiplier has increased. There has
not been much change in the asset turnover rate. The rise in the financial leverage means the
company has borrowed more money where as the profit margin has reduced to a great extent.
This is the reason why the ROE rate has also fallen in 2018 compared to 2016.
8. CALCULATION OF THE VARIOUS COST OF CAPITAL
The various cost of capital have been calculated in the excel sheet.
9. ANALYSIS OF THE WEIGHTED AVERAGE COST OF CAPITAL
Based on the cost of capital calculated, the weighted average cost of capital has been
determined. The equity cost of capital rises over the three years which is a favourable
situation for the shareholders. The WACC increases from 2016 to 2018.
10. SUMMARY OF THE FINANCIAL ANALYSIS
Financial Statement analysis helps the company as well as the investors to understand a
company’s financial situation and corporate performance over the period. Certain factors are
in favour of Telstra Corporation where as certain other factors show that the condition of the
company is not much favourable. In few situation we can see that the amounts have been

declining where as there are places where the amounts are increasing which is good for both
the company as well as the investors.
11. FACTORS THAT SHOULD BE EVALUATED BEFORE MAKING
INVESTMENT DECISIONS
The company should evaluate some of the major factors such as the growth in earning, the
debt-to-equity ratio and the P/E ratio, dividends of the company, analysis of the balance sheet
as well as the industry analysis, what is the competitive advantage of the company, the
management i.e. how well the company is managed and its environment, etc. before making
any investment decisions in the future.
12. CASH FLOW STATEMENT ANALYSIS:
Before investing in a company, the investor analyses various factors. This means that an
investor must be satisfied fully before making an investment. Cash flow analysis is an
important analysis of the financial statements of any company. The role of cash flow analysis
is to identify where a company’s cash is earned and where it is spent (Jury, 2012). In this case
study, cash flow analysis is missing. This is not a great sign for investors who are interested
to invest.

REFERENCES:
Balasundaram, N. (2012). Ratio analysis. [Place of publication not identified]: Lap
Lambert Academic Publ.
Bragg, S., & Bragg, S. (2019). Ratio analysis. Retrieved from
https://www.accountingtools.com/articles/ratio-analysis.html
Fundamental Analysis: The Cash Flow Statement. (2019). Retrieved from
https://www.investopedia.com/university/fundamentalanalysis/fundanalysis8.asp
Horngren. (2017). Business Reporting and Analysis (Custom Edition eBook). Melbourne:
P.Ed Custom Books.
Jury, T. (2012). Cash Flow Analysis and Forecasting. Hoboken: John Wiley & Sons.
Landree, E. (2009). A delicate balance. Santa Monica, CA: RAND
ANNEXURE 1
TELSTRA CORPORATION LTD. ANNUAL REPORT
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/FY16-Annual-
Report-single-pages.pdf
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/Annual-Report-
2017.PDF
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/2018-Annual-
Report.pdf