Financial Analysis of Telstra Corporation and TPG Telecom Limited

This assignment provides a financial analysis of Telstra Corporation and TPG Telecom Limited. The analysis includes the cash flow statement, income statement, debt-equity position of the shareholders of the company. The aim is to draw a comprehensive analysis for an overall success of the company and its stakeholders and the people who want to invest in the company in some way or the other.

Accounting
Assignment

1
By student name
Professor
University
Date: 25 th Sep 2018.
Executive Summary
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In the given assignment two companies have been selected and their overall financial analysis
has been done. Based on the annual reports of the company’s important conclusion has been
drawn on important elements that includes cash flow statement, income statement, debt-equity
position of the shareholders of the company. The analysis will help the investors in
understanding which company is financially more viable and in which company should they
invest their funds. The aim is to draw a comprehensive analysis for an overall success of the
company and its stakeholders and the people who want to invest in the company in some way or
the other.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Owner’s Equity............................................................................................................................................4
Cash Flow Statement...................................................................................................................................7
Other comprehensive income statement..................................................................................................11
Accounting for Corporate Income Tax.......................................................................................................13
References.................................................................................................................................................16
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Introduction
In the given assignment two companies have been selected which are Telstra Corporation and
TPG Telecom Limited. Both the companies belong to the telecommunication sector and are
strong competitors of each other. Both the companies are listed on the ASX.
Telstra Corporation is one of Australia largest companies in the telecommunication sector and is
a leading provider of mobile phones, home phones, broadband connections and helps in
providing and building telecommunication lines. The company works under two models,
business to consumer and business and business and aims to provide software related issues
solution to the companies. The company was originally founded in 1901, and now the overall
revenue of the company is in millions and the company trades its share through the Australian
Stock Exchange (Abdullah & Said, 2017).
TPG Telecom is one of the biggest Australian company and it specializes in IT related services
for consumers and business-related services and provides mobile related services for the people.
It operates the largest mobile virtual network for the companies (Alsagoff, 2010). The company
is having thousands of mobile subscribers and they rely on the company for many of their
solutions related to mobile services and other telecommunication needs.
Analysis
In the given case the annual reports of both the companies have been downloaded and analysed
and important opinion on the various elements of the financial statements of the company are
given below-
Shareholder’s Equity
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Shareholders are the people who are investing their funds in the company and are dependent on
the company to earn good returns from the company. It is the duty of the management that they
should consider the needs of the shareholders on priority basis. It helps the company in raising
funds which they can invest in their market. Shareholders equity is an important part of the
financial statement of any company and stakeholders always to analyse the same to form an
opinion whether they want to invest in the company or not (Antle & Smith, 1985). The main aim
of the management is also to focus on shareholders wealth maximization. The various elements
that are included in the shareholder’s equity are-
 Equity Share Capital - The companies that have their names listed in the stock exchange
then they can raise their funds from those sources. The companies allocate the shares at
the nominal value and some shares are issued at a premium or discount. The aim of the
management is that they can raise the funds that they need to run their business
operations. It is also important that they are providing proper returns to the shareholders
who are investing in the company (Boghossian, 2017). In case of Telstra Corporation, the
company have an overall equity shareholding of $4,421 million shares and they have also
bought back few shares and have also invested in some new shares. Thus, we see that
there is a lot of change in the overall equity structure of the company and in case of TPG
Telecom there is sale of equity investments that has boosted the cash flow of
$124.5million, and the company has also bought back few of the shares. Total there is a
lot of change in the equity structure of the company (Coate & Mitschow, 2017).
 Retained Earnings – Retained Earnings are the overall earnings that the company has
accumulated over the years after paying of the equity and the preference shareholders of
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the company. These retained earnings can be used for variety purpose for the company
and can also be used to issue more shares. It can also be seen that in case the retained
earnings are negative the companies are not allowed to issue dividends. Retained
Earnings are part of the equity share capital for the company (Dan, 1995). In case of
Telstra retained earnings are inclusive of various elements like actuarial benefit on
defined plans, income tax that is paid on actuarial gain that the company gets from
defined actuarial gain, also cumulative benefits from investments that the company gets
from equity investments at fair value. The overall retained earnings for the company is
$10,225 million. In case of TPG Telecom the overall retained earnings for the company is
$963.3 million. Out of the retained earnings, the shareholders are paid some amount of
dividend and the rest is left off. Thus, it can be said retained earnings are the important
point for the company.
 Non-Controlling Interests - In case of normal terms, there are some shareholders who
holds less than the total voting power for the company. In case of Telstra the company is
having certain non-controlling interest as a part of that but in case of TGP there are no
non-controlling interest on part of the company (Delone & Mclean, 2004). Thus, we see
that Telstra has more business combinations and holdings that TGP is not having. So, we
both the companies are having strong positions.
(Amount in USD Million)
Telstra Corporation - Owner's Equity
Particulars 2017 2016
Equity 4,421 5,167
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Reserves -105 62
Retained Profits
10,22
5
10,64
2
Total Equity
66,53
0
16,32
3
In case of Telstra Corporation, the company is having retained earnings and that has helped in
improving their equity position and it also has reserves which the company has after paying of
the dividend. But from 2016 and 2017, the overall equity shareholders have increased, and the
company has also brought back the certain shares and that has reduced their equity position and
thus affected the overall owners of the equity (Eddy, et al., 2004).
(Amount in USD Million)
TPG Telecom - Owner's Equity
Particulars 2017 2016
Equity
1,44
9
1,05
1
Reserves -18 42
Retained Profits 963 681
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Total Equity
2,39
4
1,77
4
In case of TPG Telecom, the company has negative reserves in the current period and has issued
new shares and that has increased their owner’s equity. The retained earnings of the company
have also reduced and that has affected their equity position. It can also be seen that from 2016,
to 2017, the equity share capital of the company has increased but negative reserves are a bad
part of the capital structure as it shows that the company is having accumulated losses instead of
profit and they will not be able to pay off their dividends.
2) The company can raise shares through various shares that includes both equity and debt. It
depends upon the management of the company how much risk are they ready to take in lieu of
the reward that they will get from the company (Eisemann, et al., 2017). In case of equity there is
less risk and the overall return is also less but in case of debts the risk element is high but the
return that they get is important. When we analyse the debt-equity structure of the company, we
are analysing the overall liquidity position of the company. Liquidity is a position that shows
how the companies are managing their funds and in case they are investing their funds in the
company the shareholders should have good knowledge about that. In both the companies they
are managing their debt-equity element and are trying to balance the overall liquidity position of
the company. Given below the equity-debt structure of the two companies (Gray, 2018).
(Amount in USD Million)
TPG Telecom Limited - Owner's Debt-Equity Position
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Category Description 2016 2017
Debt
Loans and
Borrowings
872.
4
1350.
4
Total Debt
872.
4
1350.
4
Equity
Equity attributable
to shareholders of
2,39
9
1,779
Total Equity
2,39
9
1,779
Debt-Equity ratio 36% 76%
In the given case the debt element was high in 2016 but in case of 2017, the company has tried to
reduce that and has invested more in the equity, so that would balance the financial position of
the company. The company has issued new shares and that has brought down the debt-equity
ratio from 76 percent to 36 percent and that is extremely good for the company and for the
investors also (Gullet, et al., 2018).
(Amount in USD Million)
Telstra Limited - Owner's Debt-Equity Position
Category Description 2016 2017
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Debt
Loans and
Borrowings
14808 14647
Total Debt 14808 14647
Equity
Equity attributable
to shareholders of
14,56
0
15,90
7
Total Equity
14,56
0
15,90
7
Debt-Equity ratio 102% 92%
In case of Telstra Corporation, the financial position of the company is not that stable as the
company is having very high percentage of borrowings in comparison to the equity element that
they have (Kusolpalalert, 2018). It can also be seen that since 2016 the company is investing
more in debt and is buy backing the old shares and that has brought the overall equity element
low and in turn have increased the risk that the company was facing with respect to paying off
the debts in case the need arises.
There is a major difference in the debt-equity position of both the companies, where Telstra is
having a very high debt element in comparison to TPG and thus when it comes to taking
decisions based on the overall liquidity position the investors will try to invest in TPG
Corporation and not in Telstra, as that would be a wiser decision on all fronts. The aim of the
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investors is to get return from the company that is on higher end and thus they want a more
stable position which is not possible in all cases.
Statement of Cash Flows:
The cash flow statements show the flow of cash from the beginning of a financial period to the
end of the financial period. It shows the position of the cash at the end of the financial period.
The provision of the company is that there are relevant provision of the Australian Accounting
Standards and the Corporations Act 2001. There are major segments of the cash flow statements
which the companies need to consider and are helpful for the investors of the company in many
ways (MORGAN, 1988)-
 Cash Flow from operating Activities-
In case of operating activities, it covers the transactions that occurs between the companies in the
ordinary course of business. These activities form the major part of the business and can often
lead to increase and decrease of the cash. There are few transactions which are part of this that
includes collection of the debtors, payment to the creditors, expenses that are operating in nature
and covered, payment of interest and other current liabilities are also covered in this. In case of
Telstra the company has paid off to the suppliers and has received cash from the customers and
has also received government grants and that forms the major part of their cash. The company
has also paid taxes and that is considered as a part of the operating activities. In case of TPG
Telecom operating activities includes cash collected from the debtors and paid to the creditors. It
also includes the amount of income tax that is paid by the company. Thus, the net cash from
operating activities is $722.7m (Sikka & Willmott, 2010)
 Cash flow from Investing activities
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In case of investing activities, it includes those transactions which the companies indulge in
when they are wanting to expand their operations and invest in different assets for the company.
The various kinds of investing activities include investing in property, plant, investing in
securities, disposing of assets etc. It often forms the major chunk of the cash transactions that the
companies indulge in. In case of TPG Telecom the company has indulged in many investing
activities that includes purchase of property plant and equipment, purchase of intangible assets,
purchase of investment, payment of contingent consideration etc. In case of Telstra the company
indulges in variety of investing activities that includes, purchase of property plant and equipment
and investment in intangible assets. So, we see that both the companies are trying to expand their
overall operations (Vieira, et al., 2017).
 Cash flow from Financing Activities
In case of financing activities, the companies aim to increase the overall capital of the company.
Some example of these type of activities include issue of shares, issue of long-term debentures,
payment of debt, taking loan etc. All these activities effect the company from the capital point of
view. In case of Telstra Corporation, the companies have indulged in many financing activities,
which includes taking loans, paying off loans, paying for the buy-back of shares, finance cost
paid, dividend paid for equity shareholders etc (Yadao, 2018). In case of TPG Telecom the
companies can indulge in many activities which are interest received, interest paid, dividend
received, dividend paid, repayment of liabilities, issue of shares, payment of finance cost etc.
Thus, we see that the company is indulging in many such activities that is affecting the overall
cash flow of the company.
Cash flow statement of both the companies are given below:
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Telstra Corporation
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TPG Telecom
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In the table that is given below a comparative analysis of the cash flow statement of the company
for three years is given below:
(Amt in US$M)
Telstra - Cash Flow Analysis
Particulars 2017 2016 2015
Net operating cash flows
7,77
5
8,13
3
8331
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Net investing cash flows
-
4279
-
2207
-
5,69
2
Net financing cash flows
-
6104
-
3777
-
6,88
2
Net increase/(decrease) in cash and cash equivalents from Continuing
operations
-
2,60
8
2149
-
4263
Cash and cash equivalents, net of overdrafts, at the beginning of the
financial year
3,55
0
1396 5527
Foreign currency exchange rate changes on cash and cash equivalents -6 5 132
Cash and cash equivalents, net of overdrafts, at the end of the financial
year
936
3,55
0
1396
(Amt in US$M)
TPG - Cash Flow Analysis
Particulars
201
7
201
6
201
5
Net operating cash flows 723 620 381
Net investing cash flows -457
-
148
8
-265
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Net financing cash flows -258 884 -116
Net increase/(decrease) in cash and cash equivalents from Continuing
operations
7 15 -0.6
Cash and cash equivalents, net of overdrafts, at the beginning of the financial
year
39 23 23.8
Foreign currency exchange rate changes on cash and cash equivalents 0.1 -0.3 0.5
Cash and cash equivalents, net of overdrafts, at the end of the financial year 46 39 23.7
Based on the overall analysis the cash flow position of TPG is not that great and the company
needs to see that they are balancing the cash flow as that shows the liquidity position of the
company. In case of Telstra from 2016 to 2017, there has been huge decrease in the overall cash
position and the company has indulged in many such activities and thus that shows that they
need to manage that (Richard & Stephan, 1995).
Statement of Other Comprehensive Income
A statement of comprehensive income statement for both the companies have been stated below:
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Telstra Corporation
TPG Telecom
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A statement of comprehensive income statement for the companies have been given in case of
TPG, there are not many items that are affecting the company, the comprehensive statement
includes some foreign exchange transactions, change in the fair-value of the assets, net loss on
the flow of hedges undertaken by the company. In 2017, the total income in comprehensive
statement is $355.9m. In case of Telstra there are many activities that is affecting the income
position of the company that includes fair value transactions, transactions related to the foreign
exchange transactions and it also include hedge funds treatment etc., thus in 2017 the company
has an income of $7m, which is very less and thus the company needs to take important steps so
that they can provide better returns to the minority
Treatment related to Corporate Tax:
TPG Limited - Tax Details
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Particulars 2017 2016 2015
Tax Expenses Incurred 206 135 107
Effective tax Rate 30.00
%
30.00
%
30.00
%
Taxes paid in Cash 178 154 95
Deferred tax -26.2 -5.8 -12.8
TELSTRA CORPORATION - Tax Details
Particulars 2017 2016 2015
Tax Expenses Incurred 1731 1,781 1,722
Effective tax Rate 31.40
%
23.50
%
29.30
%
Deferred tax 26 16 67
In the given cases TPG Telecom has paid more taxes in comparison to Telstra Corporation and
has made specific disclosures with regards to that. The overall rate of taxations has changed over
the years and that has also affected the overall amount that the company is paying off to the
government.
Conclusion
Based on the overall analysis the investors can decide which company they want to invest in
which includes many points like the level of liquidity, level of equity, cash flow and all that has
been discussed in the given assignment.
:
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