Telstra Financial Analysis Assignment

Telstra Financial Analysis
Assignment 2 - Financial Analysis Project

Contents
1 Executive Summary...........................................................................................................................3
2 Organisation's Business Profile..........................................................................................................4
3 Financial reports for 2015-2016........................................................................................................5
4 Financial ratio analysis......................................................................................................................8
4.1 Profitability................................................................................................................................ 8
4.2 Efficiency................................................................................................................................... 9
4.3 Liquidity and Solvency.............................................................................................................10
4.4 Share market performance.....................................................................................................11
4.4.1 Stock Price.......................................................................................................................11
4.4.2 Dividend.......................................................................................................................... 12
5 Conclusions and Recommendations...............................................................................................13
6 References...................................................................................................................................... 14
A. Appendix......................................................................................................................................... 15
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1 Executive Summary
This report examines financial results of Telstra’s late performance and more specifically, focuses on its
investment performance, shareholders returns in dividends and share prices growth. Furthermore, it
presents the comparison of the strategies between past performance and future expectations, by
identifying the business profile and analysing financial ratios.
Telstra is an established mature and slow growth company in terms of the use of their capital, margins
and inventory management. The competitive insensitive in the market across all communication
companies and the NBN returns did lead to the share price decline for all Telstra’s core business units.
After all the company still has a good yield, dividend payment is secure and Telstra is winning more
customers in the various categories of the telecommunication markets including mobile broadband
and the NBN.
Telstra's future focus is investing in innovation and trying to engage more with the clients rather than
only trying to have attractive and competitive prices. As a telecommunication provider and due to the
increase of the data volumes and faster connectivity demands, Telstra should still be a strong hold for
all the existing investors and a buy for all the potential investors.
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2 Organisation's Business Profile
Telstra is a company with a leading role in the Australian Telecommunications and Technology sectors.
The name of Telstra appeared after Telecom merged with the Overseas Telecommunication
Corporation in 1993 and was initially used overseas in 1993 and later on in Australia in 1995. Based on
information found on the company website Telstra employs 33,000 people across more than 20
countries and provides a wide range of services to a large number of consumers, business and
government customers. Telstra's extensive network allows for an average of 55 million calls and 356
million data connections to be completed successfully daily. In Australia only, Telstra provides 17.4
million mobile services, 6.8 million fixed voice services and 3.5 million retail fixed broadband services
(Telstra Corporation Limited, 2017).
Mr Andrew Penn is Telstra's Chief Executive Officer & Managing Director and Mr John Mullen
is The Chairman of Telstra Corporation Limited and his official title is Non-Executive Chairman. (Telstra
Corporation Limited, 2017).
Telstra's services in Australia are listed below:
 Fixed voice, data, mobiles, media and business software to the Australian retail and small to
medium sized business markets
 data connectivity, IP networks and cloud, network applications, managed services, collaboration,
unified communication and security to government customers
 wholesale telecommunications services
Telstra has a global presence in a number of countries around the world and the headquarter of Telstra
International are in Hong Kong (Telstra Global, 2017).
The main three objectives of Telstra's strategy are to ensure maximum customer satisfaction by
providing excellent customer service, to succeed customer and revenue growth by excelling the
internal procedures and the core of the business and to invest in technologies and businesses that will
strengthen Telstra's capabilities and core services. In order to meet these objectives Telstra focuses on
improving the company's networks in order to ensure unparalleled coverage, speed, reliability and
security, digitising its systems and processes to improve customer services and strengthening its culture
and capabilities in order to enhance the company's accountability (Telstra Corporation Limited, 2017).
Telstra's priorities for FY 2016 were “to maintain its network leadership, to accelerate its productivity
program, to Win in the nbn™ market and reduce their cost to acquire, to invest in long term growth, to
operate as a world class technology company” (Telstra Corporation Limited, 2017).
2.1
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3 Financial reports for 2015-2016
This section presents Telstra's Income Statements, Statement Of Financial Position and Statement of
Cash Flows for years 2015 and 2016 which were taken from Telstra’s annual report for Year 2016.
Figure 1Telstra's Income Statement for Years2015 and 2016 (Telstra Corporation Limited, 2016)
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Figure 2Telstra's Statement of Financial Position (Telstra Corporation Limited, 2016)
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Figure 3Telstra's Statement of Cash Flows(Telstra Corporation Limited 2016)
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4 Financial ratio analysis
Telstra's overall performance from continuing operations has led to an increase of its revenue from
$26.1 billion to $27.05 which corresponds to a percentage of 3.6% (Telstra Corporation Limited, 2016).
The earnings before interest, tax, depreciation and amortization (EBITDA) decreased by 0.6% due to an
increase in competition between all the telecommunication companies. A number of ratios have been
calculated in the following sections in order to assess Telstra's financial performance. TPG's ratios have
also been calculated for comparison.
4.1 Profitability
By the end of financial year 2016, Telstra's operating profit margin from continuing and discontinued
operations increased due to the sale of Autohome shares for $1.8 billion (Telstra Corporation Limited,
2016).
Telstra's operating profit margin as a percentage was calculated using the equation below (Allport and
Dunckley, 2014)
ProfitfromcontinuinganddiscontinuedOperating
SalesRevenue ∗¿ 100
and it was equal to 21.6 % in 2016 and 16.4% in 2015. TPG had an operational Profit Margin of 25% in
2016.
The return on Equity (ROE) for 2016 was 25.9% which is not as high as the ROE of TPG (one of Telstra’s
main competitors) that was 28.9% but definitely attracts equally levels of investment quality.
ROE is a measure of profitability but investors should consider that a disproportionate amount of debt
in a company's capital structure would cause a smaller equity base hence a high ROE of a modest
equity base could result from even a small amount of net income (Atrill, McLaney and Harvey, 2014).
Telstra's Return on Equity (ROE) can be found using the equation (Allport and Dunckley, 2014)
NPAT
AvgSC+ Reserves * 100
and was calculated to be 25.9 % for 2016. TPG had a ROE of 28.9% for 2016.
The Returns of Assets (ROA) figure indicates how effective the conversion of the company’s money to
investments into net income is (Atrill, McLaney and Harvey, 2014). Telstra’s ROA was found to be 12.9%
for 2016, which is slightly lower a small in comparison to 2015 when it was 14.4%. The ROA for TPG
was 13.6% for 2016 which indicates that both companies have a healthy ROA for this industry.
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The equation for the calculation of the ROA is (Allport and Dunckley, 2014)
ProfitbeforeInterest
TotalAssets x 100
and the ROA was found to be 12.9 % for 2016 and 14.4% for 2015. TPG’s return on Assets was 13.6%
for 2016.
4.2 Efficiency
Analysing a company's inventories and receivables can be helpful when assessing whether an
investment to the company's share is a good choice or not. Keeping low inventory levels and quick
collecting quickly debts allows companies to remain efficient and competitive (Atrill, McLaney and
Harvey, 2014).
As a rule of thumb, higher asset turnover ratios is related to more revenue per dollar of assets hence a
high value of asset turnover indicates a good company performance (Atrill, McLaney and Harvey,
2014).Telecommunication firms tend to have large asset bases which allow them to have lower asset
turnover. Telstra’s turnover has been kept between 0.13 and 0.10 hence kept fairly stable through the
last 2 years. This value its relatively low and within the market standards.
Telstra's value of total assets has increased to $43.2 billion comparing to previous years when it was
$40.4 billion (Telstra Corporation Limited, 2016).
Inventory turnover is an indicator of how fast a company sells its inventory. Low sales result to a low
turnover and, therefore, excess inventory. Strong sales and/or large discounts result to a high turnover
value. A company's performance is strongly related to how quickly a company can sell its inventory
(Atrill, McLaney and Harvey, 2014). Telstra's Inventory value decreased from $32 million to $29 million
at the end of financial year of 2016 (Telstra Corporation Limited, 2016).
Low inventory levels is a common logistics and inventory objective for companies and requires
management and incurs costs. Companies typically try to achieve a balance whereby they have just
enough inventory to meet current and near-term demand, but not so much that they have excess
(Atrill, McLaney and Harvey, 2014).
In order to assess the efficiency of Telstra’s inventories the below rations have been calculated:
a) Asset turnover (Allport and Dunckley, 2014)
OperatingRevenue
TotalAssets
The asset turnover was found to be 0.13 for 2016 and 0.10 for 2015. TPG has an asset turnover of 0.15
for 2016.
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b) Inventory turnover(Allport and Dunckley, 2014)
OperatingRevenue
CurrentInventory
Inventory turnover was found to be 48.56 for 2016 and 53.18 for 2015. TPG has an asset turnover of
198.98 for 2016.
4.3 Liquidity and Solvency
Liquidity ratios indicate if the company is capable of meeting its short-term obligations and is especially
useful for creditors, suppliers, management and others (Atrill, McLaney and Harvey, 2014). The liquidity
analysis includes the ratios given below. The current ratio is calculated can be calculated dividing the
current assets with the current liabilities and is the most widely recognised measure of liquidity.
According to the annual financial reports from 2015 to 2016, Telstra's Current ratio was 1.01 for 2016
(Telstra Corporation Limited, 2016) hence it was positive working capital and this shows that Telstra is
not facing a liquidity crisis. Despite the fact that Telstra has a low inventory its current ratio is above
one and this is a good indicator for investors. TPG's current ratio is equal to 0.69 which hints that
Telstra is more cable of paying its short-term bills.
Telstra's Current ratio was calculated using the equation (Allport and Dunckley, 2014)
CurrentAssets
CurrentLiabilities
and was found to be 1.01 for 2016 , and 0.85 for 2015. TPG has a current ratio of 0.69 for 2016.
The gearing ratio is an indicator of how risky is the financing structure of a company. A higher gearing
ratio shows a higher risk and a high degree of leverage but it does not indicate that the company is in
poor financial condition. Gearing ratios are very useful when they are used as a mean for comparison
(Atrill, McLaney and Harvey, 2014). Telstra’s gearing ratio for 2016 was 55%, a small increase from 2015
whereas TPG has a gearing ratio of 45.4% which means that Telstra has a riskier financial structure.
Tesla's Gearing ratio was calculated using the equation (Allport and Dunckley, 2014)
NoncurrentLiabilitie
Totalequity+Noncurrentliabilities x 100
and was found to be 55% for 2016 , and 53.49% for 2015. TPG has a gearing ratio of 45.4% for 2016.
The acid-test ratio shows if the company is able to meet its urgent liabilities using its short-term assets
(Atrill, McLaney and Harvey, 2014). Telstra's ratio is 0.9 which is really close to 1. As a result, it can be
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concluded that Telstra has good cash reinvestments and current assetsso it does not rely on its
inventory.
The Acid test ratio was calculated using the equation (Allport and Dunckley, 2014)
CurrentAsset (ExInv ∧PrePayments)
CurrentLiabilities
and was found to be 0.9 for 2016 , and 0.75 for 2015. TPG has a current ratio of 0.6 for 2016.
4.4 Share market performance
4.4.1 Stock Price
The share price of Telstra Corporation Ltd decreased significantly in 2016 after a bull market in early
2015 as seen in the chart below (ASX, 2017). The main reason for this decrease is the competition
along all the telecommunications companies.
According to Business Insider "Telstra still charges a decent premium across all price points in the post-
paid market, particularly after a price war was waged by Vodafone pushing both theirs and Optus’s
prices down" (Tucker, 2016).
It should be noted that the price chart summarises the opinions and emotions of market participants
and their views about fair value. It is easy for a share price to run up too far too quickly, and to see a
pullback as shown in this yearly chart (Tucker, 2016).
Figure 4 Telstra's Share Price Chart (ASX, 2017)
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4.4.2 Dividend
One of the most attractive aspects of Telstra’s share is its decent dividend yields. The final fully franked
dividend announced in August 2016 was 15.5 cents that brings the dividend price per year to 31 cents
per share (Telstra Corporation Limited, 2016).The Earnings per share for 2016 was calculated to be
62.32 and has been affected from the share pay back in addition to the dividend on the 11 th of August
2016 of approximately $1.25 billion. The dividend pay-out ratio for 2016 is 50% so it has slightly
increased when compared to 2015. It is clear that the company is putting investors first and as a result
Telstra is largely recognised as one of the leading income stocks in Australia with a stable dividend yield
from 2007 as seen in the table provided in Appendix A (Telstra Corporation Limited, Dividends).
As per Telstra's CEO, Andrew Penn "We need to improve earnings per share in order to have the
confidence to both increase and sustain our dividends over the long term" (Telstra Corporation Limited,
2016).
Figure 5 Telstra's Dividends (Telstra Corporation Limited 2016)
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Figure 6Telstra's Shareholders(Telstra Corporation Limited 2016)
Telstra's Dividend pay-out ratio can be calculated using the equation (Allport and Dunckley, 2014)
Dividentpershare
earningspershare x 100
and was found to be 50% for 2016 and 46.9% for 2015
The Earnings per share were calculated using the equation(Allport and Dunckley, 2014)
NetprofitaftertxandPreferenceShareDividents
NumberofordinaryShares x 100
and were found to be 62.32 for 2016 and 63.91 for 2015
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5 Conclusions and Recommendations
Telstra’s overall performance appears to be significantly stronger when compared to its competitors
sothe company maintains a leading role in the Telecommunications sector in Australia. The possibility
of this changing in the near future is low. The company is investing in its network services and
innovative products with major investments in Asia and is focusing to the clientin order to maintain its
leading role. In fact, Telstra’s dividend, combined with the reliability of its earnings, can still be a secure
investment even with no significant profit growth.
This report analyses the social, economic and industry background of Telstra in comparison with its
main competitor, TPG.According to ratio analysis of the company, it could be concluded that based on
the external factors, business environment, and the existing low share price, Telstra is a good investing
choice for investors and it would be beneficial in the long run.
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6 References
2014, A. D. 2014. Analysis of Operating Performance and Financial Ratios According to Data Analysis.
Swinburne Online University.
ASX (2017) ASX Charting. Available at: http://www.asx.com.au/prices/charting/?
code=TLS&compareCode=&chartType=LINE&priceMovingAverage1=&priceMovingAverage2=&
volumeIndicator=BAR&volumeMovingAverage=&timeframe=daily.
Atrill, P., McLaney, E. and Harvey, D. (2014) Accounting: An Introduction, 6/E. Pearson Higher Education
AU.
Harry Tucker, B. i. A. (Jan 11, 2016, 9:00 AM) Telstra. Available at:
https://www.businessinsider.com.au/charts-this-is-how-much-more-expensive-telstra-is-than-
optus-and-vodafone-2016-1.
Tesla Corporation Limited, Dividends. Available at:
https://www.telstra.com.au/aboutus/investors/financial-information/dividends.
Tesla Corporation Limited, (2016) 2016 Annual Report. Available at:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/2016-Annual-
Report.pdf.
Tesla Corporation Limited, (2017) Telstra official website. Available at: https://www.telstra.com.au/.
Tesla Global, (2017) Telstra Global website. Available at: https://telstraglobal.com/globalcapabilities.
TPG Telecom Limited, (2016b) FY16 Annual Report. Available at:
https://www.tpg.com.au/about/pdfs/FY16%20Annual%20Report.pdf.
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A. Appendix
Table 1Dividends table for the last 10 years (Telstra Corporation Limited, 2017)
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