Calculation and Analysis of Performance Ratios of TPG Telecom Limited

The article provides a detailed analysis of TPG Telecom Limited's performance through various ratios like solvency, efficiency, profitability, and market value ratios. It includes calculations and observations of short-term and long-term solvency ratios, efficiency ratios, profitability ratios, and market value ratios. The article also covers the company's financial structure, debt-equity ratio, return on investment, and more.

TPG TELECOM LIMITED
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Table of Contents
Introduction................................................................................................................................4
Brief Description of the TPG.....................................................................................................4
Calculation and Analysis of Performance Ratios.......................................................................4
Short-term solvency ratios......................................................................................................4
• Quick ratio........................................................................................................................5
• Current ratio.....................................................................................................................5
Long-term solvency ratios or Leverage ratio.........................................................................5
• Debt equity ratio...............................................................................................................6
• Debt to assets ratios..........................................................................................................6
• Debt to capital ratio..........................................................................................................6
• Debt to EBITDA ratio......................................................................................................6
• The asset to equity ratio....................................................................................................7
Efficiency ratio.......................................................................................................................8
• Accounts receivable turnover...........................................................................................8
• Inventory turnover............................................................................................................8
• Accounts Payable turnover...............................................................................................8
• Total assets turnover.........................................................................................................8
• Fixed assets turnover ratio................................................................................................8
• Operating expense ratio....................................................................................................9
• Return on investment........................................................................................................9
• Average collection period.................................................................................................9
• Average payment period...................................................................................................9
Profitability ratio..................................................................................................................10
• Return on equity.............................................................................................................11
• Earning per share............................................................................................................11
• Dividend per share..........................................................................................................11
• Price earnings ratio.........................................................................................................11
• Return on capital employed............................................................................................11
• Return on assets..............................................................................................................11
• Gross profit.....................................................................................................................11
• Net profit........................................................................................................................12
Market value ratios...............................................................................................................13
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• Book value per share......................................................................................................13
• Dividend Yield...............................................................................................................13
Graphs and comparison of share price movements..................................................................15
Share Valuation: Constant dividend growth model.................................................................15
Conclusion................................................................................................................................16
Recommendations....................................................................................................................16
References................................................................................................................................17
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Introduction
TPG is the second largest player in the telecom sector operating in Australia. TPG’s
performance is evaluated in various terms for the last two years.
Several ratios have been calculated to identify their performance for the last two years. The
deep understanding will enable shareholders to gain knowledge about the performance of the
company, return on investment, valuation of earning per share, market price per share,
analysis of assets deployed and the efficiency of its utilization, analysis of capital structure,
the flow of interest towards long-term debt and short-term debt.
Brief Description of the TPG
TPG deals in the telecommunications industry, where customers are delivered with the best
communication services which are fast, reliable and cost-effective. They deal in various types
of customers ranging from residential users, small and medium enterprises, government
bodies, large corporate enterprise to wholesale customers. TPG was formed with the
combination of two companies, Total Peripheral Group and SP Telemedia. The major areas
covered by this company are Australia, New Zealand, and Singapore.
Calculation and Analysis of Performance Ratios
Short-term solvency ratios
This ratio helps a company to understand its ability to meet its short-term financial
obligations, which helps a company to know about the financial loan prevailing in the short
run (Alexander, 2018). The short-term solvency ratios are categorized into two parts. These
are
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• Quick ratio
This is also known as the acid test ratio. This ratio states the ability of the firm to meet its
financial obligations from the available current assets, which can be easily converted into
money in case of any uncertainty such as cash and cash equivalents and accounts receivables.
Quick ratio = (current assets - inventory)/current liability
• Current ratio
This ratio indicates whether a company will be able to pay its short-term debts from the
available current assets or not. The current ratio depends to which industry it relates and
hence, they differ from company to company (Jain & Khan, 2008). However, the generally
accepted standard for current ratio lies in between1.5 to 3.
Particulars 2018 2017
Liquidity Ratio
a) Quick Ratio 0.31 0.24
b) Current Ratio 0.37 0.26
From the above, we will observe that both quick ratio and the current ratio are diminishing,
which indicates that liability is increasing more from year to year when compared from
assets. The creditor's list is increasing which signify that a company is not able to pay off
their loan on due date or they have purchased too much of inventory from their suppliers.
However, if proper measures are not taken, then the company may face a crucial problem
while dealing with their short-term obligations.
Long-term solvency ratios or Leverage ratio
This ratio helps us to ascertain the number of debts in the capital form and assess the
company's ability to meet its financial obligations. As the company relies on the debt and
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equity for its long-term financial goals, it is necessary to know whether the company will be
able to pay its obligations on due date. This ratio is subdivided into three parts:
• Debt equity ratio
High debt-equity ratio states that the company is more dependent on the external source fund
through debt, which increases liability and, the earnings per share reduces simultaneously.
Generally, the debt-equity ratio rate is acceptable to 2, more than that signifies a risky
situation for an investor. However, this rate varies from industry to industry (Gibson, 2012).
It is calculated as:
Debt equity ratio =total debt /total equity
• Debt to assets ratios
This ratio explains the relationship between a total amount of debt, which includes all types
of debts, long-term debts and short-term debts with total assets that consists of tangible assets
as well as intangible assets. The calculation of this ratio:
Debt-asset ratio = (Long-term debt +Short term debt)/Total assets
• Debt to capital ratio
It defines the company’s financial structure in a better way for the investors. The company’s
risk increases with the increase of debt to equity ratio (Tracy, 2012). This can be calculated
as:
Debt to capital ratio = interest-bearing debt / interest bearing debt + equity
• Debt to EBITDA ratio
This ratio explains the relation between total debt either it is short- term or long-term with
earnings before interest depreciation and amortization. This ratio helps to determine the
creditworthiness of the company. It is calculated as:
Debt to EBITDA= total debt /EBITDA
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• The asset to equity ratio
This explains the relationship between total assets and shareholder equity of the company. It
clearly states the proportion of assets funded by the shareholders. The formula of this ratio is
as follows:
Asset to equity ratio = total assets /total equity
Particulars 2018 2017
Long-term solvency
ratios
a) Debt equity ratio 0.36 0.47
b) Debt to assets ratio 0.24 0.23
c) Debt to capital ratio 0.47 0.11
d) Debt to EBITDA ratio 1.57 1.01
e) Asset to equity ratio 1.94 0.47
(InvestSMART Financial Services Pty Ltd., 2018)
The observations from the above table are as follows:
• Debt to equity ratio decreases which signifies that a company has reduced its debts either
it is long- term or short -term leads to less flow of interest along with repayment of the debt.
• Debts to assets ratio increased from the last year which indicates that debts have increased
more as compared to the assets
• Debt to capital ratio has increased which signifies that the company is funded from the
investors rather than the owner’s funds, which lead to an increase in financial risk. This
situation is not fruitful for the company if not taken appropriate actions.
• Debt to EBITDA increases which means that debt rises due to long-term and short-term
debts rise up from the last year.
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• The rate of asset rises which indicates that the company has undertaken more assets in the
current financial year.
Efficiency ratio
This ratio clearly states out regarding applications of company's assets efficiently, which help
to generate profit and control debt (Lindsayt, 2014). This ratio can further be categorized into
the following:
• Accounts receivable turnover
This is used to measure the company’s credit policy and evaluate how effectively it's
working. It is preferable to have a high rate of accounts receivable turnover ratio.
Accounts receivable turnover = revenue/ average accounts receivable
• Inventory turnover
This ratio helps in identification of company’s performance with respect to their inventory
levels. It is calculated as:
Inventory turnover = cost of sales / average inventory
• Accounts Payable turnover
This ratio defines the company's ability to pay their immediate bills from the available
resources. It is calculated as:
Accounts Payable turnover = cost of sales / average accounts payables
• Total assets turnover
This ratio will explain your efficiency level about the utilization of their short- term and long-
term asset with respect to sales. It is calculated as follows:
Total asset turnover = revenue / average total asset
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• Fixed assets turnover ratio
This ratio will help to determine the investment of the company towards fixed assets. This
can be computed as follows:
Fixed assets turnover ratio = net sales /average net fixed assets
• Operating expense ratio
This ratio explains the operating cost of a property against the derived income. It can be
calculated as:
Operating expense ratio= operating expense /total gross income
• Return on investment
This ratio clearly states the rate of return from the particular investment invested by the
investor. It is calculated as:
Return on investment = net profit before tax /net worth
• Average collection period
This ratio helps us to determine the relationship between the credit transactions and
receivables of the same. It can be calculated as:
Average collection period =365 days/ average receivable turnover
• Average payment period
This ratio determines the average number of days that a company take to clear its dues. This
can be computed as:
Average payment period =365 days/average payable turnover
Particulars 2018 2017
Efficiency Ratio
a) Accounts Receivable Turnover 17.24 18.37
b) Inventory Turnover - -
c) Accounts Payable Turnover - -
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d) Total assets Turnover 0.65 0.54
e) Fixed Assets Turnover 2.55 2.17
f) Operating Expense Ratio - -
g) Return on Investments 10 14
h) Average Collection Period 3.58 3.23
i) Average Payment Period 1.96 1.72
(Dow Jones & Company, Inc. , 2018)
From the above table we will conclude that:
• Accounts receivable turnover has reduced compared from last year, which means that the
company is finding hard to collect payments from the customers due to which, after some
point of time they will find difficulty for the payment of their obligations.
• Since there is no inventory, hence this ratio will not prevail for this situation due to non-
existence of cost of sales.
• Total assets turnover increased which signify that a company is improving their efficiency
level regarding their utilization of assets.
• Fixed assets turnover increased which indicates that the company has invested in fixed
assets properly. Hence, the company has also focussed on other assets also.
• Return on investment decreases from the previous year which signifies a negative return
for the shareholders.
• Average collection period increased from the previous year which means that the
company is able to recover their collection from the debtors properly.
• Average Payment period rises up from the past year, which indicates that either the
creditor's list increases or the company are unable to pay their debts at the due date.
Profitability ratio
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This ratio will help you to determine the amount of profit derived from the current operations,
which help to deliver the final result of the company to an investor, to understand the
performance of the operations perfectly (Clear tax, 2017). This ratio has categorized into
various parts:
• Return on equity
This ratio explains the profit generated by deploying the shareholder's equity of the company
for the financial year. This can be calculated as:
Return on equity= profit after tax /net worth
• Earning per share
This ratio describes earning from each ordinary shareholder point of view. Hence,
shareholder prefers high ratio. This can be computed as:
Earnings per share= net profit /total no of shares
• Dividend per share
This ratio explains the distribution of dividend by the company to each shareholder. It can be
calculated as:
Dividend per share =total dividend attributable to shareholders/number of shares
• Price earnings ratio
This ratio helps an investor to analyze the company’s share price. This can be computed as:
Price earnings ratio =market price per share/earnings per share
• Return on capital employed
This ratio explains the percentage return on funds deployed by the owner in the business. It
can be computed as
Return on capital employed=(net operating profit x 100) /capital employed
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• Return on assets
This ratio defines the rate of return per share which is invested in the company. This can be
computed as:
Return on assets = net profit /total assets
• Gross profit
This ratio defines the company's marginal profit. This can be computed as follows:
Gross profit ratio = (gross profit x100)/sales
• Net profit
This ratio states the company's profit by considering related expenses, direct or indirect, and
income. This can be computed as follows:
Net profit ratio = (net profit x100)/sales
Particulars 2018 2017
Profitability Ratio
a) Return on Equity 19.85 15.34
b) Earnings per share 0.42 0.47
c) Dividend per share 0.04 0.15
d) Price Earnings ratio 13.4 11.4
e) Return on capital employed 11.39% 13.93%
f) Return on Assets 8.53% 10.77%
g) Gross Profit 100% 100%
h) Net Profit 15.91% 16.61%
(Fusion Media Limited, 2018)
From the above table we can conclude that:
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• The return on equity increased from the last year, which signifies favourable condition for
the shareholders as their wealth also increases with the increasing rate, which means that
company’s performance is improving.
• Earnings per share decreased from the last year indicating lower earnings per share.
Basically, higher EPS signifies higher returns per share.
• Dividend per share has also decreased from 0.15 to 0.04 per share thereby resulting in
lower dividend income to the shareholders.
• Price Earnings Ratio has increased from the previous year indicating that the shareholders
expect higher earnings or it might also indicate that the share price is overvalued in relation to
the earnings of the company
• Return on capital employed decreased by 2.54% when compared to the previous year,
which signifies that the company is not able to generate higher returns on their capital
employed on a year on year basis (Dow Jones & Company, Inc., 2018).
• There was a slight reduction in the Return on Assets in the current year when compared to
the previous year indicating that assets are unable to deliver the same returns to their
shareholders as the previous year.
• As the cost of goods sold is nil in both the years, hence, Gross profit reflecting 100%
which is the optimum profit earned by the company.
• Net profit % has slightly reduced from the previous year which indicates that the company
is facing increasing cost pressure.
Market value ratios
These ratios are performed to ascertain the current share price of a company. The company
needs to keep a track of their shares price whether it is undervalued or overvalued
(Accounting Tools, 2017). The ratios are as follows:
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• Book value per share
This ratio acts as a yardstick to evaluate the market price whether it is undervalued or
overvalued. This can be computed as:
Book value per share =aggregate amount of shareholders equity /number of shares
• Dividend Yield
This ratio explains the return to investors on the investment. This can be calculated as:
Dividend yield = total dividend/market price of the stock
• Earning per share already explained
• Price-earnings ratio already explained
• Market value per share
This defines the company’s share as per the market value. This can be computed as follows:
Market value per share = total market value of the business /total number of shares
Particulars 2018 2017
Market value ratios
a) Book value per share 2.03 2.79
b) Dividend Yield 0.7 1.8
c) Market value per share 5.76 5.46
From the above table we will conclude that:
• Book value per share has decreased which is not healthy for the company as the market
price of the company share is going down and hence, the company should take appropriate
measures to tackle this situation.
• Dividend yield decreased from the previous year, which means that shareholder’ wealth
decreases in the current financial year due to the declaration of less dividend
• Market value per share has gone up by 5%.
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Graphs and comparison of share price movements
(Market Index, 2018)
From the above figure, it can be seen that in the year 2016 share price of TPG telecom was
increase sharply from 9.717 in January to 12.605 in July. After that there was steep fall in
share price and it reached 6.701 in December. However, in 2016 the all ordinaries index
increased steadily from 5344 to 5719. In the year 2017, the decline in share price continued
till October, and after that share price increased to 6.57 in December. However, in 2017, the
all ordinaries index increased steadily from 5719 to 6167. Thus, it can be said that share price
of TPG telecom is more volatile compared to the index. There is weak correlation between
share price of the company and the index (Market Index, 2018).
Share Valuation: Constant dividend growth model
In this model, it has been assumed that the dividend growth model will remain constant for a
period of time that means the growth will not increase from the required rate of return.
However, in practical life, it is not possible to stick to the one rate which stays constant (Lee
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& Lee, 2016). Further, growth rates and earning rates are also not known to the investors. It is
calculated as (Ross et al., 2008):
P= D/k-g
Where D states the pay-out ratio
K is required rate of return and g is growth rate
D=15%
K=9% g=4%
P= 0.15/(0.09-0.04)
=3 per share
The current price of TPG telecom Ltd is 8.21 which more than double from the price, which
has been derived from a constant dividend grown model. This is not limited to only three
constraints as compared in dividend model. It includes all the factors affecting the company's
price and hence wider in scope. However, on the other hand, the dividend growth model is
narrow in scope and describes only dividend-related matters which avoid all other issues
which are crucial for the company.
Conclusion
From the above findings, we will observe that though the company’s performance is showing
an upward trend, there are other areas also which need to work out for the better performance
of the company.
Recommendations
The company’s liquidity ratios show a decline which indicates that the company must try to
improve their liquidity position by reducing the inventory levels so that they are able to pay
the creditors on time. Also the ratios show that the company’s debts have increased which
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can have a negative impact on financial health of the company. The company must try and
pay back some debts so as to make the company financially stable. Also it is suggested that
the company improves its collection of payments from customers as non-receipt of payments
on time is responsible for the liquidity crunch company is facing. Also the shareholder’s
return has seen a decline from previous years, which is not a good sign for the company.
Hence, the company must increase its profits by reducing the debt levels. Reduction in debt
will lead to reduction in payment of interests which in turn will increase the profit levels of
the company.
References
Accounting Tools, 2017. Market value ratios. [Online] Available at:
https://www.accountingtools.com/articles/market-value-ratios.html [Accessed 22 September
2018].
Alexander, J., 2018. Financial Planning & Analysis and Performance Management. John
Wiley & Sons.
Clear tax, 2017. Profitability Ratio with Formula and examples. [Online] Available at:
https://cleartax.in/s/profitability-ratio [Accessed 22 September 2018].
Dow Jones & Company, Inc. , 2018. TPG Telecom Ltd. [Online] Available at:
https://quotes.wsj.com/AU/XASX/TPM/financials/annual/balance-sheet [Accessed 22
September 2018].
Dow Jones & Company, Inc., 2018. TPG Telecom Ltd. [Online] Available at:
https://quotes.wsj.com/AU/XASX/TPM/financials/annual/balance-sheet [Accessed 22
September 2018].
Fusion Media Limited, 2018. TPM Ratios. [Online] Available at:
https://au.investing.com/equities/tpg-telecom-ltd-ratios [Accessed 22 September 2018].
Gibson, C.H., 2012. Financial Reporting and Analysis. Cengage Learning.
InvestSMART Financial Services Pty Ltd., 2018. TPM Per Share. [Online] Available at:
https://www.investsmart.com.au/shares/asx-tpm/tpg-telecom-limited/financials [Accessed 22
September 2018].
Jain, P.K. & Khan, M.Y., 2008. Financial Management. 5th ed. Tata McGraw-Hill
Education.
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Lindsayt, 2014. Types of Efficiency Ratios Used in Measuring Business Performance.
[Online] Available at: https://blog.udemy.com/efficiency-ratios/ [Accessed 22 September
2018].
Market index, 2018. TPG Telecom Limited (TPM). [Online] Available at:
https://www.marketindex.com.au/asx/tpm [Accessed 22 September 2018].
Tracy, A., 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to
Analyse Any Business on the Planet. RatioAnalysis.net.
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