Comprehensive Financial Report: Telstra & JB HI-FI Analysis, HI5002

This report presents a financial analysis of Telstra Corporation and JB HI-FI Limited, comparing their financial performance over three years. It covers company descriptions, ratio analysis (liquidity, profitability, capital structure), share price movements, factors affecting share price, beta values, expected rates of return using CAPM, and dividend policies. The analysis provides insights into the financial health of each company and offers investment recommendations, determining which company demonstrates better performance and a more sound financial position. Desklib is a platform where you can find similar solved assignments and study resources.

RUNNING HEAD: FINANCE FOR BUSINESS
Financial analysis

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Contents
Introduction.................................................................................................................................................3
Description of Companies...........................................................................................................................3
Telstra Corporation..................................................................................................................................3
JB HI-FI Limited.....................................................................................................................................4
Calculation and comparison of performance ratios......................................................................................4
Liquidity ratios........................................................................................................................................4
Profitability ratios....................................................................................................................................6
Capital structure (leverage) ratios............................................................................................................8
Analysis of monthly share prices movements............................................................................................10
Significant factors affecting share price.....................................................................................................12
Calculation of beta values and expected Rates of Return using the CAPM...............................................13
Dividend policies.......................................................................................................................................14
Recommendation letter..............................................................................................................................14
Conclusion.................................................................................................................................................15
References.................................................................................................................................................16

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Introduction
The report discusses the overall financial analysis of the two Australian companies named as
Telstra Corporation and JB HI-FI Holdings Limited. It reflects the financial performance and
position of both the companies over the past three years. In the first part, the report explains
about the core activities and operations of both the companies. In addition, it identifies and
outlines their comparative advantages by considering their history. In the later part, performance
analysis is performed with the help of some specific ratios that has measure the position of the
entities with respect to its liquidity, profitability and long term solvency.
The report also discusses about the movements in share prices over the three years and compares
the same with the fluctuations in the ordinaries indices. It highlights some significant factors
which have affected the share price of both the Telstra and JB HI-FI along with the calculation of
required rate of return by using CAPM method. In the last, the report focuses on the dividend
policies followed by the organizations and provide a recommendation letter to the investors
regarding their investment decisions. On a whole, it comprises of the overall financial analysis of
both the Australian companies and provides insights about which is performing better and have
sound financial position.
Description of Companies
Telstra Corporation
It is an Australia based Multinational Corporation engaged in the business of providing
telecommunication services to the people across the country. The company deals in developing
communication networks and offers services like mobile, market voice and internet access to its

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clients. It operates through four segments named as Telstra Retail, Global Enterprise and
Services, Telstra Wholesale and Telstra Operations. Currently, the share price of Telstra is $3.19
with a market cap of $37,582.82 million. The comparative advantage of the company is to offer
its products and services at reasonable prices and with best quality. This allowed the firm to
develop its core competency and win over its competitors in terms of covering the market share
at international level (Reuters. 2018).
JB HI-FI Limited
It is an Australian company involved in the retailing of home consumer products. It operates
through two segments named as Australia and New Zealand. It is involved in distributing
products like consumer electronics consist of televisions, computers, camera, DVDs and others.
Apart from this, its core activities also include the offering of information technology and
consulting services. Currently the share is traded at $25.27 with a market cap worth $2,866.34
million. Its advantage is that it offers wide variety of home entertainment and consumer
electronics products at various attractive discounts. Moreover the company has earned high level
of trust from its customers and has built a strong brand image (Reuters. 2018).
Calculation and comparison of performance ratios
The following section measure and evaluate the performance of both the companies in financial
aspects by interpreting the calculated ratios.
Liquidity ratios
It is one of the categories of ratios that measure the financial strength of the company by
assessing its capability of managing its liquid assets in order to meet its short term financial
obligations on time (Bragg, 2012).

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Telstra Corporation JB HI – FI Limited
Liquidity ratios 2015 2016 2017 2015 2016 2017
Current ratio
0.
86
1.
02 0.86
1.62 1.57 1.32
Quick ratio
0.
80
0.
96 0.76
0.36 0.35 0.35
 Current ratio: It analyzes the capability of the firm in respect of paying off its liabilities
which are due in less than 12 months with the use of its current assets. The resources
include cash, inventories and receivables of the company (Bragg, 2012).
The current ratio of Telstra has shown a fluctuating trend as it was 0.86 in 2015 which increased
to 1.02 in 2016 and then further reduced to 0.86 in 2017. This was because of the fact that
company has decreased its investment in the operating assets. Also, its liabilities have constantly
increased in the past (Telstra. 2017). In comparison to this, the CR of JB HI-FI has shown a
declining trend as it reduced from 1.62 to 1.32 in the past years. It was because the proportionate
change in company’s assets was less than the constant increase in its current liabilities. The net
effect was an overall reduction in the ratio (JB HI-FI. 2017).
 Quick ratio: It is another liquidity ratio which also measures the financial strength of the
company by taking into account the most liquid assets that excludes inventory and
prepaid expenses (Gibson, 2011).
In case of Telstra, the QR also shows the same trend as its CR. It increased from 0.80 to 0.96 in
2016 and the same again reduced to 0.76 in 2017. The variation was due to the significant

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increase in the inventory amount of the company which holds most of the cash of the business
(Telstra. 2017). The quick ratio of JB HI-FI has remained same in 2016 and 2017 at 0.35 while it
was at 0.36 in 2015. This slightest reduction was due to the noteworthy increase in company’s
current liabilities as compare to its CA. Also its inventories increased which contributed to the
reduction of ratio (JB HI-FI. 2017).
Profitability ratios
These ratios measure the overall profitability of the company by interpreting ratios like return on
assets, net profit margin and others. Generally, they are used by the investors to determine the
amount of return a company is able to offer on the capital invested by them in the business
(Godwin and Alderman, 2012).
Telstra Corporation JB HI – FI Limited
Profitability
ratios
2015 2016
2017
2015 2016 2017
Net profit margin 15.9% 22.4% 15.2% 3.8% 3.8% 3.1%
Return on equity 26.7% 39.7% 25.9% 39.9% 37.5% 20.1%
Return on assets 10.5% 13.4% 9.2% 15.3% 15.3% 7.0%
 Net profit ratio: It expresses the amount of net profit as a percentage of total revenue. The
ratio reflects the profitability position of the entity and a high and positive NPR is
considered to be favorable for the organization (Higgins, 2012).

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A fluctuating trend has been noticed in the NPR of Telstra Corporation as it was 15.9% in 2015,
then rises to 22.4% in 2016 and again falls to 15.2% last year. Despite facing the increase in
earnings, the net profit after tax reduced due to the increased tax liabilities (Telstra. 2017). On
other hand, the NPR of JB HI-FI remained same at 3.8% in 2015 and 2016 but reduced to 3.1%
in 2017. Although the company reported high revenue and profit during the year, but the increase
in sales was more than the upsurge in revenue. As a result, the ratio reduces and more focused
was given on improving the gross profit (JB HI-FI. 2017).
 Return on Equity: Another profitability metric which determines the amount of return
offered by the entity on its shareholders’ equity. A high ROE indicates that company has
made high earnings and is capable of providing high returns to its investors (Jenter and
Lewellen, 2015).
The ROE of Telstra was 26.7% in 2015 which reduced to 25.9% in 2017. This was due to the
low earnings made during the year which allow Telstra to provide low returns to its shareholders.
Moreover, the amount of its owners’ equity has also been fluctuating in past three years. In case
of JB HI-FI, the ratio falls from 39.9% to 20.1% during the last three years. The reason behind
such decrease was that the equity of the firm increased from $405 million to $854 million but the
profit has only shown an increase of 13%. The company was not able to give sufficient returns to
its increased potential investors.
 Return on Assets: It shows the amount of returns generated with the employment of
company’s assets and resources. Investors generally seek for companies having high
ROA (Kimmel, Weygandt and Kieso, 2010).

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Telstra’s ROA was highest in 2016 at 13.4%. This was the year the company outperform the
market by reporting sound profitability. During that year, company has high profits worth $5780
million and assets amounted to $43,286 million. After that the ratio reduced to 9.2% due to the
low earnings of Telstra (Telstra. 2017). JB HI-FI’s ROA was 15.3% for the two years and it falls
to 7% in 2017. This was due to the huge increase in company’s total assets against which profit
reported a slightest change only. This reflected that company has not properly utilized its
resources to make more profit (JB HI-FI. 2017).
Capital structure (leverage) ratios
They are the long term solvency ratios which measure the capital structure and financial risk of
the firm. They compare the debt and equity portion of the company and determine the preferred
optimal capital structure for the same (Lee, Lee and Lee, 2009).
Telstra Corporation JB HI – FI Limited
Capital
Structure ratios 2015 2016 2017 2015 2016 2017
Debt/equity ratio 1.66 1.95 1.83 1.61 1.45 1.87
Debt ratio 0.65 0.66 0.65 0.62 0.59 0.65
Interest coverage
ratio 9.14 8.93 2.84 - 50.33 - 80.50 - 44.18

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 Debt/Equity ratio: It is a solvency ratio which measures the portion of company’s debt
against its owner’s equity. It shows the amount of resources funded by debt and those
funded by the equity (Nikolai, Bazley and Jones, 2009).
The D/E ratio of Telstra has increased from 1.66 to 1.83 in 2017. It was highest at 1.95 in 2016.
The reason for such hike during that year was the increased liabilities of the company. They were
reported at $28,415 million against the equity of $14,541 million. However, the obligations
reduced in 2017 which make the ratio to fall. Yet, it is interpreted that Telstra is highly
dependent on the outside borrowings rather than relying on equity (Telstra. 2017). In comparison
to this, JB HI-FI’s ratio was lower in 2015 and 2016 but it reported a hike at 1.87 in 2017. This
huge upsurge was due to the significant increase in its total liabilities from $588 million to $1599
million. It was mainly contributed by the increased bank loans of the firm taken for the purpose
of funding the acquisition of The Good Guys (JB HI-FI. 2017).
 Debt ratio: This ratio shows the proportion between the total liabilities and total assets of
the firm (Vogel, 2014).
The debt ratio of Telstra has remained almost same and stable in all the past three years. The
ratio was high but the company focused on keeping it same for the years. The reason for having a
high ratio of 65% was that the Telstra has more liabilities as compare to its total assets. Also they
have increased in the past years comparatively. In case of JB HI-FI, the ratio was same in 2017.
However, it was lower in 2015 and 2016 at 62% and 59%. The reason for the reduction was the
low and reduced financial obligations of the company as compare to its assets during those years.
 Interest coverage ratio: It reflects the number of times a company can meet its interest
payments by utilizing its earnings before interest and tax (Warren and Jones, 2018).

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The ICR of Telstra was 9.14 times in 2015 which falls to 2.84 times in 2017 (Telstra. 2017). This
decline was due to a considerable decrease in company’s earnings during the year. On the other
hand, the ICR of JB HI-FI remains negative for the past years due to the negative EBIT reported
by the company (JB HI-FI. 2017).
Analysis of monthly share prices movements
Telstra Corporation
The below graph depicts the movements in monthly share prices of the company for the past
three years. It can be clearly seen from the graph and both the trend lines are very much close to
each other. This indicates that the fluctuations in the market do impacted the share price of
Telstra. It can be observed that in the mid of 2015, Telstra has offered negative returns while the
market was also down. However, when the market turned positive in the start of 2016, the
company’s shares also started delivering positive returns. The change was observed in the initial
months of 2017, where company’s returns were negative while the market was still in the
positive phase. However, after that the variations in both the market and company return were
almost same. So it can be said that, the shares of Telstra are closely correlated and are volatile
with the ordinaries index.

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1/05/2015
1/08/2015
1/11/2015
1/02/2016
1/05/2016
1/08/2016
1/11/2016
1/02/2017
1/05/2017
1/08/2017
1/11/2017
1/02/2018
1/05/2018
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Share price movements
Average return (TLS)
Average return (ASX)
Months
Average returns
(Source: Yahoo Finance. 2018).
JB HI-FI Limited
A reverse scenario can be observed in case of JB HI-FI as the trend line of company’s returns is
highly independent of the variations going in the market. It is observed that when market was
turning negative, the firm offered high returns on its share price and the highest was at 20% on
December 2015. Also in July 2016, where the average return of JB HI-FI was 14.5% the market
was at -2.3%. The graph also depicted that in mid of 2017, the company offered negative returns
while the market tends to remain positive. Later on, when JB HI-FI’s share returns fall in 2018,
the ordinaries index remain positive. Thus, it can be observed that both the trend line are
opposite of each other and have reflected diverse returns.

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1/05/2015
1/08/2015
1/11/2015
1/02/2016
1/05/2016
1/08/2016
1/11/2016
1/02/2017
1/05/2017
1/08/2017
1/11/2017
1/02/2018
1/05/2018
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Share price movements
Average return (JBH)
Average return (ASX)
Months
Average returns
(Source: Yahoo Finance. 2018).
Significant factors affecting share price
This section list down some events happened in both the companies which impacted their share
price to a great extent.
Telstra Corporation
 On May 2018, Telstra announced that the executive of American telecommunications
Roy H. Chestnutt will join the board as non-executive director. This change in the
management will help the company to operate and face the rapidly changing environment
and prevailing competition (Telstra. 2018).
 On February 2018, the company declared its half yearly results the total income was up
by 2.5% while NPAT was down at 5.8%. Reduction in net profit has affected its share
price (Telstra. 2018).