Investor Report: Evaluating Telstra's Financial Performance (MBA403)

This report presents a financial and non-financial evaluation of Telstra Limited, an ASX-listed telecommunications company, from a shareholder's perspective. The analysis, conducted for the purpose of guiding investment decisions, examines Telstra's financial performance through key ratios, revealing a decrease in liquidity and profitability from 2017 to 2018. The decrease in net profit despite increased revenue is attributed to rising operating expenses and a shift in technology. The non-financial analysis highlights Telstra's strategic focus on customer experience, network expansion, and employee development. The report concludes with recommendations for potential investors, acknowledging competitive pressures and external economic factors. The report also provides analysis on the management structure and remuneration plans.

Executive Summary
The report is undertaken for the purpose of conducting an evaluation of the annual report
of an Australian company from the perspective of a shareholder and providing recommendations
regarding its appropriateness for the investment purpose. This has been conducted through
undertaking a financial and non-financial evaluation of the performance of the selected company.
The overall analysis is carried on the ASX listed company of Telstra Limited, a leading
telecommunication company of Australia. The main business activities of the company are
developing and providing mobile devices and broadband internets services to the users.
Analysis
Financial performance of Telstra Corporation has been analyzed through use of financial
ratios.
Ratio Formula 2017 2018 Change in %
Current Ratio Current assets/Current
liabilities 0.86 0.80 -6.48%
Net profit Ratio Net Profit/Net Sales 13.74% 12.15% -11.53%
Return on assets Net Profit/Average total assets 9.07% 8.30% -8.46%
Operating cash flow ratio Cash flow from
operations/Net Sales 33.77% 34.87% 3.25%
Dividend Yield ratio Annual Dividend per
share/Market Price per share 7.99% 10.52% 31.62%
Market performance Ratios
Ratio Calculation for Telstra to review financial performance of Telstra for year 2017 and 2018
Short term solvency or liquiidty ratios
Profitability ratios
Cash Management ratios
(Telstra Annual Report, 2018) and (Telstra Annual Report, 2017)
Changes in the most important financial items and ratios over the year (From year 2017 to
2018)
 The short term solvency position has been measured through use of current ratio and it
has been found that this ratio has been reduced from 0.86 times in year 2017 to 0.80
times 2018. It reflects poor liquidity position in year 2018 as compared to previous year.
 Review of profitability performance helps investors to check the ability of company to
earn and utilize its available resources. Net profit ratio has decreased from 13.74% in
year 2017 to 12.15% in year 2018 reflecting a decrease of 11.53% in year 2018.
 Return on assets has been also reduced from 9.07% to 8.30% that reflects poor
profitability performance of Telstra in most recent year when compared to year 2017
 Net flows from operations have been improved in year 2018 by 3.25% due to
management efficiency to collect the receivable on time
 Drastic change has been noticed in dividend yield ratio of Telstra in year 2018 as it has
improved from 7.99% in year 2017 to 10.52% despite of decrease in dividend per share
Interpretation
Causes for the change in the financial performance in year 2018
1

Profitability: The main cause of decrease in profitability of Telstra Corporation decrease in net
profit despite of increase in revenue. It has been observed that operating expenses have increased
a lot in recent year to significant changes in the pricing policies of wholesalers and retailers. The
shift from the fixed landline technology to the mobile technology has caused the income
variation and resultant there has been major change in overall profit of the company. It was
observed that profit margin in fixed landline products is more as compared to mobile technology
products (Telstra Annual Report, 2018).
Liquidity: The major reason that has caused the decline in liquidity performance in year 2018
was reduction in trade receivables of $450, cash and cash equivalents decline by $309 million,
and inventory also reduced by $92 million. It was only due to increase progress billing for NBN
and customer of Telstra Enterprises (Telstra Annual Report, 2018).
Cash Management: Cash management was good due to increase in frequency of cash collection
from regular customers.
Market performance: The reason why the dividend yield was increased in year 2018 was because
of decrease in share price of Telstra in year 2018 as compared to year 2017. As per the
information published in the news article, the market prices of Telstra had slashed in year 2018,
due to dividend of 22 cents was not sustainable and it will again cut in year 2019 as reported. It
was expected that company will generate enough cash flows to maintain current dividend due to
high NBN wholesale rates and addition of new competitor (Mickleboro, 2019).
Non-Financial Performance Analysis
The core business area of the company is developing and operating telecommunication
networks such as mobile, internet access, television pay and other products and services. It has
attained a distinctive position within the telecommunication sector by providing comprehensive
range of communication services. The company mainly provides its services within Australia
and New Zealand market (Telstra Limited, 2019). The company has experienced an increase in
net income by driving improvement in the customer experience and reduction in the overall cost
base. It has been achieved through developing new digital platforms driving the customer
experience. It has expanded the superiority of its network and expanded its coverage to regional
and rural communities (Telstra Media Releases, 2018). The business strategy is to achieve
customer growth by launching new mobile plans and delivering high customer experience. The
company requires employees with high technology skills and is facing the challenge of
developing a productive workforce due to shortage of technology skills within the market
(Connolly, 2018).
The company has huge market potential in current and future context in the
telecommunication sector of Australia supported by its strategy of launching new mobile plan
and leading the market by enhancing its customer base and reducing the prices of its products.
The management team of the company consist of highly experienced and technically skilled
people who work together for delivering the best technological solutions for the users driving its
continued increasing financial performance (Jacobs. 2018). There is distinction between the
management and the ownership structure of the company. The management team is appointed
and controlled the Board of directors of the company. The Board is developed by the
shareholders who are the ultimate owners of the company and thus there is a difference between
the management and the ownership structure. The board develops and maintains remuneration
commitment for the purpose of reviewing and managing the remuneration plans of its key
management personnel. The company in the financial year 2018 has introduced Executive
Variable Remuneration Plan (EVP) for the purpose of integrating the short and long-term
2

incentives of the company. The remuneration policy of the company focuses on aligning the
financial rewards with the employee and company performance. The Board has reduced the EVP
outcome in the financial year 2018 by 30% based on the performance of the Group Executives. It
has also increased the performance measures for EVP for the financial year 2019 in order to meet
the shareholder goals and enhancing the business performance. In addition to this, there are non-
wage related employee benefits as well provided by the company that includes annual leave and
long-service leaves (Telstra Annual Report, 2018).
Conclusion
The overall financial outlook for the company as analyzed with the use of ratio analysis
technique ahs depicted that it has maintained a stable financial performance. However, the
increasing competition within the telecommunication sector poses a significant threat for its
sustainable financial growth and development. The non-financial analysis has indicated that it is
aiming to launch new mobile plans and improving customer experience for overcoming the
competitive pressure and driving its continued financial growth. Its financial results can also be
significantly impacted by the economic factors of exchange rate movements or non-compliance
with government regulations in the future as analyzed from the annual report. As such, a
potential shareholder is recommended to watch the performance of the company over a
considerable amount of time in future context before taking any significant investment decisions.
The overall analysis suffers from the limitations of assumptions made regarding interpreting the
chairman’s report and notes section information which can have a wider meaning as compared to
that has been understood during evaluation.
3

References
Connolly, B. 2018. How DiData and Telstra are dealing with the tech skills crisis. [Online].
Available at: https://www.cio.com.au/article/650318/how-didata-telstra-dealing-tech-skills-
crisis/ [Accessed on: 10 June 2019].
Jacobs. S. 2018. Telstra is facing a huge challenge in its core business. [Online]. Available at:
https://www.businessinsider.com.au/telstra-challenges-share-price-falling-2018-5 [Accessed on:
10 June 2019].
Mickleboro, J. 2019. The Telstra share price fell 23% in 2018. [Online]. Available at:
https://www.fool.com.au/2019/01/02/the-telstra-share-price-fell-23-in-2018/ [Accessed on: 10
June 2019].
Telstra Annual Report. 2017. [Online]. Available at:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/Annual-Report-2017-
singlepages.PDF [Accessed on: 10 June 2019].
Telstra Annual Report. 2018. [Online]. Available at:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/2018-Annual-
Report.pdf [Accessed on: 10 June 2019].
Telstra Limited. 2019. Our Businesses. [Online]. Available at:
https://www.telstraglobal.com/uk/business-solutions/dowonders [Accessed on: 10 June 2019].
Telstra Media Releases. 2018. Telstra sets new strategy to improve customer experience.
[Online]. Available at: https://www.telstra.com.au/aboutus/media/media-releases/Telstra-sets-
new-strategy-to-improve-customer-experience-simplify-structure-and-cut-costs [Accessed on: 10
June 2019].
4

Appendix
Financial Items Year 2016 Year 2017 Year 2018
Current Assets 7,862.00$ 7,077.00$
Current liabilities 9,159.00$ 8,816.00$
Net profit 3,874.00$ 3,529.00$
Net Sales 28,205.00$ 29,042.00$
Total Assets 43,286.00$ 42,133.00$ 42,870.00$
Average Total Assets 42,709.50$ 42,501.50$
Cash flow from operations 9,526.00$ 10,127.00$
Annual Dividend per share 0.310$ 0.265$
Market Price per share (As on
June,17 and June 18) 3.88$ 2.52$
Financial Items extracted from the annual report of Telstra of year 2017 and 2018
Amount of $ Million
5