Financial Analysis of Telstra Corporation Ltd: A Case Study

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Finance for business

Table of Contents
Abstract............................................................................................................................................3
Introduction......................................................................................................................................4
Telstra cooperation limited..............................................................................................................5
Ratio analysis of Telstra cooperation limited..................................................................................6
Sensitivity analysis..........................................................................................................................7
The systematic and unsystematic risk............................................................................................11
The dividend payout ratio and dividend policy of Telstra cooperation limited............................13
Letter of recommendation..............................................................................................................14
Conclusion.....................................................................................................................................15
References......................................................................................................................................16

Abstract
In this report, discuss the case study of Telstra Corporation Ltd, which is an Australian leading
telecommunication company offering a full range of telecommunication services to a wide range
of subscribers of domestic as well as international market. Furthermore, they work on building
their solution technology so that it can be easy and simple to use to their customers. As an
investment analyst of the large institutional investor of the overseas market suggested the
investment opportunity in the Telstra by providing them financial reports of the company. For
encourage them, analysis of the financial performance of the Telstra through their annual report
which includes income statements, Balance Sheet and cash flow statement downloaded from the
respective website. Such a statement is being proofed to be sufficient for encouraging the
prospecting investor to invest in the Telstra.

Introduction
This study will be briefly present a report on financial analysis to the investors in which each and
everything that is related to investment analysis will be briefly discussed. The investors must
critically analysis the annual reports of a company to analyze the financial strength of a
company. In this study, Telstra Company takes as a case study to briefly explain the financial
analysis. The main purpose of making this report is to present a clear view of the financial
markets of Australia to investors. The financial position of a company plays a crucial role in the
procurement of capital, the goodwill of a firm in the market also helpful in the investment
process because this attracts investors. The market factors are also important for investors to
analysis after analyzing these factors investors arrive on a final decision. This study will be
briefly explaining the financial position of Telstra cooperation limited in front of investors.

Telstra cooperation limited
Telstra cooperation limited is an Australian based company that provides many services to
customers of the company, services such as internet services, television services, mobile
services, and other services. The Telstra Company was firstly owned by the government of
Australia after that the Telstra cooperation limited to become a separate entity and a whole
privatize company. The Telstra cooperation limited company was known from Australian and
overseas telecommunication corporation before 1993 but after the invention of government, the
name had changed Telstra Company limited. Telstra has a good network of retail network store
across Australia, the Telstra has a network of the owned store as well as contract-based stores. In
2016, Telstra has a network of 360 retail stores across Australia. The Telstra company is also
spending a lot of amount on the redesigning of their stores like – on new displays, digital tickets,
free baristas, and shop of accessories.
The vita group is an Australian based company which it operates around 109 stores of Telstra
across the world but despite these stores, Telstra company is also announcing the fresh 100 stores
will be open in near future. The Telstra Company has a good cash flow system and a better
financial position through which they sponsor many business awards and other entertainment
awards to the country.
The compare advantage of Telstra limited company
the main compare advantage of Telstra limited company is a wide range of coverage, the reach
of Telstra company is across Australia which is provide a comparative advantage to Telstra
company over the other telecom companies in Australia. According to the annual reports of
Telstra cooperation limited company, the coverage of the company is four times more than the
competitor companies so the services which are provided by Telstra company are far better than
other telecom companies in Australia.

Ratio analysis of Telstra cooperation limited
Efficiency Ratio:
Efficiency ratios are one of the categories of financial ratios which determines the efficiency of
organization's operations. In order to determine the working efficiency of a company, this
financial measure is used by the management. Ratios are easy to calculate and provides a
summarized brief idea about the actual conditions of the business entity (LHCb Collaboration,
2015). They form a part of the financial statements of the company and are used by the users of
financial information to obtain an understanding of the current position of the company. It is also
helpful in making a comparison of the firm with other firms in the market as well as to compare
the firm's performance over the years.
Asset Turnover Ratio: The asset turnover ratio depicts the revenue of the firm over the total
assets of the organization. This ratio helps in obtaining an understanding of the revenue of the
company against the assets invested in it. It is calculated by dividing the net sales of the company
with its total assets.
= Net sales / total assets
Inventory Turnover ratio: The inventory turnover ratio shows the number of time the inventory
has been rotated in the company. It shows the number of times inventory has been sold out in the
firm. It is calculated by dividing the cost of goods sold with an average inventory of the business.
The average inventory is calculated by adding opening and closing balances of inventory and
dividing it by 2. The ratio is calculated by using the following formula:
= Cost of goods sold / average inventory
Receivables Turnover ratio: Receivable turnover ratio determines the ability of the company to
provide credit to its customers. It shows the number of times a company collects cash from its
debtors (Siekelova, et. al., 2017). It is calculated by dividing net credit sales with average
account receivables. Credit sales are used for the calculation of receivable turnover ratio because
the cash sales don't create any account receivables to the company. Average account receivables

are calculated by adding opening and closing balances of account receivables and dividing it by
2. The formula for the calculation of this ratio is as follows:
= Net Credit sales / Average account receivables
Average collection period: The average collection period depicts the duration of cash collection
from the receivables of the business enterprise. It provides a general idea about how many
numbers of days the company provides credit to its customers. It is calculated by dividing the
number of days in a year with the account receivable turnover ratio. The formula for this ratio is
as below:
= 365 / account receivable turnover ratio
Profitability Ratio:
The profitability ratio shows the profit measures of the company in terms of percentage. It
determines the profits of the company at various levels of the expenses of the firms (Ahmed,
2015). Profitability ratios hold major importance in the financial ratios of the company as they
are related to the profits that are earnings of the company and the users of the financial
statements are interested in knowing the profit-making ability of the enterprises. Some of the
ratios under this category are discussed below:
Gross margin: It depicts the percentage of gross profit earned by the entity. Gross profit is the
profit calculated by subtracting the cost of goods from their sales amount.
= (Total Revenue – Cost of goods sold) * 100 / Total revenue
Operating margin: Operating margin shows the percentage of profit calculated after charging the
operating expenses of the organization. Operating profit margin is calculated using the following
formula:
= EBIT * 100 / Total Revenue
Return on assets: It defines the net profit earnings of the business over the total assets invested in
the business of the firm (Khadafi, et. al., 2014).

= Net income * 100 / Total assets
Return on equity: It depicts the earnings of the firm against the amount invested by the
shareholders in the business of the company. Shareholders and investors of the company are
mainly interested in this ratio.
= Net Income *100 / Shareholder’s equity
Calculations of financial ratios of Telstra Corporation Limited:
Efficiency Ratios
Particulars 2016 2017 2018
Asset Turnover Ratio 0.60 0.61 0.60
Inventory Turnover Ratio 6.11 4.53 4.19
Receivables Turnover Ratio 5.46 5.08 4.90
Average Collection Period 66.81 71.88 74.56
Profitability Ratios
Particulars 2016 2017 2018
Gross Margin 88% 87% 86%
Operating Margin 24% 24% 22%
Return on Assets 13% 9% 8%
Return on Equity 36% 27% 24%
Extract of data from company's annual reports:
Particulars 2016 2017 2018
Net sales
25,83
4
25,91
0
25,66
7
Total Assets
43,28
6
42,13
3
42,87
0

Cost of goods sold
3,20
4
3,28
7
3,55
1
Average account receivables
4,72
9
5,10
3
5,24
3
Average inventory
52
4
72
5
84
7
Total Revenue
25,91
1
26,01
3
26,01
1
EBIT
6,31
0
6,23
8
5,65
1
Net income
5,78
0
3,87
4
3,52
9
Shareholder's equity
15,90
7
14,56
0
15,01
4
Year 2015 2016 2017 2018
Receivables 4,721 4,737 5,468
5,01
8
Inventory 491 557 893 801
Note:
Credit sales are not separately provided so the net total sales are assumed to be the credit
sales.
The above-mentioned figures are in million $ value.

Cash management analysis:
As per the annual financial reports of Telstra Corporation Limited, the company has current
investments in derivatives financial assets worth $ 75 million which has increased from $ 21
million in the last year (Choi, et. al., 2016). This shows that the company is diverting its
additional cash in making investments in the derivative market. It is an optimistic way of using
the ideal cash in the business. Telstra Corporation Limited has investments in cross-currency
swaps, interest rate swaps and forwards foreign exchange contracts. The investment in
derivatives is profitable for the business of the company as the company operates at various
locations and this derivative investment will ensure the specified amount of payments to the
business and reduces the risk of foreign currency fluctuations. The whole analysis of cash and
current investments of the business helps to understand that the company has a satisfactory cash
management system as these investments are quickly convertible in cash and thus there are no
liquidity problems in the business of Telstra Corporation Limited.

Sensitivity analysis
Price of the product $20.00
Units to be sold 30
0,000
Time period = 4 years 4
Equipment Cost $2,000,000
Residual Value $200,000
Working Capital Requirement $600,000
Other Information-
Depreciation method Straight Line
Method
Variable cost per unit $12.00
Cash fixed costs per year $300,000
Discount rate 10%
Tax Rate 30%
Yearly Net Inflow $2,100,000
PV of Net
Inflow:
Year Income
Depreci
ation
Net
Income
After
Tax
Profit
Net Cash
Flow
DCF
@ 10%
PV Net
Income
1 2,100,000
5
00,000
1,6
00,000
1,
120,000
1,
620,000 0.909
1,472
,727.27
2 5 1,6 1, 1, 0.826 1,338

2,100,000 00,000 00,000 120,000 620,000 ,842.98
3 2,100,000
5
00,000
1,6
00,000
1,
120,000
1,
620,000 0.751
1,217
,129.98
4 2,100,000
5
00,000
1,6
00,000
1,
120,000
1,
620,000 0.683
1,106
,481.80
Total
5,135,
182.02
PV of Net Outflow $2,094,570.04
NPV $3,040,611.98
1. Unit Sale decreases by
10%
New Sales units 270000
Yearly Net Inflow $1,860,000
New PV of
Net Inflow:
Year Net Income
Depreci
ation
Net
Income
After
Tax
Profit
Net Cash
Flow
DCF
@
10%
PV Net
Income
1 1,860,000
5
00,000
1,3
60,000 952,000
1,
452,000 0.909
1,320
,000.00
2 1,860,000
5
00,000
1,3
60,000 952,000
1,
452,000 0.826
1,200
,000.00
3 5 1,3 1, 0.751 1,090