Financial Ratio Analysis of Telstra Corporation (2016-2017)

This report presents a financial analysis of Telstra Corporation, focusing on its performance in 2016 and 2017. The analysis utilizes various financial ratios, including operating profit margin, price to equity ratio, gearing ratio, asset turnover ratio, return on capital employed, and interest coverage ratio. The report calculates and interprets these ratios to assess Telstra's profitability, efficiency, capital structure, and liquidity. The study also examines the company's sources of finance and their potential for funding future investments, such as research and development. The analysis highlights key trends and provides insights into Telstra's financial health and operational effectiveness based on the provided data.

RUNNING HEAD: FINANCE
Management accounting and Finance

Finance 2
Part 1
Telstra Corporation Limited is an Australia based telecommunications and technology
company having its headquarters situated at Melbourne. The company deals in developing
telecommunication networks and offering product and services which includes fixed line and
mobile telephony, data services, internet and other network services. Telstra provides approx.
17.4 million mobile services; 6.8 million fixed voice services and 3.5 million retail fixed
broadband services to its customers worldwide (Telstra. 2018).
Company has a vision and mission of connecting more and more people with offering more
opportunities to them. In order to accomplish this, Telstra focuses on using simple and easy
technology and solutions that are easily accessible to its users. It also focuses on becoming
the largest national mobile network of Australia (Reuters. 2018).
As of 2017, the company has earned a net profit of $3874 million. Telstra Corporation is
listed on Australian Stock Exchange (ASX) with a ticker symbol of ASX: TLS. The company
is now focused on expanding its operations in the international markets and looking forward
for its successful growth in future (Bloomberg. 2018).
Financial analysis is the process of measuring the performance of a company in terms of its
profitability, capital structure, efficiency and liquidity. The analysis includes a critical
examination of the financial statements prepared by an enterprise at the end of every fiscal
year. On the basis of the evaluation, decisions related to that company are been taken by
investors and other key people. The information presented in the statements is used for the
analysis and the same is been compared with the industry average or over the years (Lee, Lee
and Lee, 2009)
However, there are various tools used for conducting a financial analysis. Among the various
available techniques, the most commonly used is the ratio analysis. This technique involves

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the calculation of different categorized ratios which determine and measure the financial
performance of a company from every aspect. Most of the investors rely on the key ratios
which provide a snapshot of the company’s financial position. On the basis of this ratio they
take their decisions regarding making investment in the particular company. The ratios are
also very useful for the shareholders of the company as by correctly interpreting them, they
can understand what is the company doing with their investment plus how it is using it and
how much return is been available to them (Vogel, 2014).
Following are the ratios calculated for Telstra Corporation Limited to evaluate its
performance over the years 2016 and 2017.
1. Operating profit margin ratio
Operating profit or Earnings before Interest and Tax is that portion of revenue which is left
after paying all the cost of goods sold and the operating expenses. The amount is expressed as
a percentage of total sales and is used for measuring the profitability of the company (Tracy,
2012). The OPR of Telstra is represented below.
Operating Profit Margin 2016 2017
Operating Profit (A) 6,310 6,238
Revenue (B) 27,050 28,205
OPR(A/B) 23% 22%
(Telstra. 2016).

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2016 2017
0.215
0.22
0.225
0.23
0.235
Operating profit ratio
Operating Profit Margin
Years
%
The above graph shows the graphical representation of Telstra’s operating profit margin for
the past two year that are 2016 and 2017. It can be observed from the graph that the company
has a ratio of 23% in 2016 and the same reduces to 22% in 2017. This is because of the
overall reduction in the EBIT of Telstra from $6310 million to $6238 million. However, the
change is minor and has not impacted the profitability of Telstra to a great extent. Also, the
organization’s net profit has risen in the year 2017.
2. Price to equity ratio
It is also known as price earnings ratio. It indicates the willingness of an investor to pay per
dollar of earnings. Therefore, it is also known as price multiple and is calculated by dividing
the market value per share with earnings per share. Generally a high P/E ratio indicates that
the company is doing well, earning profits and has a quality of management (Warren and
Jones, 2018).
Price Earnings ratio 2016 2017
Market price per share (A) 5.6 4.3
Earnings per share (B) 47.4 32.5
P/E ratio (A/B) 0.12 0.13

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(Telstra. 2017).
2016 2017
0.10
0.12
0.14
P/E ratio
Price Earnings ratio
Years
Values
The above graph shows the price earnings ratio of Telstra Corporation for years 2016 and
2017. In 2016, company had a ratio of 0.12 which rises to 0.13 in 2017. This shows an
increase in the P/E ratio due to the high profits and minor change in the share price of the
company. The EPS and MPS of Telstra both have reduced in 2017 but the reduction in the
market price is lower than the fall in company’s EPS which boosted up its ratio. However the
rise indicates that the investors are expecting growth in future and the company is performing
well.
3. Gearing ratio
It is a fundamental analysis ratio which measures the company’s long term liabilities against
its equity capital or capital employed. It is calculated by dividing company’s long term
liabilities with its capital employed (Zainudin, et. al., 2016). Usually, a high gearing ratio is
not considered to be favourable for the companies as it indicates high financial risk to which
an entity is exposed to. On the other hand a low gearing ratio shows less portion of debt taken
by a company against its equity. Below graph shows Telstra’s gearing ratio for the years 2016
and 2017 (Hussey, 2011).

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Gearing ratio 2016 2017
Long term liabilities
(A) 14,647 14,808
Capital employed (B) 34,098.00 32,974.00
GR (A/B) 43% 45%
2016 2017
40%
42%
44%
46%
Gearing ratio
Gearing ratio
Years
%
From the above graph, it can be interpreted that Telstra’s long term debt has increased in
2017 which boosted up its gearing ratio to 45% from 43%. In 2016, the liabilities of the
company were $14,647 million which increases to $14,808 million in 2017. Also 3%
reduction was there in the amount of capital employed of Telstra. This is due to the upsurge
in company’s current liabilities and fall in its total assets. Telstra’s borrowings rise due to the
favourable foreign exchange movements and reclassification of the debt. It implies that
Telstra is exposed to high financial risk as it highly depends on long term borrowings rather
on its shareholders’ equity.
4. Asset turnover ratio
It is one of the efficiency ratios which determine the capability of an organization to generate
sales by efficiently using its assets. ATR is calculated by dividing the total revenue made by a

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company with its average total assets. Usually, a high ATR is considered to be more desirable
as it indicates high turnover from assets and make the firm more efficient (Jenter and
Lewellen, 2015). Telstra Corporation ATR is represented below.
Asset Turnover ratio 2016 2017
Revenue (A) 27050.0 28205.0
Average total assets (B) 41,866 42,710
ATR (A/B)
0.6
5
0.6
6
2016 2017
0.62
0.64
0.66
0.68
Asset turnover ratio
Asset Turnover ratio
Years
values
It can be seen in the above graphical representation that the ATR of Telstra has increased
over the years, marking it more efficient. In 2016, the ratio was 0.65 times while the same
figure rises to 0.66 times in 2017. However, the rise is so minor but it represents that Telstra
is capable enough of generating more revenue by efficiently deploying its assets. The upsurge
is obviously due to the reduction in company’s total assets which is been reported in its
balance sheet.
5. Return on Capital Employed

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It is another profitability metric which is expressed in terms of percentage and is used to
measure the impact of leverage over a company’s profitability position. The two components
required for calculating ROCE are EBIT and capital employed. EBIT is the income of the
company earned before paying any taxes and depreciation. Capital employed comprises of
company’s share capital and debt liabilities (Penman, et. al., 2017). Alternatively, it also
represents the difference between the total assets and current liabilities of the company. A
higher ROCE is generally acceptable by the investors as it clearly indicates that the company
has deployed its capital more efficiently than the one having a low ROCE ratio (Levi and
Segal, 2015).
Return on capital employed 2016 2017
EBIT (A)
6,310.0
0
6,238.0
0
Capital employed (B)
34,098.0
0
32,974.0
0
ROCE (A/B) 18.5% 18.9%
2016 2017
18.2%
18.3%
18.4%
18.5%
18.6%
18.7%
18.8%
18.9%
19.0%
ROCE ratio
Return on capital emoployed
Years
%
The above graph represents the return on capital employed ratio of Telstra in the past two
year. In 2016, its ratio was 18.5% which slightly increase to 18.9% in 2017. However, overall
the ratio remains the same if figures got rounded off. Reason being, the operating profit and

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capital employed of Telstra falls by almost same percentage. As a result of which, the ratio
remains unchanged. However, it can be interpreted that Telstra is capable of maintaining its
ROCE by properly utilizing its capital in the business.
6. Interest coverage ratio
It measures the ability of company to pay off its interest expense with its EBIT. In other
words, it is a type of gearing ratio which shows how many times a company can make its
interest payments with its operating profits (Saleem and Rehman, 2011). A high ICR
indicates that the entity has sufficient earnings to pay its interest. Whereas a low ICR shows
represents vice-versa of above situation. Generally, this ratio is mostly preferred by creditors
and lenders measure the credit worthiness of the company and to take their decisions
regarding credit supply (Periasamy, 2009).
Interest Coverage ratio 2016 2017
EBIT (A) 6,310 6,238
Interest expense (B) 710 591
ICR (A/B)
8.8
9
10.5
5
2016 2017
8.00
8.50
9.00
9.50
10.00
10.50
11.00
Interest coverage ratio
Interest Coverage ratio
Years
Times

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From the graph represented above, it can be said that the ICR of Telstra has been raised over
the past two years. In 2016, it was 8.89 times and the same in 2017 was reported at 10.55
times. Such huge increase reflects that the company is paying its interest timely and is
earning sufficient to make the same. The increase is reflected due to the significant reduction
in the interest expense of Telstra Corporation. Ion 2016, the amount was $710 million which
reduces to $591 million in 2017 and as a result of which, the ratio got increased.
Sources of finance
There are various sources of finance available to a company through which it can raise funds
for its investments. Finance is categorized on many bases among which the most popular are
short term financing and long term financing. There are many ways through which such
finances can be raised (Rigby, 2011). Short term sources include loans, overdraft, borrowings
from creditors and payables. On the other hand, long term sources consists of equity and debt
issuance, long term loans and retained profits. Apart from time period, finances are also
categorized as internal and external funds and owned and borrowed funds. Medium term
financing is also there which is raised by issue of preference shares, bonds, medium term
bank loans, hire purchase and many more (Peria and Schmukler, 2017).
For a leading company like Telstra, making investment in an option like research and
development may prove to be profitable in future. As the company deals in developing
networks, the new research will help it to figure out the new channels and networks that will
stimulate the growth and success of the company. The net assets of the company as of 2017
were $14,560 million (Telstra. 2017). If Telstra decides to make 20% net asset investment,
the amount required will be $2912 million that is 20% of company’s net assets. The amount
is very much lower than the long term borrowings of the company. This implies that
company need to raise funds from short term financing in order to invest in its R&D

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activities. The sources of short term financing include trade credit, borrowing funds from
creditors and payables, fixed deposits, bill discounting and many more. Telstra has stable
liquidity and solvency which allows the company to raise funds easily and invest in the R&D
programs. The company generates its short term finance from following ways:
 Bank loans: By taking a loan of considerable amount from the bank.
 Bank overdraft: Entering into overdraft agreement with the bank, company can
borrow funds up to a certain limit in return of a collateral security
 Financial leasing: It is another method in which a leasing company purchases assets
for the users and provide the same to them on rent. It helps in generating funds.
 Advances from customers: receiving the payments in advance from the customers
before selling goods and services to them, enables the organization to collect finance
for their investment (Mathur, 2007).
From the above sources, Telstra can generate funds for its 20% investment in R&D project.
As per the facts, the company is a leading telecommunication provider in Australia and is
competitive in nature. It provides tough competition to its key competitors within the industry
by offering innovative products and services to its customers. On the basis of its financial
health, leadership and competitive quality, it will be much easier for Telstra to raise short
term funds for its 20% investment. By putting money in research and development, company
will be able to discover the innovative and new networks and enhance the quality of its
products and services. This will eventually end up in increasing the profitability and
efficiency of Telstra Corporation Limited.
Part 2
Budgets are defined as a financial plan made to control the future expressions. They are the
statements which expresses plans, goals and objectives of an organization. In other words,

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budgets are the tools used for measuring the actual performance of the company and assisting
the employees to work in correct direction to achieve the set targets (Mypescpe.com. n.d.).
Budgeting process helps the organization to plan and control its operations effectively and
efficiently. Yes, it is true that in the modern environment, budgeting is still the central
framework with the help of which organizations and entities set their targets, allocate
resources and execute their strategies (Swain and Reed, 2014).
Initially, traditional budgeting approach was used by the companies which make them to fix
their thinking and response to the events in the dynamic world. As a result of which,
companies were bound to think in one direction which limits the flexibility of the responses.
Also there was an argument that the budgets reflect the pat reality of an organization which
forces the company and the management to focus on the historical data rather than
concentrating on current and future value of the business. In today’s era, many people view
budgeting process from different perspectives (ACCA Global 2018). For executives, it is a
way to control the activities of the organization whereas for operational managers, it is a
pointless activity and irrelevant for their daily operations. However, it can be argued that
traditional budgeting process requires too much time of finance personnel to deploy the
resources in the organization and to focus on the activities which are relatively of low value.
On the top of that, the business world is changing now and is becoming more complex,
dynamic and uncertain (Griff, 2014). Technological advancement in shorter product
lifecycles resulted in the greater innovation as a good indicator of corporate success. The
companies are require to adapt such changes but the rigidity of traditional budgets is only
limited to the innovation and responsiveness (ACCA Global. 2018). As a result of which,
companies started facing many challenges in the changing environment that showcases the
limitations of the traditional budgeting process. They are as follows:
 Traditional budgets add little value and are very time consuming