Comparative Financial Analysis of Telstra Corporation and TPG Telecom

This report provides a comparative financial analysis of Telstra Corporation and TPG Telecom Limited, both telecommunication companies listed on the ASX. The analysis, based on their annual reports, examines key financial elements including owner's equity, cash flow statements, and debt-equity positions. The report delves into the equity structure, including equity share capital, retained earnings, and non-controlling interests. It also explores the debt-equity ratios of both companies, highlighting their liquidity positions and the implications for investors. The cash flow statements, focusing on operating activities, are analyzed to assess the companies' financial health. The report aims to provide insights into the financial viability of each company, aiding investors in making informed decisions. The analysis covers the period from 2016 to 2017, offering a comprehensive overview of their financial performance and position.

Accounting
Assignment

1
By student name
Professor
University
Date: 25 th Sep 2018.
Executive Summary
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In the given assignment two companies have been selected and their overall financial analysis
has been done. Based on the annual reports of the company’s important conclusion has been
drawn on important elements that includes cash flow statement, income statement, debt-equity
position of the shareholders of the company. The analysis will help the investors in
understanding which company is financially more viable and in which company should they
invest their funds. The aim is to draw a comprehensive analysis for an overall success of the
company and its stakeholders and the people who want to invest in the company in some way or
the other.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Owner’s Equity............................................................................................................................................4
Cash Flow Statement...................................................................................................................................7
Other comprehensive income statement..................................................................................................11
Accounting for Corporate Income Tax.......................................................................................................13
References.................................................................................................................................................16
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Introduction
In the given assignment two companies have been selected which are Telstra Corporation and
TPG Telecom Limited. Both the companies belong to the telecommunication sector and are
strong competitors of each other. Both the companies are listed on the ASX.
Telstra Corporation is one of Australia largest companies in the telecommunication sector and is
a leading provider of mobile phones, home phones, broadband connections and helps in
providing and building telecommunication lines. The company works under two models,
business to consumer and business and business and aims to provide software related issues
solution to the companies. The company was originally founded in 1901, and now the overall
revenue of the company is in millions and the company trades its share through the Australian
Stock Exchange (Abdullah & Said, 2017).
TPG Telecom is one of the biggest Australian company and it specializes in IT related services
for consumers and business-related services and provides mobile related services for the people.
It operates the largest mobile virtual network for the companies (Alsagoff, 2010). The company
is having thousands of mobile subscribers and they rely on the company for many of their
solutions related to mobile services and other telecommunication needs.
Analysis
In the given case the annual reports of both the companies have been downloaded and analysed
and important opinion on the various elements of the financial statements of the company are
given below-
Shareholder’s Equity
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Shareholders are the people who are investing their funds in the company and are dependent on
the company to earn good returns from the company. It is the duty of the management that they
should consider the needs of the shareholders on priority basis. It helps the company in raising
funds which they can invest in their market. Shareholders equity is an important part of the
financial statement of any company and stakeholders always to analyse the same to form an
opinion whether they want to invest in the company or not (Antle & Smith, 1985). The main aim
of the management is also to focus on shareholders wealth maximization. The various elements
that are included in the shareholder’s equity are-
 Equity Share Capital - The companies that have their names listed in the stock exchange
then they can raise their funds from those sources. The companies allocate the shares at
the nominal value and some shares are issued at a premium or discount. The aim of the
management is that they can raise the funds that they need to run their business
operations. It is also important that they are providing proper returns to the shareholders
who are investing in the company (Boghossian, 2017). In case of Telstra Corporation, the
company have an overall equity shareholding of $4,421 million shares and they have also
bought back few shares and have also invested in some new shares. Thus, we see that
there is a lot of change in the overall equity structure of the company and in case of TPG
Telecom there is sale of equity investments that has boosted the cash flow of
$124.5million, and the company has also bought back few of the shares. Total there is a
lot of change in the equity structure of the company (Coate & Mitschow, 2017).
 Retained Earnings – Retained Earnings are the overall earnings that the company has
accumulated over the years after paying of the equity and the preference shareholders of
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the company. These retained earnings can be used for variety purpose for the company
and can also be used to issue more shares. It can also be seen that in case the retained
earnings are negative the companies are not allowed to issue dividends. Retained
Earnings are part of the equity share capital for the company (Dan, 1995). In case of
Telstra retained earnings are inclusive of various elements like actuarial benefit on
defined plans, income tax that is paid on actuarial gain that the company gets from
defined actuarial gain, also cumulative benefits from investments that the company gets
from equity investments at fair value. The overall retained earnings for the company is
$10,225 million. In case of TPG Telecom the overall retained earnings for the company is
$963.3 million. Out of the retained earnings, the shareholders are paid some amount of
dividend and the rest is left off. Thus, it can be said retained earnings are the important
point for the company.
 Non-Controlling Interests - In case of normal terms, there are some shareholders who
holds less than the total voting power for the company. In case of Telstra the company is
having certain non-controlling interest as a part of that but in case of TGP there are no
non-controlling interest on part of the company (Delone & Mclean, 2004). Thus, we see
that Telstra has more business combinations and holdings that TGP is not having. So, we
both the companies are having strong positions.
(Amount in USD Million)
Telstra Corporation - Owner's Equity
Particulars 2017 2016
Equity 4,421 5,167
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Reserves -105 62
Retained Profits
10,22
5
10,64
2
Total Equity
66,53
0
16,32
3
In case of Telstra Corporation, the company is having retained earnings and that has helped in
improving their equity position and it also has reserves which the company has after paying of
the dividend. But from 2016 and 2017, the overall equity shareholders have increased, and the
company has also brought back the certain shares and that has reduced their equity position and
thus affected the overall owners of the equity (Eddy, et al., 2004).
(Amount in USD Million)
TPG Telecom - Owner's Equity
Particulars 2017 2016
Equity
1,44
9
1,05
1
Reserves -18 42
Retained Profits 963 681
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Total Equity
2,39
4
1,77
4
In case of TPG Telecom, the company has negative reserves in the current period and has issued
new shares and that has increased their owner’s equity. The retained earnings of the company
have also reduced and that has affected their equity position. It can also be seen that from 2016,
to 2017, the equity share capital of the company has increased but negative reserves are a bad
part of the capital structure as it shows that the company is having accumulated losses instead of
profit and they will not be able to pay off their dividends.
2) The company can raise shares through various shares that includes both equity and debt. It
depends upon the management of the company how much risk are they ready to take in lieu of
the reward that they will get from the company (Eisemann, et al., 2017). In case of equity there is
less risk and the overall return is also less but in case of debts the risk element is high but the
return that they get is important. When we analyse the debt-equity structure of the company, we
are analysing the overall liquidity position of the company. Liquidity is a position that shows
how the companies are managing their funds and in case they are investing their funds in the
company the shareholders should have good knowledge about that. In both the companies they
are managing their debt-equity element and are trying to balance the overall liquidity position of
the company. Given below the equity-debt structure of the two companies (Gray, 2018).
(Amount in USD Million)
TPG Telecom Limited - Owner's Debt-Equity Position
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Category Description 2016 2017
Debt
Loans and
Borrowings
872.
4
1350.
4
Total Debt
872.
4
1350.
4
Equity
Equity attributable
to shareholders of
2,39
9
1,779
Total Equity
2,39
9
1,779
Debt-Equity ratio 36% 76%
In the given case the debt element was high in 2016 but in case of 2017, the company has tried to
reduce that and has invested more in the equity, so that would balance the financial position of
the company. The company has issued new shares and that has brought down the debt-equity
ratio from 76 percent to 36 percent and that is extremely good for the company and for the
investors also (Gullet, et al., 2018).
(Amount in USD Million)
Telstra Limited - Owner's Debt-Equity Position
Category Description 2016 2017
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Debt
Loans and
Borrowings
14808 14647
Total Debt 14808 14647
Equity
Equity attributable
to shareholders of
14,56
0
15,90
7
Total Equity
14,56
0
15,90
7
Debt-Equity ratio 102% 92%
In case of Telstra Corporation, the financial position of the company is not that stable as the
company is having very high percentage of borrowings in comparison to the equity element that
they have (Kusolpalalert, 2018). It can also be seen that since 2016 the company is investing
more in debt and is buy backing the old shares and that has brought the overall equity element
low and in turn have increased the risk that the company was facing with respect to paying off
the debts in case the need arises.
There is a major difference in the debt-equity position of both the companies, where Telstra is
having a very high debt element in comparison to TPG and thus when it comes to taking
decisions based on the overall liquidity position the investors will try to invest in TPG
Corporation and not in Telstra, as that would be a wiser decision on all fronts. The aim of the
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investors is to get return from the company that is on higher end and thus they want a more
stable position which is not possible in all cases.
Statement of Cash Flows:
The cash flow statements show the flow of cash from the beginning of a financial period to the
end of the financial period. It shows the position of the cash at the end of the financial period.
The provision of the company is that there are relevant provision of the Australian Accounting
Standards and the Corporations Act 2001. There are major segments of the cash flow statements
which the companies need to consider and are helpful for the investors of the company in many
ways (MORGAN, 1988)-
 Cash Flow from operating Activities-
In case of operating activities, it covers the transactions that occurs between the companies in the
ordinary course of business. These activities form the major part of the business and can often
lead to increase and decrease of the cash. There are few transactions which are part of this that
includes collection of the debtors, payment to the creditors, expenses that are operating in nature
and covered, payment of interest and other current liabilities are also covered in this. In case of
Telstra the company has paid off to the suppliers and has received cash from the customers and
has also received government grants and that forms the major part of their cash. The company
has also paid taxes and that is considered as a part of the operating activities. In case of TPG
Telecom operating activities includes cash collected from the debtors and paid to the creditors. It
also includes the amount of income tax that is paid by the company. Thus, the net cash from
operating activities is $722.7m (Sikka & Willmott, 2010)
 Cash flow from Investing activities
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