Solution Code: 1BDI
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ASSIGNMENT REQUIREMENTS
CODE COMPANY
ANZ Australia And New Zealand Banking Group Limited
NAB National Australia Bank Limited
QBE QBE Insurance Group Limited
TLS Telstra
QAN Qantas Airways Limited
MGR Mirvac Group Stapled
TPM TPG Telecom Limited
HVN Harvey Norman Holdings Limited
RIO Rio Tinto Group
WPL Woodside Petroleum Limited
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This report intends to provide an overview of Telstra Corporation Limited and conduct analysis of the several aspects of the financial statements of the company. This shall include various items from the cash flow statements, balance sheets and the profit and loss account for the last six years i.e. 2010 to 2015. The report intends to address the significant areas of performance by the company by conducting ratio analysis and itemized study of important items and thereby focusing on the areas to be improved by the company. External influences that do not cover the financial aspect but may affect the investor’s decision have been also identified and discussed. These include the market rating given by various credit rating agencies and the study of the industry in which the company belongs because the company does not function as an independent entity and its success and failure depends on lots of factors.
Telstra Corporation Limited is the biggest market player in mobile telecom in Australia (Telstra 2016). The company was founded in the year 1975. The company privatized in the years of 1997, 1999 and the year 2006 in three stages. The company originated from the Australia post as one of the government departments. It operates mobile towers, pay television, internet access etc. Currently, Andy Penn is the Chief Executive Officer of the company. Warwick Bray is the Chief Financial Officer of the company. As of 2015, the total revenue of the company stands at $26.6 billion and the profit after tax stands at $4.3 billion (Thomson Reuters 2016). Telstra has been voted as the most respected company in the year of 2014 by a leading Australian newspaper. Telstra in order to win back its market share has separately allocated a huge sum of money which it intends to spend for the said purpose.
Depreciation charged to the profit and loss account has been on a reducing trend for the past 6 years which implies that the company has not invested any funds in the procurement of capital assets. This can be attributable to the nature of industry in which it is involved. However, it can also be commented that the company has not expanded its operations for these years and so, it idi not require any further capital asset. We can study the following chart
Operating Expense: We can observe that the operating expense has also remained almost consistent in the past 6 years. The main reason behind such consistency would be attributable to the consistent operating revenue. This can also be seen as a positive factor because it would ensure that the operating margin has not reduced in the years. These expenses are directly attributable to operations therefore, it can be stated that the company is operating efficiently even with consistent revenue.We may look at the following chart:
Ratio - Refer Appendix A-1 and A-2 at the end
Gross profit ratio
The GP ratio has been fluctuating over the last 6 years which is not a good sign for the company’s growth as the sales of the company have remained almost consistent and the falling GP suggests that the cost of goods sold of the company has increased.
Net profit ratio
NP ratio, however, has increased in the last 3 years which implies that the company is operating efficiently. This suggests that company is able to hold its place in the market well.
Debt equity ratio
Debt equity ratio is around 1 which suggests that company uses equity and outside debt almost equally to meet its financial needs. However, the ratio is always over 1 therefore, the debt financing has always remained higher and we can state that it is very important to have good earnings in order to meet the debt obligations.
Fixed Asset turnover ratio
This has been increasing over the last 6 years suggesting that the company is able to generate more out of its fixed assets used in production.
Equity turnover ratio
This has increased and then decreased again over the past 6 years indicating that the company uses how much equity to generate a particular level of sale. However, there is not much significant change as such. The performance of the company seems reasonable.
Payout ratio
This has increased considerably since 2010 and then decreased again. However, we must understand if the company pays the dividend, then the market value of the company decreases. So, overall the shareholders of the company do not gain or lose in case of a dividend.
Dividend yield
This reflects the ratio between the market price per share and the dividend per share declared by the company. This has actually decreased too much which is due to the fact that the Market price per share has decreased considerably over the last 6 years. However, looking at the dividend individually, the dividend has increased despite fall in the market share instilling confidence among its shareholders.
Solvency ratio
The solvency ratio of the company is the measure company being solvent. In the given case the solvency ratio of the company has been almost stagnant at 0.49 which seems a good sign. However, this should be compared with other competitors to get the better idea.
Current Ratio
The current ratio of the company was 0.8 in 2010 which improved above in 2014 to 1.2. However, it has declined to 0.9 which is still acceptable as the acceptable current ratio for any company is generally 1.
Market rating/ credit rating
The credit ratings given by various credit rating agencies must be considered before making an investment decision in large companies. This is because these are professional agencies who take into account all the monetary and nonmonetary factors which ultimately may affect the growth of the company or the industry of the company have immense expertise in understanding the business environment and the financial position based on policies of the government, other external factors, thus ensuring the investors of a safe investment.
Business environment of the industry in which the company relates
If the company has the strong financial background and appears free from all the negative financial indications, then the investor might consider the industry also in which the company relates. For example, take a sugar industry. The company seems strong but a recent circulation by the government has allowed the import of sugar at low prices which would directly affect the company’s profitability. Now, the investor might want to reconsider the decision of investing in that company even though as of now the company has strong financial base but soon the company may be severally affected by the change in the policy of import by the government due to which the company may not be able to earn healthy profits or may altogether come in losses.
After studying the above points, it looks that the company has been able to maintain and sustain the business it manages in Australia. The company has sustained the revenue collection and the profit of the company seems overall well managed. However, the one thing which may bother the current and the prospective customers is that the company has not been able to grow at a pace that is expected from the company of such size and capacity. The revenue has increased marginally by just 4% in the last 6 years which does not seem that impressive. In terms of profit also, the company has not been able to grow at much pace. However, one good sign is that the company has reduced the other overhead cost as the Net profit ratio has increased more than the gross profit ratio. This suggests that company has been able to reduce the other indirect costs incurred by the company in processes other than the manufacturing processes which implies that the controlling steps must have been taken by the management (Edmunds, (n.d.))
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