Telstra Corporation Limited has been chosen as the company for analysis. It is one of the largest telecommunication company in Australia and is listed on the Australian Stock Exchange. It builds and operates networks and deals in voice, mobile devices, internet, television and other entertainment services and products (Alexander, 2016). It is the telecommunication leader in Australia. It is fully privatised and has its head office at Melbourne.
The CEO of the company is Andy Penn, who succeeded David Thodey in the past. The Home office of the company is in Telstra Corporate Centre, Melbourne, Australia. Telstra follows the financial year July to June and therefore the last concluded financial year was June 30, 2017. The company deals in a number of telecommunication products and services in both the wholesale and the retail market including broadband network, fixed telephony, cable internet, ADSL , mobile broadband, satellite internet, dial up internet, low cost internet, subscription television, etc. The main geographic area within which the company caters its clients is Australia and New Zealand. The company’s independent auditors for the year ended 30th June, 2017 were Ernst & Young, who declared that Telstra has made no contravention against what is mentioned in Corporation Act 2001 and the applicable professional code of conduct (Bena, et al., 2017). Further, they have mentioned that the financials have been prepared as per the Australian Accounting Standards and International Financial Reporting Standards and that they give the true and fair view of the consolidated performance of the company. Also, they have received all the declarations as required by Sectio 295A of the Corporations Act, 2001. Also, they declared that on reasonable grounds it can be concluded that the company woud be able to pay off its debts as and when it becomes due. The most recent price of the company’s stock was AUD 3.54 per share as on 27th October, 2017 and the dividend per share was found to be 15.5 cents which was fully franked.
With the rising market for the internet and broadband based market, there has been a sharp rise in the demand for the telecommunication and other related products and services particularly internet (Boccia & Leonardi, 2016). Moreover, the market is not saturated in Australia and Telstra is receiving heavy competition from TPG Telecom, vodafone and other emerging telecom companies particularly on grounds of providing low cost services. As a result of this, Telstra has fell rapidly in 2017 as compared to last 3-4 years.
As per the future plans of Telstra, it plans $5 Billion monetisation through sale from NBN infrastructure income. As a part of the growth strategy, it plans to invest more in the network space which will increase the speed and reliablility and security for the end user. Also it plans for expansion in digitisation considering its future and enrichinh the experience for the customer. Besides all this, it also aims to focus on the capital allocation strategy which includes curtailing on the dividend distribution for the year and replacing the same with the dividend reinvestment plan (Dichev, 2017). It also aims to reach the rural and regional community in Australia and introducing 4G for the same. It has plans for coping with the unprecedented technology and digital disruption in the current market and thus aiming towards the global leadership in the telecommunication market.
Mentioned above in the workings is a income statement comparison and trend analysis over the period of last 5 years from the common size statement analysis perspective. The income from operations as can be seen from the above table has increased from AUD 25,368 Mn in 2012 to 26,013 Mn in 2017. It has grown steadilty by 2%-3% every year depending on the market and the gross margin as a result of which has remained fairly constant from AUD 14,347 Mn in 2012 to AUD 14,604 Mn in 2017 which shows the average and subnormal growth for the company (Bromwich & Scapens, 2016). The company has been able to increase the net income during this period rapidly by reducing the indirect expenses and increasing the indirect incomes and it was able to generate AUD 5780 Mn in 2016 from AUD 3405 Mn in 2012 on account of this but again due to the slowness in the industry and amongst rapid competition from the other market competitors, the net income dropped to AUD 3891 Mn in 2017. On further analysis of the common size statement, it can be seen that the company has been able to decrease the interest costs by working more on equity and less on debt as a result of which the interest as well as the debts have come down.
From the below mentioned statement of financial position for the last 5 years prepared on the trend analysis technique, it can be seen that the current + non current assets = Liabilities + Stakeholders’ equity. Further we can see that the company has changed the policy towards current assets, and it is maintaining less of cash and cash equivalents as compared to the previous years whereas accounts receivables and inventory has increased over this period. The net balance of Property, Plant and Equipment has remained fairly constant over this period (Das, 2017). On the liabilities front, the current liabilities have decreased over this period of 5 years and the company has relied long term debts and retained earning to increase the business as this has increased over the years. The company has introduced a couple of changes in accounting as compared to the industry trend such as the level of the diclosures, the categorization of the PPE, the basis of assumption of its useful life, the accounting for business combinations which is done through the acquisition method. Furthermore, new accounting standards have been applied in accounting for impairment of financial assets, revenue from contracts from customers, and new leasing standard introduced AASB 16 has been used in Accounting for leases as against AASB 117 which was being used earlier. The new thing which sets apart Telstra from all the other company in the industry is the introduction of the new IT system as mentioned in the Auditor’s report which has added to the internal control and operating effectiveness of the company.
From the above shown cash flow analysis over last 5 years, it can be seen that the churn in the cash flow has been unusal consiudering the growth in the company (Félix, 2017). Cash flow from operation has decreased over the years and in not in line with the rise in the net income. It shows that the the company is working more on credit terms than on the cash basis.
The investing activities has increased over the years from AUD 4079 Mn to AUD 4279 Mn which is mainly on account of the increase in the capital expenditure by the company particularly in PPE, though it is not the expanding through investing activities.
The company hasn’t had issued equity nor it has raised much of long term debt, therefore its main source of financing has been through the use of long term debts which has increased from AUD 2276 Mn to AUD 4702 Mn (Gooley, 2016).
On an overall basis, the cash flow for the company has decreased over the past years which shows that the company doesn’t want to keep idle cash and wants to optimally utilise it.
From the above ratio analysis, It can be seen that the return on the assets and return on equity as well as capital has been fairly constant over the last 5 years with a slight increase which shows good position of the company when the industry is slow and the average rate is 15-20% ROE. The gross margin has decreased slightly over the years from 56% to 53% whereas the net margin has increased from 13% to 14% which shows that the company has been able to cut short the indirect expenses and has also been able to decrease interest costs and taxes (Heminway, 2017). The major turnover ratios like the receivable turnover and fixed assets turnover ratio has been constant around 6 times and 1 time respectively whereas the inventory turnover ratio has decreased from 40 to 17 times which shows that the company has increased the average inventory holding because the sales have been constant. This helps in saving the ordering cost again and again. In terms of the liquidity ratio, the current ratio and the quick ratio has been same at 1 times and 0.7 times respectively. This has been against the normal industry trend of 2 and 1 respectively which shows that company is carrying less current and liquid assets to meet the current liabilities. The average cash conversion cycle has increased from 32 to 54 days which is evident of the weak internal control and pressure on cash collection. In terms of long term solvency, the debt equity ratio has been between 1.2 to 1.3 times which is good as per the industry trend of 2:1 (Jones, 2017). This shows that the company is utilising the equity funds too to do its operations. The interest coverage ratio has increased from 6 to 8 times over this period which shows the ability of the company to meet its obligations on time. Further, the cash flows yield as well as cash flow to sales has dropped which is evident from cash collection ratio. The dividends has been constant whereas the P/E ratio has increased during this period implying the demand for the stock (Visinescu, et al., 2017).
Conclusion
Based on the above analysis on the financial statements, ratios and comparing it with the industry and other market levers, it can be concluded that the company is performing well and outclassing the peers in terms of return and profits. Further, as the clean audit report has been issued, it sets apart Telstra from other companies in terms of the diclosures and transparency in preparing the financial statements (Trieu, 2017). It has also adopted newly introduced IFRS standards in order to make the correct representation of the data. It is a strong performer but it still can do good in terms of the cash flow generation and other internal controls like inventory liquidation and increasing the revenue. The decision would always be to invest in the company considering the future prospect and Telstra being a market leader. Further, it is planning of bringing a lot of changes in technology to meet the customer demands more smoothly which will further increase the credibility of the company.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Bena, J., Ferraira, M., Matos, P. & Pires, P., 2017. Are foreign investors locusts? The long-term effects of foreign institutional ownership. Journal of Financial Economics, pp. 21-35.
Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and Appropriate Economic Models, pp. 1-16.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.
Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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