Financial Performance Analysis Of Telstra Corporation

Income statement

The current report aims to evaluate the financial statement analysis of Telstra Corporation with the help of financial ratios, horizontal and vertical analyses. Telstra Corporation is one of the leading telecommunication companies in Australia building and operating telecommunication networks, mobiles, internet access, markets voice, paid television and other entertainment products and services. After the deregulation of the telecommunications industry in the beginning 1990s, the organisation has succeeded in remaining the biggest provider of telecommunications services despite the growing popularity of its competitor, Optus. The organisation has above 150 subsidiary businesses and it has managed to extend its market share by discounting its mobile phone products as of 30^th June 2016 (Telstra.com.au, 2018). Hence, the current report would aim to evaluate its current performance by considering its financial reports for the past three years.

According to Almamy, Aston & Ngwa (2016), the primary goal of a business organisation is to create wealth or profit and the profit made in a particular year is the basic concern of most of the users of financial statements. The income statement helps in gauging the amount of profit that an organisation has earned in a year. Moreover, it enables the users to obtain an insight of the way the profit was earned. Profit or loss could be defined as the difference between incomes earned and expenses incurred. A profit denotes rise in shareholders’ equity, while a loss denotes fall in the same (Asquith & Weiss, 2016).

The following important items have been extracted from the income statement of Telstra Corporation to evaluate its financial performance:

According to the above figure, it could be observed that the net income of Telstra Corporation has decreased from $4,345 million in 2014 to $4,305 million in 2015; however, it has increased to $5,849 million in 2016. In other words, the net income of the organisation has declined by 0.92% in 2015; however, it has increased by 35.87% in 2016 (Refer to Appendices, Appendix 4). The possible reasons identified behind such increase in net income are the fall in labour costs, purchase of other goods and services and rise in other expenditures. Hence, the goal of the organisation in maximising profit is achieved in 2016.

In a healthy business, the rise in total income per year needs to be greater in contrast to percentage increase in expenses including cost of revenue (Bansal, 2014).With the help of horizontal/trend analysis; it could be observed that total income has increased by 1.18% in 2015 and by 1.66% in 2016. However, the total expenses have increased by 4.58% in 2015 and by 4.53% in 2016. In addition, the operating profit has declined by 5.89% in 2015 and by 6.68% in 2016 (Refer to Appendices, Appendix 5). This denotes that the growth in expenses has outrun the growth of total income and hence, it could be stated that the organisation has to incur additional cost to carry its business operations, while the revenue has not increased in tandem. Thus, it indicates unhealthy position of the business and its market share has not increased in 2017.

Comprehensive gain/loss

With the help of vertical analysis, it could be seen that Telstra has incurred additional cost in labour, goods and services and other expenses. The labour expenses have varied from 18.50% to 19%, while the expenses related to goods and services have varied from 25.50% to 27% over the years 2014-2016 (Refer to Appendices, Appendix 6). In addition, the other expenses have remained within 15% to 16%; however, they have been on the increasing scale. As a result, the operating profit of the organisation has declined over the years and the trend is inherent in case of net profit as well. Thus, from the income statement analysis, it could be stated that the financial performance of Telstra Corporation has declined in 2016.

In the words of Altman et al., (2017), the balance sheet statement, also called the statement of financial position, helps in depicting the financial condition of an organisation at a particular point of time. It depicts all the resources that an organisation controls and its overall obligations.

Percentage change in total assets, total liabilities and total equity:

According to the above figure, it could be observed that the total asset base has increased by 2.16% in 2014 and it has increased further to 2.76% in 2015 and it has increased further by 7.02% in 2017 (Refer to Appendices, Appendix 6). This is because of the rise in the current asset base, especially in cash and cash equivalents. On the other hand, the trend is similar in case of total liabilities and equity as well, which denotes that Telstra has utilised its cash base for clearing its obligations.

Selected factors as a percentage of total assets:

According to the above figure, it could be seen that the overall cash base has comprised of a major portion of the overall asset base; however, it is to receive maximum amount from the debtors. Moreover, adequate amount item is not spent on maintaining inventory; however, there is increase in long-term asset base, which denotes future expansion plan of the organisation (Evans & Mathur, 2014).

As commented by Collier (2015), the cash flow statement is an overview of the cash payments and receipts over a year and it depicts the cash movements of an organisation for that stated period. Cash flows need to be evaluated along with accrual accounting, since the potential issues could be identified resulting in shortage of cash in the business. There is no recent diversification on the part of Telstra Corporation due to the fall in inventory base and prepayments.

Income, expenses and operating profit

It has been observed that the operating cash flows of the organisation have declined from $10,387 million in 2014 to $10,066 million in 2015 and the decline is inherent further to $9,993 million in 2016 (Refer to Appendices, Appendix 8 and Appendix 9). This is because of the additional payment made to the staffs and suppliers, which questions the ability of the organisation in questioning its cash flow consistency.

It has been observed that the investing cash flows of the organisation have declined from $1,130 million in 2014 to $5,692 million in 2015; however, the increase is significant to $2,207 million in 2016. This is because of the fall in payments associated with property, plant and equipment and less proceeds.

Cash flows from financing activities:

It has been identified that the investing cash flows of the organisation have increased from $4,430 million in 2014 to $6,882 million in 2015; however, there is decline in the same to $3,777 million in 2016. The reasons identified behind such trend include the lower buyback of shares and lower repayment of borrowings (Gippel, Smith & Zhu, 2015).

Due to these reasons, there has been fall in closing cash balance at the end of 2016, which depicts that Telstra Corporation is suffering from cash flow problems.

Particulars	Details	2014	2015	2016
Revenue	A	26,296	26,607	27,050
Operating profit	B	7,185	6,762	6,310
Net profit	C	4,345	4,305	5,849
Opening total assets	D	38,527	39,360	40,445
Closing total assets	E	39,360	40,445	43,286
Average total assets	F=(D+E)/2	38,944	39,903	41,866
Shareholders’ equity	G	14,510	15,907	15,907
Operating margin	B/A	27.32%	25.41%	23.33%
Return on assets	C/F	11.16%	10.79%	13.97%
Return on equity	C/G	29.94%	27.06%	36.77%

Table 1: Profitability ratios of Telstra Corporation for the years 2014-2016

According to the above figure, it could be observed that the current ratio of the organisation has fallen from 1.20 in 2014 to 0.86 in 2015; however, it has increased to 1.02 in 2016. The trend is similar in case of quick ratio, cash ratio, cash flow to sales ratio and cash flow to total debt ratio. This is because of the lower amount of cash base, fall in operating cash flows and rise in trade payables. Hence, from the liquidity point of view, Telstra is improving its performance to clear its existing dues with short-term assets.

Capital Structure Ratios:-
Particulars	Details	2014	2015	2016
Total liabilities	A	25,400	25,935	27,379
Total equity	B	14,510	15,907	15,907
Total assets	C	39,360	40,445	43,286
Operating profit	D	7,185	6,762	6,310
Interest expense	E	957	689	710
Debt-to-equity ratio	A/B	1.75	1.63	1.72
Debt ratio	A/C	0.65	0.64	0.63
Equity ratio	B/C	0.37	0.39	0.37
Interest cover ratio	D/E	7.51	9.81	8.89
Gearing ratio	A/(A+B)	0.64	0.62	0.63

Table 4: Capital structure ratios of Telstra Corporation for the years 2014-2016
(Source: Telstra.com.au, 2018)

According to the above figure, it could be observed that the debt-to-equity ratio of the organisation has fallen from 1.75 in 2014 to 1.63 in 2015; however, it has increased to 1.72 in 2016. The similar trend is observed in case of debt ratio, equity ratio and gearing ratio, which implies that Telstra is relying largely on debt financing for conducting its business operations (Gitman, Juchau & Flanagan, 2015). In addition, it contains greater business risk and thus, the organisation is not in a stable position from the solvency point of view.

Balance sheet statement

Conclusion:

Based on the above evaluation, it could be inferred that the growth in expenses has outrun the growth of total income and hence, it could be stated that the organisation has to incur additional cost to carry its business operations, while the revenue has not increased in tandem. Thus, it indicates unhealthy position of the business and its market share has not increased in 2017. Moreover, the ratios computed denote that Telstra Corporation is struggling to maintain its competitive advantage in the market. Hence, the management of the organisation needs to adopt corrective measures to recover from such situation.

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