Financial Statements And Ratio Analysis Of Telstra Corporation

Introduction – Description of the company

The company chosen is Telstra Corporation which is one of the famous and oldest companies in Australia known widely for its telecommunication services provided. It was formed in 1975 and has come a great deal since then into providing the media services to its customers. The company generally deals in providing the internet and broadband services, the voice and data services, building, construction and operation of the telecommunication networks. It is also involved in delivering other entertainment related products and services (Bae, 2017). The company is listed on the Australian Stock Exchange and is the biggest telecommunication company in Australia. The company started as a part of the Australia Post which was a government company but got privatised over the period of time. The company has plans of going international in the years to come by and increase its reach to the customers, the company also focuses on bringing in the innovation and digitization and thereby increasing customer eccentricity. It has more than 36000 employees and also owns more than 150+ subsidiaries in different nations. The main mission of Telstra is to meet the customer expectation and improve the quality of service. Over the years, in pursuit of the above mission, the company has been able to reduce the customer complaints by more than 50%. In pursuit of achieveing the objective of digitization, the company has also increased the quantum of digital transactions from 26% to 60% in the past 5 years (Alexander, 2016). 

The company has a current shareholding of $ 4421 Mn in 2017 whereas the same was $ 5167 Mn in 2016. The company does not have any investor or shareholder who is holding more than 20% of the shares. The maximum sharehoding pattern is like HSBC Custody Nominees with 15.29%, J P Morgan nominees with 13.47% and remainder of them holding less than 10% which includes giants like BNP Paribas, Citicorp Nominees Pty Limited, National Nominees Limited, etc(Boccia & Leonardi, 2016). Therefore, it can be concluded that the company is not a family company and has more of public shareholding thereby making it a non family business. The list of shareholders having ownership more than 5% in the company is as follows:

Sl. No.	Shareholder	Capital % Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Shares
1	HSBC Custody Nominees	15.29	1,869,587,702
2	J P Morgan Nominees Australia Ltd	13.47	1,647,360,682
3	National Nominees Limited	7.78	950,975,016
4	Citicorp Nominees Pty Limited	5.42	662,334,314

 The main people involved in the governance of the firm are mentioned below:

Particulars	Names
Ø  Chairman	John P Mullen
Ø  Board Members	John P Mullen,
Andrew R Penn,
Craig W Dunn,
Peter R Hearl,
Jane S Hemstritch,
Russell A Higgins,
Nora L Scheinkestel,
Margaret L Seale,
Steven M Vamos,
Trae A N Vassallo and
Chin Hu Lim.
Ø  Chief executive officer	Andrew Penn

None of the above mentioned shareholders and the management committee or the key management personnel of Telstra is holding more than 20% or 5% of the compnay’s share and hence it is evident that the company is not a family firm and the external parties have a major stake in the business (Bena, et al., 2017). Moreover, it is not that if a person or an institution not having shareholding more than 5%, then they will not be involved in the decision making process. Instead, all the stakeholders in the company are being given opportunities to participate in the decision making process through voting and the general meeting procedure.

Ownership-governance structure

The following is the ratio analysis of the company Telstra corporation which has been done for the past few years in order to enable the user to make the trend analysis and get the better view of what has been the company’s progress over the years. Some of the important ratios that have been covered here areprofitability ratios, the efficiency ratios, short term liquidity, long term liquidity and finally the market value ratios.

Telstra Corporation Limited
Financial Performance Analysis
For the Fiscal Period Ending	As on Jun 30 2012	As on Jun 30 2013	As on Jun 30 2014	As on Jun 30 2015	As on Jun 30 2016	As on Jun 30 2017
A. Profitability Ratios
Gross Margin %	56.6%	56.5%	56.7%	55.4%	54.3%	53.4%
EBIT Margin %	24.3%	25.8%	26.8%	25.2%	24.1%	21.6%
Net Income Margin %	13.4%	15.3%	16.8%	16.4%	21.8%	14.2%
B. Asset Turnover
Total Asset Turnover	0.7x	0.6x	0.7x	0.6x	0.6x	0.6x
Fixed Asset Turnover	1.2x	1.2x	1.3x	1.3x	1.3x	1.3x
Accounts Receivable Turnover	6.2x	5.6x	5.9x	5.9x	5.6x	5.2x
Inventory Turnover	40.6x	30.8x	27.7x	27.0x	23.1x	17.6x
C. Short Term Liquidity
Current Ratio	0.9x	1.1x	1.2x	0.9x	1.0x	0.9x
Quick Ratio	0.8x	0.9x	1.1x	0.8x	0.9x	0.7x
Avg. Cash Conversion Cycle	31.9	34.2	33.8	37.6	40.2	53.5
D. Long Term Solvency
Total Debt/Equity	136.4%	121.6%	117.5%	112.0%	112.8%	121.6%
Total Debt/Capital	57.7%	54.9%	54.0%	52.8%	53.0%	54.9%
LT Debt/Equity	108.1%	115.7%	101.2%	101.6%	95.7%	104.6%
E. Market Value Ratios
Book Value per share	0.93	1.02	1.11	1.16	1.30	1.22
Price/Tang BV	NA	NA	NA	NA	551.9%	671.8%
Price / Book Value	NA	NA	NA	NA	2.7x	2.9x

The price graph of the company Telstra has been given below for the period of 2 years. It has also been compared with the market index named All Ordinaries Index to get the fair idea as to how the company or share is performing as compared to the market (Das, 2017). The chart below also shows the volume of the shares being traded in the market over the period of last 2 years. 

With respect of volume of trade of shares in the market, it can be seen that the same has been fluctuating over the period of 2 years. From April 2016 to April 2017, the same was low and it began to increase in there onwards till October 2017 after which there was a dip. However, with respect to the prices of the shares, the company has always been in the opposite direction as compared to the All Ordinaries Index (Dumay & Baard, 2017). The share prices of Telstra have continuously decreased during this period whereas on the other hand, the share prices of All Ordinaries Index have been on the positive side. All in all, telstra’s graph can be said to be below the All Ordinaries Index. However, in Telstra the volatility in the stock has been less as compared to the Index as can be seen from the flatter graph for Telstra.

Many announcements from the company keep on coming from the companies day in and day out. This might pose systematic or unsystematic impact on the company or the industry as a whole. Some of the management’s announcements or the factors which might have an impact on the share prices of the company include the management’s estaimte of the future sales or the profits, the news of mergers of acqusitions, or the sell off of one of its divisions, new insvestment or unusual write off from the books of accounts, abnormal or exceptional items, significant industry changes, change in the focus or objective of company or other microeconmic or macroeconomic factors, new competition into the market, etc (Farmer, 2018). In the given case, some of the breakthrough announcements by Telstra have been Telstra entering into a digitization deal with Robobank, which will have an impact on earnings and profitability and thus led to increase in share prices as well. Telstra also released the news of entering into 5G business which will be a boost to its digitization plan. Also the company entered into a deal with Microsoft for cloud voice services. The company also made recent announcements with regards to the dealration of dividend in March as well as in late februray which gave the boost to the share prices. Amdist all this, it released the news fo impairment of the US based media and video business and market it down to zero. This had significant impact of share prices and it fell down. The company had also estimated the impairment charges of A$ 273 Mn against impairment of goodwill and non current assets. All this has had a cumulative effect of lowering of the share prices of the company in the long run.

Fundamental Ratio

1. The current beta of the company Telstra corporation is 0.64 as against 0.71 for the industry which clearly shows that the volatility in the prices of shares of the company is less than that of the market(Gooley, 2016).
2. In case the risk free rate is 4% and the market rate of return is 6%, then the required rate of return of the company based on the capital asset pricing model will be as follows:

v R = rF + (rM – rF) * Beta,

R = 4 + (6-4) * 0.64 = 5.28%

(where rF = risk free rate of return, rM = Market return rate)

• The  company Telstra corporation can be said to be the conservative investment as per the analysis above as it is less volatile as compared to the market. On top of that, its required rate if return falls in between the market rate of return and the risk free rate which depicts that the invetors will get atleast the risk free rate and will be near abouts the market rate(Heminway, 2017).

1. The weighted average average cost of capital od the company as per the required rate of return calculated above and the inputs given in the annual report have been shown below:

Telstra Corporation Limited
Calculation of Weighted average cost of capital
Particulars	Amount	Proportion	Interest Rate	Weighted Average
Amount of Debt in total capital	17703	54.90%	5.10%	2.80%
Amount of Equity in total capital	14560	45.10%	5.28%	2.38%
Total capital	32263	100.00%
Weighted Average cost of capital				5.18%

Higher WACC will alaways be an issue with the company as it mentions the higher cost of capital procurement. Furthermore, it will cause even more issue when the company has plans of expansion and prospective investment. It reflects the average cost for both the debt as well as the equity. In other words, it is the opportunity cost of taking the risk of going ahead with the investment in the company. Higher the WACC, higher the risk involved(Goldmann, 2016). And therefore more is the expectation of the returns. This is a sum total of cost of debt financing and equity financing, interest cost and requisite rate of return for equity shareholders. In case of prospective investments, if the costs are higher, then the return and savings would be lower. Finally, it may also have an impact in the form of falling share prices and thus, the cost of capital needs to be planned well.

1. The debt ratio of the company as per the annual report has been 54.9 % in the year 2017 as against 54.2% in the previous year.

Telstra Corporation Limited
Proportion of Debt in capital
Particulars	2017	2017
Amount	Proportion	Amount	Proportion
Amount of Debt in total capital	17703	54.90%	17210	54.20%
Amount of Equity in total capital	14560	45.10%	14569	45.80%
Total capital	32263	100.00%	31779	100.00%

As per the abive table, the ccapital structure of the company is good and optimum as compared to the industry. The one main reason for this is it results in one of the least weighted average cost of capital in industry (Knechel & Salterio, 2016). The company has not had major increase in the debt share and has been fairly constant which also shows the stability of the company and that it has not had substantial dilution of control in the past 2 years.

The company is in the continuous process of monitoring its gearing ratio, which should be in the bandwidth of 50-70% as per the company guidelines. The same range was applicable for the last year as well. Gearing ratio is simply the ratio of the net debt by the total capital of the company where net debt is the sum total of interest bearing and the derivative liabilities less cash and cash equivalents. Total capital is sum total of net debt and equity. The company takes steps on the continuous basis to keep the gearing ratio in control some of which are putting the additional cash in the form of investments, bank deposits or issue the commercial paper or long term debts, etc. In 2017, the company also made the major repayments of the debts and also raised less debt capital as compared to the year 2016. In addition, the company did not issue any shares or buy back any of them in the year 2017(Kuhn & Morris, 2016). All this cumulatively has kept the gearing ratio in control. The Directors’ report does highlight as to why these steps are being taken and it is for keeping the debt proportion in control and to manage the capital effectively.

Price Graph/Chart movements

The year 2017 marked good performances for the company in terms of sales, EBITDA and the profitability. Due to this, the company announced 15.5% fully franked dividend in the 2^nd half of the year making it a total of 31% for the year. The company has also declared in its annual report the changes in the company’s policy with regards to dividend in the years to come by as it plans to reduce the pay out percentage to 70-90% of earnings and thereby returning 75% of the net one off nbn receipts to the shareholders in the form of special dividends in the future years. The new dividend policy has been brought to give effect to nbn transition. Further, the company is also moving away from the old practice of giving away 100% of the underlying earnings as the dividend (Linden & Freeman, 2017). All these changes will be from 2018 and onwards. With this change, the total fully franked dividend expected for the years to come will be 22% annually including both the special and ordinary dividend. This will ensure two objectives of the company of giving constant returns to the shareholder and ensuring long term sustainability. Though it is a big decline in terms of return, but as per the company it is towards achieving strategic transition. This will ensure parity with the other companies in the industry.

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Varied discussions and analysis has been done on the company. It can be concluded from the various aspects that the company is still growing and will be a prospective investment to be in the portfolio for the future period. The last 2-3 years have not been on the positive side because of the strategic decision, impairment, reducing in dividend, etc. but these are measures which will have an impact in the future period (Visinescu, et al., 2017). It should be in investors’ portfolio for many reasons like the gross profit of the company has been constant over the years. However, the net profit of company fell from 21% in 2016 to 14% in 2017 due to various announcements like nbn transition, impairment and dividend policy change. The share prices has also fell but the volatility in the share has been less as compared to market. The profitability ratios have been more or less in line with industry. IN terms of the efficiency ratios again, the company has been performing constantly over the years. The fixed assets turnover ratio and the total assets turnover ratio has been constant in the last 4-5 years but the debtors turnover ratio has come down from 5.9 to 5.2 which shows inefficiency in collection. Similarly inventory runover ratio has also witnessed a major decline from 40 times in 2012 to 17 times in 2017 which shows the inability to convert the inventory to sales. This can go up only if the internal control is improved (Raiborn, et al., 2016). The short term liquidity of the company has been more or less constant as compared to the industry with current ratio at 0.9 times and quick ratio at 0.7 times but there is still a scope of improvement. Astonishly, the cash conversion cycle has also decreased from 31 days to 54 days in the past few years which shows that the company’s cash collection has not been upto the mark and the company needs to make improvement in its internal control measures. In terms of the long term liquidity, the company has been performing well and effectively managing the capital ratio and its cost and is not a cause of worry.Coming on the market ratios, the company has performed well here too as is evident from the book value which has increased substantially and also the price to book value of the share has also increased which shows the heavy demand for the shares (Sithole, et al., 2017). There are several other positive impacts and effects associated with the company like the expansion and the digitization plan, the lower WACC and mergers and acquisitions.

References 

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea. Journal of Applied Business Research, 33(1), pp. 153-172.

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.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.

Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge Companion to Qualitative Accounting Research Methods, p. 265.

Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

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.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

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.