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Telstra Corporation Limited’s Financial Analysis

Abstract

The research paper develops an in-depth analysis of the financial position of Telstra Corporation Limited through an analysis of its performance in the last two fiscal years (2012 and 2013). The analysis aims at developing an in-depth understanding of the company’s position and future performance, which may indicate the possibility for investors to consider (or not consider) the company’s potential in terms of investment worthiness.

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In particular, the paper investigates the company’s financial health based on its financial statements as well as financial ratios for the two fiscal periods. The research argues that Telstra is a privatized, publicly-traded and indigenous corporation that uses some of the most advanced technology in the modern market, a factor that has contributed to improved financial health that indicates that it is a good destination for investments.

The research finds that the company has used its resources to increase its operations and investments in new areas and markets, which have produced positive results. Also, the trend in profitability, solvency, and liquidity since 2011 shows evidence of increased growth, which further indicates that the company has been recovering from the recent economic crisis in Australia and the world in general.

Executive summary

The telecommunication sector is one of the largest industries in Australia by revenue and annual growth and expansion, with estimated annual revenue of $42 recorded at the end of the 2013 fiscal year (Hossain & Malbon 2013). With the advancement of technology in terms of the internet and mobile communication, the sector is growing annually, competing intensively with old sectors such as mining, service and manufacturing industries.

The Telecom industry is recording a faster rate of growth than the three sectors that have traditionally dominated the economy of Australia. The increase in the demand for mobile technology, social networking and e-commerce explain the rapid growth in the telecoms industry in Australia. While several national and multinational corporations dominate the sector, Telstra Corporation Limited, Vodafone Australia and Optus (SingTel Optus Pty Limited) are the largest in terms of revenue, market size and coverage (Hossain Malbon 2013).

Unlike the foreign-owned corporations Vodafone and Optus, Telstra is an indigenous Australian telecommunication company that has grown rapidly over the last two decades, competing with the multinationals operating in the region. It is a publicly listed corporation in Australia and the largest corporation in terms of service subscription (market share), coverage and revenue at $25.5 billion ahead of multinationals Optus ($8.8 billion) and Vodafone ($1.7billion) as of 2013.

Purpose statement

The purpose of this paper is to develop an in-depth analysis of the financial position of Telstra Corporation Limited through an analysis of its performance in the last two fiscal years (2012 and 2013). The analysis aims at developing an in-depth understanding of the company’s position and future performance, which may indicate the possibility for investors to consider (or not consider) the company’s potential in terms of investment worthiness. In particular, the paper investigates the company’s financial health based on its financial statements as well as financial ratios for the two fiscal periods.

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Thesis statement

Telstra is a privatized, publicly-traded and indigenous corporation that uses some of the most advanced technology in the modern market, a factor that has contributed to improved financial health that indicates that it is a good destination for investments.

Company Overview

Telstra Corporation Limited (hereby referred to as ‘Telstra’), is a telecommunication and media corporation indigenous to Australia (Hossain & Malbon 2013). From its Telstra Corporate Center headquarters in Melbourne, the company specializes in building and operating networks for telecommunication throughout Australia, including mobile phone communication, internet connections, voice calls and Pay TV services(Telstra Corporation limited 2012).

Although it is considered a relatively new company, Telstra’s history is long because it originates from the Post-Office (the Post Master General or PMG) that was formed in the early 1900s as a mail service after the formation of the Australian federation. Since the 1970s, the company has undergone various transformations, changing its names several times before assuming the current corporate name during its privatization process, which took place between 1995 and 2011.

The company is a publicly-traded organization, listed in the Australian Stock Exchange and trading as TLS. Also, it is listed in the New Zealand Stock Exchange, where it trades under the same name(Telstra Corporation limited 2013). Currently, the company’s main areas of the trade include the provision of fixed-line (landline) and mobile telephones, internet, and digital television services. It has an estimated profit of $4 billion, estates worth about $40 billion and total equity worth $ 11 billion. Also, it employs more than 36,000 people and runs more than 100 retail stores (Hossain & Malbon 2013).

Financial Analysis

Analysis of financial statements 2012-2013

This section will analyze the annual financial statements in the two fiscal years 2012 and 2013 for Telstra Corporation. The section determines the financial position of the company at the end of the two periods in terms of profitability, liquidity, solvency, and stability. It will involve an intensive scrutiny of the company’s performance for the two fiscal periods based on the presented income statements, balance sheet, profit and loss account, and cash flows.

Profitability

In financial analysis, the profitability of an organization is its ability to earn income and sustain financial growth on a long and short-term basis(Kieso, Weygandt & Warfield 2007). In this case, the performance is valued by analysis of the company’s income statement for a given period.

According to the statement, the company’s income increased from $25, 304 million in 2011 to $25,503 million, which represents a 0.79% increase per annum. This increase was attributable to an increase in revenue and other incomes in the fiscal year 2012. Also, the company’s profit before tax expense improved significantly in 2012 due to several aspects observable in the income statement.

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In 2011, the company had realized profit before tax expense worth $4,557 million but changed to $4,934 million in 2012. This represents an annual increase of 8.27%, which is recommendable for a company working in a highly competitive and technologically dynamic business environment. This improvement is attributable to several aspects presented in the income statement. For instance, the overall expenses in the year reduced significantly in 2012 when compared with their value in 2011 (Weston 1990). While the value of net fiancé costs in 2011 was $1,135 million in 2011, the company successfully reduced this value to 888 million, an annual decrease rate of 21.76%.

While the expenses on labor increased from $3,924 million in 2011 to $4,061 in 2012, other expenses reduce significantly, including goods and services purchased, which reduced from $6,183 million in 2011 to 6,179 million in 2012. Moreover, other expenses reduced from $5,047 million to $5,029 million in the same period. Also, the rates on the depreciation of goods and services reduced from 44,459 million to $4,412 million in the same period.

It is also worth noting that the company was successful in reducing its finance costs against fiancé income. For instance, while the income on finance increased from $ 127 million to $134 million, in the period, the reduction in costs on fiancé reduced from 1,262 million to 1,022 million in the same period, which contributed to the overall reduction in the finance costs and an increase in the profit accrued before tax expense as indicated before.

Overall, the company’s profit for the year increased from $3,250 million in 2011 to $3,424 million in 2012, which represents an improvement of a 5.35% increase. This is the main aspect that provides evidence of the company’s ability to raise its profit by a significant margin. It shows that trading in the company, including its new ventures and position in the market, is worth. Also, it is an indication that the company can improve its performance from one year to another.

However, the financial position of the company as at now cannot be judged fully without a comprehensive analysis of its profitability in the latest financial statements. In this case, we compare the performance in profitability between the results obtained in 2012 and those obtained in 2013.

First, the company’s income continued to improve in the 2013 financial year. For instance, income accrued before expenses improved from 25,503 million in 2012 to 25,980 million in 2013, which represents an increased rate of about 1.87% compared to 0.79% realized in 2012. Thus, it is clear that in 2013, there was an increase of more than 1% in the rate of improvement in the income realized before expenses are reduced.

Secondly, the expense rates paid by the company in 2013 increased from 15,269 million to 15,350 despite the reduction recorded in the previous year. Nevertheless, the company’s income on fiancé increased from $134 million in 2012 to $219 million in 2013, which represents an increase of about 63.4%. Although the value of costs on finance increased from $1,022 million to $1,128 million in the period, it is worth noting that the company was able to realize a net fiancé cost of $909 million in 2013, which is an increase from the $888 million recorded in the previous financial year.

It is important to note that the profit before tax for the company continued to increase significantly, indicating an improvement in the company’s financial health. In particular, the value of the company’s profit before tax was $5,482 million in 2013 after increasing from $4,934 million recorded in the previous trading period. This represents an increase of about 11.11% for the year. Noteworthy, in the previous year, the increase rate was about 8.27%. Thus, it is clear that the company not only improves in the number of profits earned by the year but also in the rate of improvement in the profits from one fiscal year to the next (Ehrhardt & Brigham 2008).

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Overall, the company obtained a profit worth $3,865 million in 2013 after paying government tax worth $1,617. In comparison, the company had obtained a profit worth $3,424 million in the previous trading period, which represents an increase in profitability by about 12.88% per annum. Similarly, this indicates that the company’s financial health has been improving in the two dimensions because the previous rate of improvement was about 5.35%. a difference of about 7% in the rates of improvement between the two trading period not only suggests a good financial position at the time but also a good future in terms of performance, growth, and development.

While the amounts paid to the shareholders in 2012 was $3,405 million, it increased significantly to $3,813 million in 2013, suggesting that the investment in the company is worth. Moreover, the worthiness of investing in the company is evidenced by an increase in the rate of earnings per share recorded in the two fiscal periods. While the rate of earning per share in 2012 was 27.75 cents, the company was able to use its increase in profits to raise this value to 30.6 cents per share in 2013.

Solvency

Solvency is the ability of the company to pay its debts using its assets (Groppelli & Nikbakht 2000). The company’s ability to pay its creditors and other third parties, including the employees and at the same time retain a positive balance sheet is an important aspect that shows positive financial health in a given period and a good future in the long-term basis (Houston & Brigham 2009).

The value of current assets at Telstra indicates a non-uniform change since 2011. For instance, in 2012, the value of worthiness of current assets at the company increased from $7,453 million recorded in the previous year to $9,950 million. However, in 2013, the amounts reduced again to $7,903. The explanation behind this phenomenon is the periodic variance in the company’s current assets. For instance, cash and cash equivalents, inventories and asset receivables varied greatly between 2011 and 2013 as the company carried out comprehensive improvement in its trading, including its new ventures in other parts of the world apart from Australia and New Zealand.

However, the value of noncurrent assets has been increasing significantly since 2011. For instance, in 2011, the company had total noncurrent assets worth $29,575 million before increasing to $30,460 million in 2012 and $30,624 million in 2013. This means that the total value of assets for the company in the three consecutive trading periods was increasing by a slight margin from $37,913 million in 2011 to 38,527 million in 2013, despite a slight reduction between 2012 and 2013.

Similarly, the value of current liabilities increased between 2011 and 2013. For instance, in 2012, the company’s current liabilities were worth 10,684 after a slight increase from $8,990 million in the previous year. However, in 2013, the value of current liabilities reduced again to $7,522 million. Noncurrent liabilities recorded in the two periods indicate an increase per annum from 17,152 million to 418,130 million in 2012 and 2013 respectively. Similarly, the company incurred total liabilities worth 25,652 million in 2013, which is a significant reduction from 27,836 million recorded in the previous year. In total, the company’s net assets after the reduction of total liabilities increased from 11,689 million in 2012 to 12,875 million in 2013.

At this point, it is worth noting that the company’s assets remained strong enough to provide a good source of resources to cover its liabilities on a long-term and short-term basis. The growth in current and long-term assets is an indication that the company invests in increasing its solvency and reduction in risks associated with insolvency, especially at a time when it is listing in new bourses as well as entering new markets in Asia and Europe.

Liquidity

In financial analysis, liquidity of a company is its ability to maintain a positive and strong while maintaining a strong capacity to meet other financial obligations in a given trading period (Williams, Haka, Bettner & Carcello 2008). By looking at the cash flow statement, it is possible to determine the liquidity position at the company.

The company’s cash flows provide by its operating activities decreased from 9,276 million in 2012 to 8,359 million in 2013. Similarly, the difference between operating cash flows and cash flows used in an investment indicates a reduction from 5,197 million in 2012 to 5,024 million in 2013. Nevertheless, the liquidity ratios indicate a positive trading period for the two consecutive years as indicated below.

Recommendations

Given that the solvency, liquidity and profitability ratios at the company show positive aspects of the company, it is worth saying that the company is on the right track. As such, it is recommended that investors consider this company because it has a good future (Bodie, Kane & Marcus 2004). Also, the company should focus on increasing the net value given to investors as dividends to ensure that it obtains more investments through the bourses it has listed. Moreover, it is recommended that the company seek operation in additional markets such as in South Korea, Vietnam, and the Philippines, where the internet and mobile phone marketing are still enlarging.

Conclusion

Using this analysis, it is worth noting that the company has used its resources to increase its operations and investments in new areas and markets, which have produced positive results. Also, the trend in profitability, solvency, and liquidity since 2011 shows evidence of increased growth, which further indicates that the company has been recovering from the recent economic crisis in Australia and the world in general.

References

Bodie, Z, Kane, A & Marcus, AJ, 2004, Essentials of Investments, McGraw-Hill Irwin.

Ehrhardt, M & Brigham, 2008, Corporate Finance: A Focused Approach, New York: Cengage.

Grappelli, A, &Nikbakht, E, 2000, Finance, New York: Barron’s Educational Series, Inc.

Hossain, M &Malbon, J, 2013, Who Benefits from Privatisation? Sydney, Routledge.

Houston, JF & Brigham, EF, 2009, Fundamentals of Financial Management, Cincinnati, Ohio: South-Western College Pub.

Kieso, D, Weygandt, JJ & Warfield, T, 2007, Intermediate Accounting, Hoboken, NJ: John Wiley & Sons.

Telstra Corporation Limited, 2012, Telstra annual report 2013, Sydney: Telstra Corporation.

Telstra Corporation Limited, 2013, Telstra annual report 2013, Sydney: Telstra corporation.

Weston, J, 1990, Essentials of Managerial Finance, Hinsdale: Dryden Press.

Williams, JR, Haka, S, Bettner, MS &Carcello, JV, 2008, Financial & Managerial Accounting, New York: McGraw-Hill Irwin.

Appendices

Appendix 1: Profitability ratios

Financial ratio 2013 2012
Ratio Formulae
Gross margin Gross profit ÷ net sales 15350/25980
= 0.59
15269/25503
=0.6
Operating margin Operating income ÷ net sales 25980/15351
= 1.69
25503/15269
=1.67
Profit margin Net profit ÷ net sales 3865/15351
0.25
3424/15269
=0.24
Return on equity Net income÷ average shareholder equity 3865/3813
=0.252
3424/3405
=0.241
Return on assets Net income ÷ total assets 3865/38527
=0.1
3424/39525
=0.099
Efficiency ratio Non-investment expense÷ revenue 15350/25980
=0.1
15269/25503
=0.099

Appendix 2: solvency ratios

Financial ratio 2013 2012
Ratio Formulae
Debt ratio Total liabilities ÷ total assets 25652/38527
=0.67
27836/39525
=0.65

Liquidity ratios

Financial ratio 2013 2012
Ratio Formulae
Current ratio Currents assets / current liabilities 7903/7522
=1.05
9950/10694
0.93
Quick ratio (Current assets – current liabilities) / current liabilities (7903-7522)/ 7903
0.05
(9950-10684)/9950
=0.044
Cash ratio Cash securities / current liabilities 5711÷7522
=0.76
5636÷10684
=0.74
Operation ratio Operating cash flow/ total debts 5024 ÷25652
0.2
5197÷27836
=0.198
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StudyCorgi. (2020, December 10). Telstra Corporation Limited's Financial Analysis. Retrieved from https://studycorgi.com/telstra-corporation-limiteds-financial-analysis/

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