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Financial Analysis

Discusss about the Fundamental Cornerstones Of Managerial Accounting.

Financial analysis of the company deals with the critical examination of its financial performance and position. It is concern with the evaluation of all the factors and information that covers the financial aspects of a business. This helps investors, managers and owners in taking important business decisions that will guide the future operations of the company. Ratio analysis is a tool of assessing the performance of the company by calculating several categorized ratios that measures the profitability, liquidity, efficiency and solvency of the organization. It is performed with the use of data presented in the annual reports of the company and the year on year performance is been evaluated (Vogel, 2014). 

Trend analysis is a part of technical analysis that focuses on predicting or estimating the future movements in the stock of the company based on past data. Considering the evaluation of trend in financial statements of the company, the analysis is known as the horizontal analysis. It shows the changes in the value of corresponding items of the statement over the period of time (Boyd, et. al., 2014). It is a tool which evaluates the performance over more than two periods and the earlier year is taken as a base for calculating the changes. In trend analysis, both dollar and percentage changes are been calculated for making the evaluation understandable. On a whole, both the analysis has their own advantages and disadvantages but both of them help the companies in making strategies and taking important decisions (Sinha, 2012).

Singtel Optus Pty Limited is an Australia based Telecommunication Company and is the second largest in the country. Optus is a wholly owned subsidiary of Singtel since 2001, which is a company headquartered in Singapore. Primarily, the organization trades under the brand name Optus and maintains several brands such as Virgin Mobile Australia in telephone market, Uecomm in market of network services and Alphas wet in ICT service sector. The products offered by the company include internet access, fixed and mobile telephony, leased lines, cable television and data transmission (Optus. 2018).

 In order to provide services, Optus generally uses its own network and also the wholesale services of Telstra and National Broadband Network. The organization provides direct services to the consumers and also act as a wholesaler to other services provides like Amaysim and Exetel. The Optus ‘Yes’ brand of the company is engaged in offering wireless and broadband services. Before becoming private, the company was originally known as Aussat Pty Limited and after that it was named as Optus. The organization is focused on investing in people, communities, networks and sustainable future. The aim is to make a more connected Australia in future (Bloomberg. 2018).

Trend Analysis

Optus operates in telecommunication industry which has performed better in recent years. The connectivity is been increased across the country demanding more mobile services. The revenue from wireless services has shown a significant upsurge, stimulated by the high volume consumption of mobile data and improved connectivity of the mobiles. However, the fixed voice telecommunication services demand has been declined over the years as people are now focusing on having mobile communications which are growing at fast pace (Optus. 2018).

In order to analyse the performance of Optus for the past three years, a trend analysis of its financial statements is done. The trends are been noticed in the balance sheet and statement of comprehensive income of the company by conducting a horizontal analysis of the statements. Under this, the financial data of 2015, 2016 and 2017 is been considered out of which the base year is considered to be2015. On the basis of that, the changes in each and every item of the statements is been noticed in 2016 and 2017. The results are attached below in appendix.

Referring to appendix 1, it is been observed that the net profit of Optus has increased over the period of three years. In 2015, the profit was amounted to A$ 3784.5 million which increased to A$ 3831.0 million. As compare to 2015, the change in 2016 was 1.95% increase and in 2017 it was 1.2%. However, the operating revenue of the firm declines in both the years. A decrease of 1.52% and 3% was there in the revenue of Optus in 2016 and 2017 respectively. Due to which the profit generated from operating activities also reduces by 4.25% and 6.3% respectively. The significant increase in the share of results of joint ventures and associates boosted up the profit for the company. The share part has shown an upsurge of 16.79% and 16.3% in both the years as compare to 2015. Moreover the expense related to tax has shown only a 0.9% increase in 2017, when compared against the tax expense of 2015. All this have a positive effect on the profit after tax of Optus, reflecting an upsurge in the same (Heitger, Mowen & Hansen, 2007). 

Talking about the statement of financial position of the company, the amount of cash and cash equivalents of Optus has increased in 2017 as compared to 2016 but the same was less than the amount of cash in 2015. Looking at the debtors of the firm, they have continuously increased during the period of three years. Moreover, the change in their amount was just double in 2017 as compare to the change reported in 2016. The same trend is been noticed in the inventories which are been continuously risen during the period of past three years. In 2015, the inventories were worth A$ 289.8 million and in 2017; the same was reported at A$ 352.2 million, showing an increase of 22%. Such upsurges have boosted up the total current assets of the company and they have shown a 24% increase in 2017 as compare to 2015. The same trend is been observed in the non-current assets of the company. The investment in property, plant and equipment has been continuously increased from A$ 10,683.2 million to A$ 11,892.9 million over the years. Along with this, the joint ventures of the group have also increased. On a whole, the total assets of the company have risen showing an increase of 4% and 15% in 2016 and 2017 respectively.

Recommendations


Considering the liabilities, same trend is been noticed and the current and non-current liabilities of the company has increased over the past three years. The amount of creditors and advance billing has increased by 10% and 36% respectively in 2017 as compare to the base year. A significant change is been noticed in the unsecured borrowings of the Optus Pty Limited. In 2015, they were reported at A$ 150 million and in 2017 they showed an huge upsurge of A$ 3046.9 million, reflecting an increase of 1931%. Due to such hikes, the current liabilities of the firm showed a rise of 61% in 2017 as compare to the base year. However, opposite trend is been noticed the non-current unsecured borrowings. They have shown a reduction of 9% in 2017; though increase by 5% in 2016. Apart from that, when compared to 2016, the tax liability and deferred gain of the company has been reduced along with the decline in its secured borrowings. On a whole, the non-current liabilities of Optus have reduced in 2017 as compare to 2016. As far as the equity is concerned, the continuous increase in share capital and reserves has shown an upward trend in the total equity capital of the firm. It has reported 14% increase in 2017 and only 1% in 2016, as against the base year.

It is been recommended to Optus Pty Limited that it should focus on reducing its finance cost which has been continuously increased over the past three years. Also the firm should increase its investment income as both the factors will eventually raise its operating and net profit after tax. In addition to that the company must increase its sales by providing more services in order to increase its operating revenue. An upsurge in revenue will definitely have a positive impact on the net income of Optus. Concerning the assets and liabilities of the firm, the company should emphasize on reducing its trade receivables and must focus on converting its inventories into cash quickly. It will increase the balance of cash and cash equivalents as well as enhance the liquidity position of Optus. Apart from this, it should sale some of its PPE in order to stimulate the flow of cash in the business.

The company should also focus on reducing its creditors as well as current unsecured borrowings. Availability of cash will help Optus to pay off its trade payables quickly and decline in borrowings will help the company in reducing its finance cost or interest expense. It should also pay off its advance bills in order to reduce its financial obligations. It is also recommended that the company should reduce its long term borrowings in order to decrease the total liabilities. Talking about equity, company has enough reserves and has raised its equity in the past three years and should continue to do the same in future.

Efficiency Ratios

It is one of the tools of financial analysis which evaluates the performance of the entity over the past years. It measures the position of the company from each and every financial aspect. Several ratios are been calculated which include liquidity, profitability, solvency and efficiency ratios for the past three years of Optus Ltd. The calculation is been shown in appendix 2 and is compared against the industry benchmarks. (Bragg, 2012). 

Starting with the liquidity ratios, these metrics measure the financial health of the company. The current and quick ratio both indicates the capability of a firm to meet its short term obligations with its current and quick assets (Bragg, 2012). Referring to Appendix 2, it can be interpreted that the CR of Optus has shown a continuous decrease in the past three years. In 2015, it was 0.83:1 which reduces to 0.64 in 2017.  The same trend follows in case of QR of the company. It also declines from 0.78:1 to 0.60:1 in the span of three years. The industry average for the same is 0.99 and 0.9 respectively. Reason being, the current assets of the company are way lesser than its current liabilities (Saleem & Rehman, 2011). However the, liquid ratios of Optus are below its industry benchmarks.

Efficiency ratios show the competency of the firm in generating revenue by using its assets. In case of Optus Pty Ltd, the debtor turnover ratio has been reduced from 1.03 to 0.90 in 2017. This was due to a decrease in the operating revenue and upsurge in the amount of receivables (Gibson, 2011). When compared with industry average, it is very much lower than the benchmark of 6.8 times. The same movement is seen in inventory turnover ratio of the firm. In 2016, it was reported at 14 times which declines to 12 times in 2017. However, the same was below the benchmark of 18.85 times. It reflects that company is not able to convert its inventory in cash quickly which can also be seen in its balance sheet. Similarly, the asset turnover ratio also reduces and it shows that the company has generated only 9% of its revenue from its average total assets. Overall the efficiency of Optus has deteriorated over the years (Godwin & Alderman, 2012). 

Profitability ratios are those financial metric which measures the overall profit situation of the company. Investors and shareholders generally look up to these indicators in order to assess the feasibility and viability of a firm (Higgins, 2012). The ratios include calculation of operating profit ratio, net profit ratio, return on assets and return on equity. Optus’s OPR has been slightly reduced in the past three years that is from 17.09% to 16.50%. The operating margin ratio of the industry is 22.31% which is way more than the OPR of Optus. However, the NPR of the company remains almost same for 2015 and 2016, later shows 1% increase in the ratio with 23% in 2017. When compared, it is observed that the industry average for net profit margin is negative that is -2.45%. Thus, it can be said that Optus has high NPR within the industry. Talking about the ROA, it has been continuously declined from 9% to 7.9% along with the fall in ROE of the company. The return offered to the shareholders reduces due the declined profits and less return generated from the assets. The ROA and ROE of the industry are 9.53% and 27.82% respectively. On a whole, company does not have a sound profit situation (Jenter & Lewellen, 2015).

As far as capital structure ratios are concerned, they basically deal with evaluating the portion of debt and equity in a firm’s structure of capital. The main ratios are Debt-equity ratio and Interest coverage ratio (Lee, Lee & Lee, 2009).  D/E ratio shows the amount of entity’s assets financed through debt and the portion financed through equity. On the other side, the ICR presents the number of times a company is capable of making interest payments. It checks the capability and credibility of the firm. Referring to Appendix 2, it is observed that D/E of Optus has slightly increased from 36% to 40% in 2017. This is because of the significant increase in the short term debt of the company. The debt to equity ratio of the industry is 116.26% which is very much higher than the Optus’s D/E ratio. On the other hand, the ICR reduces from 15.13 times to 12.76 times, reflecting the declined capacity of the company for meeting its interest payments (Nikolai, Bazley & Jones, 2009).

From the above ratio analysis, it will be recommended to Optus to work on each and every aspect of its operations in financial terms. It has to improve its liquidity ratio by increasing the cash balance so that company can have enough assets to meet its current liabilities. In addition to that, Optus must focus at reducing its debtors and inventories in order to improve and enhance its efficiency of generating revenue from its assets. It also has to put emphasis on using its assets efficiently and effectively so that more revenue can be made.

Moreover, it has to look at its profits and should take efforts to increase them. Reducing the operating and interest expenses can have a positive impact on the net and operating profit of the firm. Increase in such profits will eventually improve the ROE and ROA of the company and the firm will be able to offer more returns to its shareholders and investors. Talking about the capital ratios, Optus has to reduce its current borrowings so that its debt portion can be reduced. Also it needs to control its finance cost and enhance its EBIT in order to improve its interest coverage ratio. On a whole the company needs to improve its performance to match to the standards or benchmarks of the industry in which it operates.

The above trend and ratio analysis covers all the aspects of Optus’s financial statements. Trend analysis shows the changes in each item of the statement while ratios reflected the whole position and performance of the company in a nutshell. As per the interpretation and recommendations horizontal analysis, the company needs to work only on some factors like receivables, borrowings, fixed assets and many more. But when looking at the ratio analysis, it is observed that Optus is required to improve its performance overall to ensure a sound financial position in the market. Both the analysis provided a whole evaluation and examination of the company, on the basis of which certain recommendations are been given.

Conclusion

From the above report, it can be concluded that there are various tools which can be used to for measuring the financial performance of an entity. The tools used in the report covers all the areas in financial aspect and provided an overview of the position of Optus Pty Limited within its industry. Moreover, these techniques are popularly used for giving recommendations and taking important decisions. Overall, it can be said that financial analysis is very much necessary for evaluating a company from all aspects.

References

Bloomberg. (2018). Company Overview of Singtel Optus Pty Limited. Retrieved from: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=784454

Boyd, K., Epstein, L., Holtzman, M. P., Kass-Shraibman, F., Loughran, M., Sampath, V. S., & Welytok, J. G. (2014). Accounting All-in-one for Dummies. Hoboken: John Wiley & Sons.

Bragg, S. M. (2012). Financial analysis: a controller's guide (3rd ed.). New Jersy: John Wiley and Sons.

Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New Jersy: John Wiley and Sons.

Gibson, C. H. (2011). Financial reporting and analysis (13ed.). USA: South-Western Cengage Learning.

Godwin, N., & Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.

Heitger, D. L., Mowen, M. M., & Hansen, D. R. (2007). Fundamental cornerstones of managerial accounting. USA: Cengage Learning.

Higgins, R. C. (2012). Analysis for financial management (10th ed.). New York: McGraw-Hill/Irwin.

Jenter, D. & Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), 2813-2852.

Lee, A. C., Lee, J. C., & Lee, C. F. (2009). Financial analysis, planning and forecasting: Theory and application (2nd ed.). Singapore: World Scientific Publishing Co Inc.

Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate Accounting (11th ed.). USA: Cengage Learning.

Optus. (2018). About Us. Retrieved from: https://www.optus.com.au/

Saleem, Q. & Rehman, R.U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), 95-98.

Sinha, G. (2012). Financial statement analysis (2nd ed.). New Delhi: PHI Learning Pvt. Ltd.

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis (9th ed.). New York: Cambridge University Press.

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