This assignment task is a written report and evaluative analysis of the financial performance of a selected listed company on the ASX. This analysis requires:
- Description of the company.
- Preparation of common size financial statements.
- Analysis of company networking capital position.
- Analysis of liquidity and capital structure.
You are required to obtain the relevant information from chosen company annual reports and company web site. You can access the company web site via www.asx.com.au.
Note: Choose is COL (Coles group Limited)
Content Of The Assignment
Introduction
The introduction should briefly explain the purpose of the assignment, the selected company for analysis and the type of analysis.
Financial Performance Analysis Of The Selected Company
a. Description of the company
Prepare a brief description of the selected company (when they started, key milestones etc.), outlining the core activities (major business, key products) competitive advantages, and the market in which it operates (in which industry sector they are in ASZX, do they export their products and services or whether they serve only the local market).
b. Preparation of common size financial statements for the most recent financial year
First, briefly discuss the importance of common size financial statement. Second, prepare a common size income statement and a common size balance sheet based on the most recent annual report.
c.Analysis of company net working capital position
Based on balance sheet information and the notes to the financial statements,
- Analyse the working capital position of the company over minimum of past 4 years (composition of current assets and current liabilities, changes in CA and CL, any significant decision about working capital management etc.).
- Calculate the networking capital and give your opinion on the net working capital position of the company (Whether the company net working capital is positive or negative, what will be the implication of identified net working capital position on the company short term and long-term solvency)
d. Analysis of company liquidity and capital structure using liquidity and capital structure ratios
Using data from financial statements of your selected company, calculate the following ratios for minimum of past 4 years and present them using suitable charts. Discuss the implications of the identified trends for company performance.
- Liquidity ratio (calculate minimum of 2 liquidity ratios over 4 years and analyse them using suitable charts)
- Capital Structure ratio (calculate minimum of 2 capital structure ratios over 4 years and analyse them using suitable charts)
Conclusion
Based on the analysis in section 2, provide brief conclusion on the company financial performance.
This report conducts an examination of the financial performance of a selected listed company on the ASX. The analysis is conducted for providing the description of the company that includes explanation of its core activities, competitive advantages and the market in which the firm it operates. This is followed by discussing the importance of common size financial statements that includes statement of income and common size balance sheet. The net working capital position of the selected company is then carried out which includes evaluation of the working capital position over the past 4 years and assessing its implications on the short as well as long-term solvency. In addition to this, the evaluation of liquidity and capital structure of the company is carried out with the use of ratio evaluation. The company selected for the analysis purpose is Telstra Corporation Limited, a leading telecommunication and information services company operating within Australia.
Telstra Corporation Limited is a widely known telecom company of Australia that offers a diverse range of telecom services to the people of the nation. The company is involved in providing basic telecom and information services that includes call services, mobile, internet and wholesale services. It is also intended to deploy the next generation LTE technology including voice over LTE and aims to expand into the emerging technology fields such as e-health services (Our Company, 2020). The major business activities of the company include the following:
- Telstra Consumer and Small Business: This business unit of the company offers a diverse range of telecom products and services to the customers and is involved in giving online services such as internet plans, phone and billing services.
- Telstra Enterprise: This unit is involved in managing the global networks of Telstra that includes developing advanced technology products and services (Our Company, 2020).
- Network and IT: This unit is involved in planning, designing and creating of Telstra networks and telecom solutions and providing various network and internal services.
- Telstra Infraco: It provides different types of telecom products and services such as data centers, non-mobile fibre, HFC cable, fixed network infrastructure.
Telstra Corporation is perceived to provide wide coverage and have achieved competitive advantage in the telecom industry of Australia on the basis of the pricing of its products. The consumers are willing for paying the premium price for its services owing to the quality given by its different telecom products and services (Our Company, 2020).
The purpose of the common size statement analysis is to displays each line item of financial statements as a percentage of selected common figures. In case of income statement, revenue is used as base figure to express the each line of income statement. In balance sheet, the common figure taken is total assets and each line item of balance sheet is expressed as total assets.
- Formula to express each line item of income statement = Line Item/Revenue
- Formula to express each line item of Balance sheet statement = Line Item/Total Assets (Anderson, 2013)
Importance of common size statements:
- The major benefit of common size analysis it helps the investors to identify the any major change in any item of financial item which can be material information for decision making purpose.
- Common size statements are easy to understand and they also provide some of profitability ratios directly such as net profit margin, gross profit margin and operating profit margin.
- Common size analysis also allows to compare financial statement of one period with another period that help analyst to gain knowledge of any irregular item that requires further examination (Anderson, 2013).
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Common Size Income Statement |
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Telstra Corporation Limited |
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Financial Items |
2018 |
2019 |
Common Size |
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Year ended 30 June |
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Amt in Million $ |
2018 |
2019 |
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Income |
||||
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Revenue from operations |
$ 25,848.00 |
$ 25,259.00 |
89.62% |
90.84% |
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Other income |
$ 2,993.00 |
$ 2,548.00 |
10.38% |
9.16% |
|
Total Income |
$ 28,841.00 |
$ 27,807.00 |
100.00% |
100.00% |
|
Expenses |
||||
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Labour |
$ 5,207.00 |
$ 5,279.00 |
18.05% |
18.98% |
|
Goods and services purchased |
$ 8,338.00 |
$ 9,138.00 |
28.91% |
32.86% |
|
Net impairment losses on financial assets |
$ 190.00 |
$ 184.00 |
0.66% |
0.66% |
|
Other expenses |
$ 4,887.00 |
$ 5,234.00 |
16.94% |
18.82% |
|
Sub-Total |
$ 18,622.00 |
$ 19,835.00 |
64.57% |
71.33% |
|
Share of net profit/(loss) from joint ventures and associated entities |
$ (22.00) |
$ 12.00 |
-0.08% |
0.04% |
|
Total Expenses |
$ 18,644.00 |
$ 19,823.00 |
64.64% |
71.29% |
|
EBITDA |
$ 10,197.00 |
$ 7,984.00 |
35.36% |
28.71% |
|
Depreciation and amortisation |
$ 4,470.00 |
$ 4,282.00 |
15.50% |
15.40% |
|
EBIT |
$ 5,727.00 |
$ 3,702.00 |
19.86% |
13.31% |
|
Finance Income |
$ 218.00 |
$ 238.00 |
0.76% |
0.86% |
|
Finance Cost or Interest Expenses |
$ 806.00 |
$ 868.00 |
2.79% |
3.12% |
|
Net finance costs |
$ 588.00 |
$ 630.00 |
2.04% |
2.27% |
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Profit before income tax expense |
$ 5,139.00 |
$ 3,072.00 |
17.82% |
11.05% |
|
Income tax expense |
$ 1,582.00 |
$ 923.00 |
5.49% |
3.32% |
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Profit for the year |
$ 3,557.00 |
$ 2,149.00 |
12.33% |
7.73% |
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Earnings per share (Cents) |
||||
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Basic |
30.20 |
18.10 |
||
(Annual report, 2017) and (Annual report, 2019)
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Common Size Balance Sheet |
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Telstra Corporation Limited |
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Financial Items |
2018 |
2019 |
Common Size |
|
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Year ended 30 June |
2018 |
2019 |
||
|
Amt in Million $ |
||||
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ASSETS |
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Current assets |
||||
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Cash and cash equivalents |
$ 629.00 |
$ 604.00 |
1.47% |
1.42% |
|
Trade and other receivables and contract assets |
$ 5,588.00 |
$ 5,392.00 |
13.08% |
12.66% |
|
Deferred contract costs |
$ 69.00 |
$ 95.00 |
0.16% |
0.22% |
|
Inventories |
$ 492.00 |
$ 448.00 |
1.15% |
1.05% |
|
Derivative financial assets |
$ 75.00 |
$ 179.00 |
0.18% |
0.42% |
|
Current tax receivables |
$ 6.00 |
$ 7.00 |
0.01% |
0.02% |
|
Prepayments |
$ 431.00 |
$ 457.00 |
1.01% |
1.07% |
|
Assets classified as held for sale |
$ - |
$ 121.00 |
0.00% |
0.28% |
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Total Current assets |
$ 7,290.00 |
$ 7,303.00 |
17.06% |
17.15% |
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Non-Current assets |
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Trade and other receivables and contract assets |
$ 730.00 |
$ 780.00 |
1.71% |
1.83% |
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Deferred contract costs |
$ 1,180.00 |
$ 1,232.00 |
2.76% |
2.89% |
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Inventories |
$ 19.00 |
$ 35.00 |
0.04% |
0.08% |
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Investments – accounted for using the equity method |
$ 1,237.00 |
$ 1,298.00 |
2.90% |
3.05% |
|
Investments – other |
$ 36.00 |
$ 25.00 |
0.08% |
0.06% |
|
Property, plant and equipment |
$ 22,108.00 |
$ 22,332.00 |
51.75% |
52.44% |
|
Intangible assets |
$ 7,922.00 |
$ 7,210.00 |
18.54% |
16.93% |
|
Derivative financial assets |
$ 1,897.00 |
$ 2,083.00 |
4.44% |
4.89% |
|
Deferred tax assets |
$ 54.00 |
$ 59.00 |
0.13% |
0.14% |
|
Defined benefit asset |
$ 250.00 |
$ 232.00 |
0.59% |
0.54% |
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Total non-current assets |
$ 35,433.00 |
$ 35,286.00 |
82.94% |
82.85% |
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Total Assets |
$ 42,723.00 |
$ 42,589.00 |
100.00% |
100.00% |
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Current Liabilities |
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Trade and other payables |
$ 4,528.00 |
$ 4,528.00 |
10.60% |
10.63% |
|
Employee benefits |
$ 868.00 |
$ 804.00 |
2.03% |
1.89% |
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Other provisions |
$ 89.00 |
$ 103.00 |
0.21% |
0.24% |
|
Borrowings |
$ 1,635.00 |
$ 2,222.00 |
3.83% |
5.22% |
|
Derivative financial liabilities |
$ 1.00 |
$ 57.00 |
0.00% |
0.13% |
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Current tax payables |
$ 132.00 |
$ 103.00 |
0.31% |
0.24% |
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Contract liabilities and other revenue received in advance |
$ 1,532.00 |
$ 1,657.00 |
3.59% |
3.89% |
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Liabilities classified as held for sale |
$ - |
$ 79.00 |
0.00% |
0.19% |
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Total current liabilities |
$ 8,785.00 |
$ 9,553.00 |
20.56% |
22.43% |
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Non-Current Liabilities |
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Other payables |
$ 65.00 |
$ 68.00 |
0.15% |
0.16% |
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Employee benefits |
$ 157.00 |
$ 158.00 |
0.37% |
0.37% |
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Other provisions |
$ 168.00 |
$ 158.00 |
0.39% |
0.37% |
|
Borrowings |
$ 15,316.00 |
$ 15,031.00 |
35.85% |
35.29% |
|
Derivative financial liabilities |
$ 388.00 |
$ 283.00 |
0.91% |
0.66% |
|
Deferred tax liabilities |
$ 1,537.00 |
$ 1,529.00 |
3.60% |
3.59% |
|
Defined benefit liability |
$ 7.00 |
$ 8.00 |
0.02% |
0.02% |
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Contract liabilities and other revenue received in advance |
$ 1,681.00 |
$ 1,271.00 |
3.93% |
2.98% |
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Total Non-current liabilities |
$ 19,319.00 |
$ 18,506.00 |
45.22% |
43.45% |
|
Total Liabilities |
$ 28,104.00 |
$ 28,059.00 |
65.78% |
65.88% |
|
Net Assets |
$ 14,619.00 |
$ 14,530.00 |
34.22% |
34.12% |
|
Equity |
||||
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Share capital |
$ 4,428.00 |
$ 4,447.00 |
10.36% |
10.44% |
|
Reserves |
$ (131.00) |
$ (58.00) |
-0.31% |
-0.14% |
|
Retained profit |
$ 10,335.00 |
$ 10,160.00 |
24.19% |
23.86% |
|
Equity available to Telstra Entity shareholders |
$ 14,632.00 |
$ 14,549.00 |
34.25% |
34.16% |
|
Non-controlling interests |
$ (13.00) |
$ (19.00) |
-0.03% |
-0.04% |
|
Total Equity |
$ 14,619.00 |
$ 14,530.00 |
34.22% |
34.12% |
(Annual report, 2017) and (Annual report, 2019)
(Annual report, 2017) and (Annual report, 2019)
Net working capital is best measure of liquidity, short term financial health and operational efficiency of the company. If company has sufficient net working capital i.e. current assets exceeds than liabilities than it can be said that company has potential to invest and grow. On the contrary if company does not have current assets greater than liabilities than company will find difficulty in paying back the creditors and can even go bankrupt (Baker and Martin, 2011).
Common Size statements of Coles Group Limited for years 2021 and 2022
In case of Telstra Corporation has been found that during the last 4 years, net working capital has been decreasing with rapid pace and resultant, in year 2019, the net working capital was negative $2250 million. Credit risk refers to the risk arises when counterparty and customers become default on their obligations and result is financial loss. Telstra Corporation makes use various working capital strategies to manage the credit risk but during the last few years the company does not have enough working capital to meet its financial obligations that are due within a period and for this reason company need to depend upon available financing options to pay for current liabilities (Damodaran, 2011).
Liquidity Analysis
These ratios are used for identifying the debt repaying ability of a business with the use of its near cash or quick assets. The liquidity position of Telstra Corporation Limited has examined with the use of following ratios:
(Annual report, 2017) and (Annual report, 2019)
Current Ratio
It is one of the most used financial measures by the companies for examining their ability to meet the short-term debt financial obligations in context of its available assets that can be quickly transformed into cash.
Formula: Current Assets/Current liabilities (Ogier, Rugman and Spicer, 2012)
As depicted above, there is a decline in the trend of the current ratio for the company and it has decreased from 1.02 to 0.76 during the financial years 2016-2019. The ratio is less than 1 over the past 4 years representing a financial risk within Telstra for not able to meet its current liabilities due to low maintenance of assets that are convertible to cash within a year. The decline in the ratio is mainly due to large increase in the current liabilities that has increased to about 8.7 per cent as compared with the increase in the current assets position that has only depicted an increase of about 1.4 per cent. This has caused a decrease in the current ratio with current assets being lower than the current liabilities and thus the company holds a financial risk of not meeting its short-term borrowings in a timely manner (Ogier, Rugman and Spicer, 2012).
Quick Ratio
This liquidity ratio is used for measuring the ability for meeting the current financial obligations through its near cash assets.
Formula: Current assets-Inventory/Current Liabilities
It has decreased in the financial years 2016-2019 from 0.96 to 0.72 that is less than 1 indicating that the company does not hold sufficient liquid asset base for meeting the short-term financial obligations. This is also due to use of more borrowings in the company to $587 million mainly due to improvement in the debt maturing term within 12 months. The decrease in the net cash provided by the operating activities has also results a further decline in its ability for meeting the current obligations. The decline in the quick assets presents a financial risk of default on the part of the company for paying its debt obligations on time (Frino, Chen and Hill, 2013).
Analysis of Company Net Working Capital Position
It depicts the adequacy of the cash generated from the operational activities of a company for extinguishing its current liabilities.
Formula: Cash flow from operations/Current Liabilities (Arnold, 2013)
(Annual report, 2017) and (Annual report, 2019)
It has decreased from 88.52% to 69.96% over the years 2016-2019 depicting a decline in its ability to generate cash from the business operations. This is mainly due to the decrease in the free cash flow generated from operating activities that has declined by 22.3 per cent to $6,683 million due to reduction in the off-bn receipts in line with the increase in payment to suppliers and employees (Gibson, 2011).
These ratios provide an assessment of the strengths and weakness of its capital structure and the following ratios are used for examining the effectiveness of the capital structure of Telstra:
(Annual report, 2017) and (Annual report, 2019)
Debt to Equity Ratio
It provides the proportion of owner’s equity and debt that is utilized for financing the asset base
Formula: Total Liabilities/Shareholder’s Equity
As depicted above, there is increase in the debt proportion as compared to equity in the capital structure of the company with increase in the ratio from 172.12% to 193.11% during the financial years 2016-2019. This illustrates an increase in the debt position of the company over the past five years due to increase in the finance lease, short-term borrowings and the effect of other non-cash revaluation impacts on the borrowings and derivates. The use of larger debt in comparison to the equity within the capital structure of Telstra indicates a financial risk as there does not exist an optimum capital mix within the company essential for supporting long-term growth of the company (Lin, Liang, and Chen, 2011).
(Annual report, 2017) and (Annual report, 2019)
Debt Ratio
The financial ratio indicates the amount of total debt and assets possessed by a company.
Formula: Total Liabilities/Total Assets
The ratio has also depicted an increasing pattern from 63.25% to 65.88% over the financial years 2016-2019 which means that it uses more debt for financing its asset proportion as compared with the equity. This can reflect a financial risk for the company as most of the assets are financed by debt and thus it can result in financial breakdown if debt is not met (Ak, Dechow, Sun and Wang, 2013).
(Annual report, 2017) and (Annual report, 2019)
Interest coverage Ratio: Interest coverage ratio measures the time the interest expenses can be paid by the company through using the earnings before interest and tax.
Formula: EBIT/Interest expenses
On the basis of calculation it can be said that Telstra Corporation has enough earnings available to fund the interest expenses but the times the interest coverage ratio available had been decreasing continuously (Gibson, 2011).
Conclusion
On the basis of overall financial analysis of Telstra Corporation it can be said that both financial performance and financial position of respected company has been poor during the last two financial years as compared to previous two financial years. The main reason for the decrease in profitability performance was the increase in operating expenses together with increase in competition and decrease in telecommunication prices. Telstra Corporation has increased borrowings to finance various expansion projects but to fund the working capital but it has increase the pressure on the available earnings for shareholders. There is need to reframe and develop business strategies to overcome these situation.
References
Ak, B., Dechow, P., Sun, Y., and Wang, A. 2013. The use of financial ratio models to help investors predict and interpret significant corporate events. Australian Journal of Management, 38(3), 553–598.
Anderson, T. 2013. The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth. US: John Wiley & Sons.
Annual report. 2017. Telstra Corporation. [Online]. Available at: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/Annual-Report-2017.PDF [Accessed on: 30 May, 2020].
Annual report. 2019. Telstra Corporation. [Online]. Available at: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/Annual-Report-2017.PDF [Accessed on: 30 May, 2020].
Arnold, G., 2013. Corporate financial management. USA: Pearson Higher Ed.
Baker, K. and Martin, G. 2011. Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. US: John Wiley & Sons.
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Frino, A., Chen, Z. and Hill, A. 2013. Introduction to corporate finance (5th edition.). Frenchs Forest, NSW: Pearson Australia Group.
Gibson, C. 2011. Financial Reporting and Analysis: Using Financial Accounting Information. Australia: Cengage Learning.
Lin, F., Liang, D., and Chen, E. 2011. Financial ratio selection for business crisis prediction. Expert Systems with Applications, 38(12), 15094–15102.
Ogier, T., Rugman, J. and Spicer, L. 2012. The Real Cost of Capital: A Business Field Guide to Better Financial Decisions. UK: Pearson UK.
Our Company. 2020. Telstra Corporation. [Online]. Available at: https://www.telstra.com.au/aboutus/our-company [Accessed on: 30 May, 2020].
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