Financial Analysis Essay: Telstra And JB HI-FI Holdings Limited.

Description of operation and comparative advantages of the two chosen companies

The report discusses the overall financial analysis of the two Australian companies named as Telstra Corporation and JB HI-FI Holdings Limited. It reflects the financial performance and position of both the companies over the past three years. In the first part, the report explains about the core activities and operations of both the companies. In addition, it identifies and outlines their comparative advantages by considering their history. In the later part, performance analysis is performed with the help of some specific ratios that has measure the position of the entities with respect to its liquidity, profitability and long term solvency.

The report also discusses about the movements in share prices over the three years and compares the same with the fluctuations in the ordinaries indices. It highlights some significant factors which have affected the share price of both the Telstra and JB HI-FI along with the calculation of required rate of return by using CAPM method. In the last, the report focuses on the dividend policies followed by the organizations and provide a recommendation letter to the investors regarding their investment decisions. On a whole, it comprises of the overall financial analysis of both the Australian companies and provides insights about which is performing better and have sound financial position.  

It is an Australia based Multinational Corporation engaged in the business of providing telecommunication services to the people across the country. The company deals in developing communication networks and offers services like mobile, market voice and internet access to its clients. It operates through four segments named as Telstra Retail, Global Enterprise and Services, Telstra Wholesale and Telstra Operations. Currently, the share price of Telstra is $3.19 with a market cap of $37,582.82 million. The comparative advantage of the company is to offer its products and services at reasonable prices and with best quality. This allowed the firm to develop its core competency and win over its competitors in terms of covering the market share at international level (Reuters. 2018).

It is an Australian company involved in the retailing of home consumer products. It operates through two segments named as Australia and New Zealand. It is involved in distributing products like consumer electronics consist of televisions, computers, camera, DVDs and others. Apart from this, its core activities also include the offering of information technology and consulting services. Currently the share is traded at $25.27 with a market cap worth $2,866.34 million. Its advantage is that it offers wide variety of home entertainment and consumer electronics products at various attractive discounts. Moreover the company has earned high level of trust from its customers and has built a strong brand image (Reuters. 2018).

The following section measure and evaluate the performance of both the companies in financial aspects by interpreting the calculated ratios.

It is one of the categories of ratios that measure the financial strength of the company by assessing its capability of managing its liquid assets in order to meet its short term financial obligations on time (Bragg, 2012). 

	Telstra Corporation			JB HI – FI Limited
Liquidity ratios	2015	2016	2017	2015	2016	2017
Current ratio	0.86	1.02	0.86	1.62	1.57	1.32
Quick ratio	0.80	0.96	0.76	0.36	0.35	0.35

• Current ratio: It analyzes the capability of the firm in respect of paying off its liabilities which are due in less than 12 months with the use of its current assets. The resources include cash, inventories and receivables of the company (Bragg, 2012).

Calculation and comparison of performance ratios

The current ratio of Telstra has shown a fluctuating trend as it was 0.86 in 2015 which increased to 1.02 in 2016 and then further reduced to 0.86 in 2017. This was because of the fact that company has decreased its investment in the operating assets. Also, its liabilities have constantly increased in the past (Telstra. 2017). In comparison to this, the CR of JB HI-FI has shown a declining trend as it reduced from 1.62 to 1.32 in the past years. It was because the proportionate change in company’s assets was less than the constant increase in its current liabilities. The net effect was an overall reduction in the ratio (JB HI-FI. 2017).

• Quick ratio: It is another liquidity ratio which also measures the financial strength of the company by taking into account the most liquid assets that excludes inventory and prepaid expenses (Gibson, 2011). 

In case of Telstra, the QR also shows the same trend as its CR. It increased from 0.80 to 0.96 in 2016 and the same again reduced to 0.76 in 2017. The variation was due to the significant increase in the inventory amount of the company which holds most of the cash of the business (Telstra. 2017). The quick ratio of JB HI-FI has remained same in 2016 and 2017 at 0.35 while it was at 0.36 in 2015. This slightest reduction was due to the noteworthy increase in company’s current liabilities as compare to its CA. Also its inventories increased which contributed to the reduction of ratio (JB HI-FI. 2017).

These ratios measure the overall profitability of the company by interpreting ratios like return on assets, net profit margin and others. Generally, they are used by the investors to determine the amount of return a company is able to offer on the capital invested by them in the business (Godwin and Alderman, 2012). 

	Telstra Corporation			JB HI – FI Limited
Profitability  ratios	2015	2016	2017	2015	2016	2017
Net profit margin	15.9%	22.4%	15.2%	3.8%	3.8%	3.1%
Return on equity	26.7%	39.7%	25.9%	39.9%	37.5%	20.1%
Return on assets	10.5%	13.4%	9.2%	15.3%	15.3%	7.0%

• Net profit ratio: It expresses the amount of net profit as a percentage of total revenue. The ratio reflects the profitability position of the entity and a high and positive NPR is considered to be favorable for the organization (Higgins, 2012). 

A fluctuating trend has been noticed in the NPR of Telstra Corporation as it was 15.9% in 2015, then rises to 22.4% in 2016 and again falls to 15.2% last year. Despite facing the increase in earnings, the net profit after tax reduced due to the increased tax liabilities (Telstra. 2017). On other hand, the NPR of JB HI-FI remained same at 3.8% in 2015 and 2016 but reduced to 3.1% in 2017. Although the company reported high revenue and profit during the year, but the increase in sales was more than the upsurge in revenue. As a result, the ratio reduces and more focused was given on improving the gross profit (JB HI-FI. 2017).

• Return on Equity: Another profitability metric which determines the amount of return offered by the entity on its shareholders’ equity. A high ROE indicates that company has made high earnings and is capable of providing high returns to its investors (Jenter and Lewellen, 2015).

The ROE of Telstra was 26.7% in 2015 which reduced to 25.9% in 2017. This was due to the low earnings made during the year which allow Telstra to provide low returns to its shareholders. Moreover, the amount of its owners’ equity has also been fluctuating in past three years. In case of JB HI-FI, the ratio falls from 39.9% to 20.1% during the last three years. The reason behind such decrease was that the equity of the firm increased from $405 million to $854 million but the profit has only shown an increase of 13%. The company was not able to give sufficient returns to its increased potential investors.

• Return on Assets: It shows the amount of returns generated with the employment of company’s assets and resources. Investors generally seek for companies having high ROA (Kimmel, Weygandt and Kieso, 2010). 

Analysis of monthly share prices movements

Telstra’s ROA was highest in 2016 at 13.4%. This was the year the company outperform the market by reporting sound profitability. During that year, company has high profits worth $5780 million and assets amounted to $43,286 million. After that the ratio reduced to 9.2% due to the low earnings of Telstra (Telstra. 2017). JB HI-FI’s ROA was 15.3% for the two years and it falls to 7% in 2017. This was due to the huge increase in company’s total assets against which profit reported a slightest change only. This reflected that company has not properly utilized its resources to make more profit (JB HI-FI. 2017).

They are the long term solvency ratios which measure the capital structure and financial risk of the firm. They compare the debt and equity portion of the company and determine the preferred optimal capital structure for the same (Lee, Lee and Lee, 2009). 

	Telstra Corporation			JB HI – FI Limited
Capital Structure ratios	2015	2016	2017	2015	2016	2017
Debt/equity ratio	1.66	1.95	1.83	1.61	1.45	1.87
Debt ratio	0.65	0.66	0.65	0.62	0.59	0.65
Interest coverage ratio	9.14	8.93	2.84	- 50.33	- 80.50	- 44.18

• Debt/Equity ratio: It is a solvency ratio which measures the portion of company’s debt against its owner’s equity. It shows the amount of resources funded by debt and those funded by the equity (Nikolai, Bazley and Jones, 2009). 

The D/E ratio of Telstra has increased from 1.66 to 1.83 in 2017. It was highest at 1.95 in 2016. The reason for such hike during that year was the increased liabilities of the company. They were reported at $28,415 million against the equity of $14,541 million. However, the obligations reduced in 2017 which make the ratio to fall. Yet, it is interpreted that Telstra is highly dependent on the outside borrowings rather than relying on equity (Telstra. 2017). In comparison to this, JB HI-FI’s ratio was lower in 2015 and 2016 but it reported a hike at 1.87 in 2017. This huge upsurge was due to the significant increase in its total liabilities from $588 million to $1599 million. It was mainly contributed by the increased bank loans of the firm taken for the purpose of funding the acquisition of The Good Guys (JB HI-FI. 2017).

• Debt ratio: This ratio shows the proportion between the total liabilities and total assets of the firm (Vogel, 2014). 

The debt ratio of Telstra has remained almost same and stable in all the past three years. The ratio was high but the company focused on keeping it same for the years. The reason for having a high ratio of 65% was that the Telstra has more liabilities as compare to its total assets. Also they have increased in the past years comparatively. In case of JB HI-FI, the ratio was same in 2017. However, it was lower in 2015 and 2016 at 62% and 59%. The reason for the reduction was the low and reduced financial obligations of the company as compare to its assets during those years.

• Interest coverage ratio: It reflects the number of times a company can meet its interest payments by utilizing its earnings before interest and tax (Warren and Jones, 2018). 

The ICR of Telstra was 9.14 times in 2015 which falls to 2.84 times in 2017 (Telstra. 2017). This decline was due to a considerable decrease in company’s earnings during the year. On the other hand, the ICR of JB HI-FI remains negative for the past years due to the negative EBIT reported by the company (JB HI-FI. 2017).

Telstra Corporation

The below graph depicts the movements in monthly share prices of the company for the past three years. It can be clearly seen from the graph and both the trend lines are very much close to each other. This indicates that the fluctuations in the market do impacted the share price of Telstra. It can be observed that in the mid of 2015, Telstra has offered negative returns while the market was also down. However, when the market turned positive in the start of 2016, the company’s shares also started delivering positive returns. The change was observed in the initial months of 2017, where company’s returns were negative while the market was still in the positive phase. However, after that the variations in both the market and company return were almost same. So it can be said that, the shares of Telstra are closely correlated and are volatile with the ordinaries index.

Significant factors which may have influenced the share price

JB HI-FI Limited

A reverse scenario can be observed in case of JB HI-FI as the trend line of company’s returns is highly independent of the variations going in the market. It is observed that when market was turning negative, the firm offered high returns on its share price and the highest was at 20% on December 2015. Also in July 2016, where the average return of JB HI-FI was 14.5% the market was at -2.3%. The graph also depicted that in mid of 2017, the company offered negative returns while the market tends to remain positive. Later on, when JB HI-FI’s share returns fall in 2018, the ordinaries index remain positive. Thus, it can be observed that both the trend line are opposite of each other and have reflected diverse returns.

This section list down some events happened in both the companies which impacted their share price to a great extent.

Telstra Corporation

• On May 2018, Telstra announced that the executive of American telecommunications Roy H. Chestnutt will join the board as non-executive director. This change in the management will help the company to operate and face the rapidly changing environment and prevailing competition (Telstra. 2018).
• On February 2018, the company declared its half yearly results the total income was up by 2.5% while NPAT was down at 5.8%. Reduction in net profit has affected its share price (Telstra. 2018).

JB HI-FI Limited

• On august 2018, the company announced its full year 2018 results which reflected an increase in its sales by 21.8%, EBIT by 14.5% and EPS by 9.2%. This has cause the share price to rise during the year (ASX. 2018).
• On May 2018, it presented a report about the Macquarie Australia Conference that suggested the outlook for 2018 and a group model to be followed to achieve desired results. All the data is market sensitive and do impact the share price of the company (ASX. 2018).

Telstra Corporation

• The calculated beta for the company is 0.64.
• The required rate of return is calculated as follows:

Risk free rate (Rf)	5%
Market risk premium (Rm)	6%
Beta	0.64
Cost of equity [Rf + Beta*(Rm-Rf)]	5.6%

JB HI-FI Limited

• Calculated beta of the firm is 0.37.
• Required rate of return calculated using CAPM method is

Risk free rate (Rf)	5%
Market risk premium (Rm)	6%
Beta	0.37
Cost of equity [Rf + Beta*(Rm-Rf)]	5.4%

Looking at the past data, Telstra has declared increased dividends over the years. In 2012 and 2013, the company paid dividends per share of 28 cents which further increased to 28.5 and 30 cents in 2014 and 2015 and finally to 31 cents in 2016 and 2017. This shows that despite making low earnings, the company has offered dividends to its shareholders. Thus, it can be interpreted that Telstra offer regular dividends to its shareholders.

The annual report of JB HI-FI suggested that the company has declared high dividends in the past years. In 2013 it offered DPS at 72 cents which further increased to 90 cents in 2015 and in 2017, its dividends were reported at 118 cents. It has appropriate dividend payout ratio which manages company’s earnings and distribution efficiently.

After analyzing the financial performance and position of both the companies, it will be recommended to invest in the shares of Telstra Corporation as the company has sound liquidity and profitability position. Also, it has high ROE as compare to JB HI-FI last year and is focused on reducing its financial risk by paying off its obligations. Moreover, the share price movements are properly aligned with the market variations. Also the company has declared regular dividends despite having low earnings.

Conclusion 

The overall report concludes that it is very much necessary for the investors to conduct an overall analysis of the companies before making any sort of investment in them. The financial analysis will help them in taking appropriate decisions by providing them the insights about the financial performance and position of the companies.

References 

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Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for business decision making. New Jersy: John Wiley & Sons.

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Telstra (2018). Telstra reports increased subscriber numbers reduced fixed costs and growing nbn impact. [Online]. Available at:  https://events.miraqle.com/DownloadFile.axd?file=/Report/ComNews/20180215/01950752.pdf [Accessed 26 September 2018].

Telstra (2018). US telco executive Roy H. Chestnutt to join Telstra Board. [Online]. Available at:  https://events.miraqle.com/DownloadFile.axd?file=/Report/ComNews/20180510/01980132.pdf [Accessed 26 September 2018].

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