Vision and Mission

Discuss about the Analysis of Liquidity Position Using Financial Ratio.

The company Telstra Corporation Ltd. has started its journey since 1901 with its erstwhile name as Post Master General. The company was named as Telstra Corporation Ltd in 1993 with its share listed in ASX with ASX code TLS. The company is engaged in the field of telecom, data service and domestic signal provider for home television channels. (Gilmour, 2013)

The company provides 17.6 million retail mobile services, 5.1 million retail fixed voice services and 3.5 million retail fixed broadband services.  (Telstra, 2018)

Vision- to ensure improvement as per the way of live and work of people

Mission- the company builds simple technology and content solutions with simplicity, easy for using and acknowledged by customers. Telstra strives hard to serve and understand customers in a better way than the competitors. (GPS, 2012).

Balance sheet analysis showed following features:

• Current Assets- Total current assets are comprised of cash, receivables, prepaid expenses, inventories, investments-short term, NCA held sale and others. Out of them cash is showing significant variance from 2012 to 2017. Receivables are also showing high in 2017. Prepaid expenses and inventories are in increasing trend. Investments are fluctuating during the period. Overall current assets are going up and down as per the items.
• Non-Current Assets- NCA is comprised of receivables, inventories, investments, PP&E, intangibles excluding goodwill, goodwill, future tax benefit and others. Receivable is increasing denoting that recovery of long term receivable is not as per expectation during 2012-2017. Long term investments are increasing. Intangible assets except goodwill are increased. Overall trend of NCA is trending towards increase during the period.
•   Current Liabilities- Current liabilities are comprised of payable, short term debt, provision, NCL held sale and other. All the current liabilities are with generalized trend of status quo maintained with no significant variance found.
• Non-current liabilities- Non-current liabilities had shown insignificant variance in different items except long term debt with increasing trend.

• Revenue and operating expenses are showing standard increasing trend as per inflation factor. EBIT had not shown significant increase during the period. Tax expense increased in 2017 comparing other years. NPAT had reached highest in 2016 due to impact of abnormal factor. Earnings per share considering abnormal effect had rose to peak in 2016, too.

All these above observations are featured in common-size (Fuhrmann, 2016) and horizontal analysis (John, 2017) of the financial statements in XL sheet and Chart with Appendices A to D.

Consult common size analysis and horizontal analysis of 735422.xlsx

Analyzing cash flow statement of Telstra, certain observations are highlighted as follows:

• Net operating cash flow has no significant change during the period 2012 to 2017. This is due to standard level of receipts from customers and payments to suppliers and employees and tax payment.
• Significant impact had been found in the field of purchase of PPE and purchase of investments. Subsequent sale of PPE and investments also featured in 2017. Overall investing cash flow had shown negative impact.
• Net financing cash flow had shown increased with negative effect. This is due to borrowings procured and disposed off, dividend paid and other financial cash flows.
• Net increase in cash is fluctuating with positive and negative impact in subsequent years.
• Exchange rate of foreign currencies had gain and loss during the period due to prevailing foreign currency exchange rate.
• End-year cash position is diminishing in gradual succession over the specified period of 2012 to 2017.

Above observation never endorses any positive outcome from the cash flow statement of Telstra for the period 2012 to 2017. Year-end cash position is not encouraging, as it had come down to 936 million dollar in 2017 from 3550 million dollar in 2016. (PEAVLER, 2017)

Liquidity analysis projects ability of any firm to meet its short-term needs. Basically, these needs can be met through availability of liquid funds of any firm. The basic criterion of deriving liquidity is to assess current working capital. Working capital is calculated by deducting current liabilities from current assets. There are two different accounting ratios considered for deriving liquidity of any firm- current ratio and quick ratio. Hence, there are three factors considered for this purpose- current ratio, quick ratio and net working capital. While current ratio is derived through the formula of dividing current assets by current liabilities, quick ratio is derived through same formula- but treatment of current assets to be considered are total current assets less inventories. In ideal situation, good liquidity position of any company is justified by current ratio ranging from 1.5 to 2.5 and quick ratio ranging from 1 to 2. (PEAVLER, 2017)

In the case of Telstra, normal trend of current and quick ratio found from 2012 to 2017 is found at average of 0.99 and 0.93 respectively. This trend clearly indicates that the company is not covering current liabilities by its current assets. This is not healthy situation for Telstra.

Balance Sheet Analysis

Income analysis is derived by some specific factors like net profit margin, EBIT margin, earnings per share, etc. In case of Telstra; Net profit margin is derived by net profit before tax, depreciation and amortization in respect of revenue. EBIT margin is derived by earning before tax in respect of revenue. EPS is the sole instrument through which earnings can be defined on per share basis and is derived from formula of total NOPAT divided by number of shares. In case of Telstra, net profit margin is ranging from 15 to 19% (approx) with the derived average of 16.28 for this period. EBIT margin is ranging from 25 to 30% (approx) with the derived average of 26.24 for this period. EPS is dictated by abnormal. EPS adjusted is ranging from 30 to 38 cents per share (approx) with an average of 33.87; whereas EPS after abnormal is ranging from 27 to 47 cents per share (approx) with an average of 34.44 per share for the period.

Apart from these instruments, ROA %age and EBIT ROA are also important factors to analyze income analysis of any firm. ROA and EBIT ROA% age is depicting net income and EBIT in respect of total assets respectively. ROA % for Telstra is ranging from 11 to 14 with the average of 11.98 and EBIT ROA %age is ranging from 16 to 19 with the average of 16.58 for the period.

With the above findings income can be analyzed as standard potential in respect of net profit margin, EBIT margin, and EPS. The business of Telstra is not showing any abnormal downfall during the period and seems to be steady with its business, income and respective return. Income and EBIT in respect of total assets also showed standardized figures which depicts standardized performance of the company.

Capital structure of any firm is constituted by two broad spectrum sources of finance- equity and debts. Debts are defined as short-term and long term debts. Short term debts are components of current liabilities, where as long term debts are components of non-current liabilities.  For Telstra, the company is depending on these three major sources for funds. To analyze short term debts, it is observed that the company is holding an average of 2161 million AUD under that category for the period 2012 to 2017. Long term debts are analyzed as at the average of 13902 million AUD for the specified period. Equity is showing an average of 13917 million AUD for the same period. It is to be noted that the average contribution %age of short term debt is 7.22, long term debt is 46.43 and equity is 46.35. It clearly shows that the company is more insisting on long term investors funds in the form of debts and equity than that of short term debts. (Tools, 2018)

Cash Flow Analysis

Coverage is analyzed on the perspective of covering ability of different liabilities of any firm in respect of EBIT, NOPAT and asset strength. There is different coverage ratios used for this purpose. In this analysis, we will consider interest coverage ratio, debt service coverage ratio and asset ratio for the period 2012 to 2017.

For Telstra, the interest coverage ratio has shown 873% average capacity to cover its net interest expenses in respect of EBIT. The calculation of such ratio is to divide EBIT by net interest expenses %.

Debt coverage ratio has shown average of 25% capacity to cover its debt and interest in respect of NPAT. The calculation is total of short term, long term debts and net interest expenses divided by NPAT.

Asset ratio is derived by considering base figure of total tangible assets less current liabilities with consideration of total debt-both short and long term, accumulated. The average of this ratio for this period is shown as 145%.

From the above ratios, it is analyzed that Telstra has good coverage ratio in respect of interest and total debt. Interest expense is well covered by EBIT, where as net tangible asset coverage in respect of total debts is above 100%, which means that the company has good coverage of their debts by net asset value. (Divestopedia, 2017)

To assess growth and risk analysis, the uses of different financial ratios are considered as effective tools. Out of them, contribution margin ratio and operating leverage effect ratio or OLE ratio are considered in case of Telstra for the period 2012 to 2017.

While calculating contribution margin ratio, we have to consider factors like operating revenue and operating expenses. We have to deduct revenue from expenses to arrive at contribution margin. Then contribution margin is to be divided by operating revenue to arrive at this ratio. This ratio is directly proportionate to sales for yielding profit. For the case of Telstra, average contribution margin ratio is shown as 39%. This observation endorses that if the company increases its operating revenue, the increase in profit will be 39% of that revenue.

Operating leverage ratio is calculated by dividing contribution margin ratio by operating margin. Operating margin is calculated by dividing EBIT by revenue. In case of Telstra, the average OLE ratio is showed as 1.48. If this ratio is equals to or above 1, the company has scope of increasing income as per increase in revenue, and the company proves its operating leverage. (PEAVLER, 2018)

Consult business risk analysis sheet of 735422.xlsx

• The company has good scope of future business in the field of telecom and data service.
• The share price will not fluctuate, instead it will show steady move in ASX.
• The future business growth depends upon management of business risk and the company is well placed in this segment.
• Right from its journey since early 1900, the company has met its commitment to the stakeholders in all aspects.
• Takeover of subsidiary or making strategic alliance with overseas telecom industries may excel its performance provided proper SWOT and PESTLE analysis is made by the management.

Divestopedia, 2017. Coverage Ratio. [Online] Available at: https://www.divestopedia.com/definition/4925/coverage-ratio [Accessed 19 May 2018].

Fuhrmann, R.C., 2016. The Common-Size Analysis of Financial Statements. [Online] Available at: https://www.investopedia.com/articles/investing/111413/commonsize-analysis-financial-statements.asp [Accessed 19 May 2018].

Gilmour, J., 2013. A Brief History of Telstra. [Online] Available at: https://prezi.com/3fu4ahupkupy/a-brief-history-of-telstra/ [Accessed 19 May 2018].

GPS, 2012. A review of Telstra’s vision, mission and values. [Online] Available at: https://gpsoblog.wordpress.com/2012/04/21/a-review-of-telstras-vision-mission-and-values/ [Accessed 19 May 2018].

John, 2017. HOW TO PERFORM HORIZONTAL AND VERTICAL ANALYSIS OF INCOME STATEMENTS. [Online] Available at: https://vintagevalueinvesting.com/perform-horizontal-vertical-analysis-income-statements/ [Accessed 19 May 2018].

PEAVLER, R., 2017. Analysis of Liquidity Position Using Financial Ratios. [Online] Available at: https://www.thebalancesmb.com/liquidity-position-analysis-with-ratios-393233 [Accessed 19 May 2018].

PEAVLER, R., 2017. Cash Flow Analysis Techniques and Tips. [Online] Available at: https://www.thebalancesmb.com/cash-flow-analysis-393050 [Accessed 19 May 2018].

PEAVLER, R., 2018. Calculate Business Risk Using These Financial Ratios. [Online] Available at: https://www.thebalancesmb.com/how-to-calculate-business-risk-393472 [Accessed 19 May 2018].

Telstra, 2018. Proud Past, Brilliant Future. [Online] Available at: https://www.telstra.com.au/aboutus/our-company [Accessed 19 May 2018].

Tools, A., 2018. Capital Structure Analysis. [Online] Available at: https://www.accountingtools.com/articles/how-does-capital-structure-analysis-work.html [Accessed 19 May 2018].