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Swinburne University of Technology

ACC 60005

ACCOUNTING PRINCIPLES

Telstra Corporation LIMITED (TLS)

Company Analysis Assignment

Semester 1 – 2017

Class: 4.30 p.m Tuesday

Teacher name: Elizabeth Martino

Student: Hien Tran - Student ID: 101.564.808

Huyen Bui - Student ID: 101.014.646

Van Tuan Le - Student ID: 101.255.283

Word count: 2548

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Executive summary

The aim of this report is to assess the students’ ability in evaluating performance of a
company listed on Australia Stock Exchange (ASX) regarding profitability, efficiency,
liquidity, solvency, and share market performance. Telstra Corporation Limited (Telstra) was
chosen as a subject for financial evaluation. It is the biggest telecommunication and media
company in Australia. Secondary data were collected from Financial Morning Star’s website,
Telstra annual reports to calculate relevant ratios for each aspect of performance of Telstra
from 2014 to 2016. The authors of this report also used study textbooks, course materials on
BlackBoard to understand how to calculate ratios and make evaluation. In the main text of the
report, the movement trends of ratios of Telstra were analyzed using ratios provided by
Financial Morning Star over three years. In the appendix, the authors’ own calculation of
ratios is provided to compare with the ones from Financial Morning Star. Based on
investigations, Telstra’ profitability, solvency, earning per share improved over three years.
Most of performance indicators improved significantly from 2015 to 2016 because the
investments of Telstra in the fastest network connection in Australia in 2015 brought
significant additional revenues to the company. However, Telstra’ efficiency and solvency
were worse than before. Telstra’ borrowings, operating expenses and investment expenses on
network related services increased significantly in 2016. Overall, Telstra performance is still
very good so it can be concluded that investor should buy shares of Telstra for future growth
in dividends and consistent growth.
Table of Contents

1 Company overview ................................................................................................................ 4

2 Financial ratios analysis ......................................................................................................... 5


2.1 Profitability ................................................................................................................................ 5
2.1.1 Net profit margin ............................................................................................................... 5
2.1.2 Gross profit margin ............................................................................................................ 6
2.1.3 Return on Asset .................................................................................................................. 6
2.1.4 Return on Equity ................................................................................................................ 7
2.2 Efficiency (asset utilization) ...................................................................................................... 8
2.2.1 Receivable Turnover .......................................................................................................... 8
2.2.2 Days in inventory ............................................................................................................... 9
2.3 Liquidity .................................................................................................................................. 10
2.4 Solvency................................................................................................................................... 11
2.5 Share market performance ...................................................................................................... 12
2.5.1 Earnings per share ratio ................................................................................................... 12
2.5.2 Price earnings ratio .......................................................................................................... 13

3 Conclusion ........................................................................................................................... 15

4 Recommendation ................................................................................................................ 16

5 References .......................................................................................................................... 17

6 Appendix ............................................................................................................................. 18

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1 Company overview

Telstra Corporation Limited (Telstra) is the biggest telecommunication and media company
in Australia, which established in 1992 by merge between Telecom and the Overseas
Telecommunications Corporation. It has presences in Australia and international over 20
countries, which engaged in full range of telecommunication services such as Internet
services, fixed and mobile network infrastructure, broadband access, distributed cable
services and wholesale service. The company is headquartered in Melbourne, Australia and
has around 3,000 employees outside of Australia distributing different services to individuals,
firms and government customers (Telstra Corporation Limited, 2016).
Telstra’ customers could make local and long distance phone calls, using content and
broadband access services, or whatever, some of services such as Internet and data services,
advertising, cable providing services, as well as pay television pill, internationally
connectivity. In addition, customers are could also provide roaming, 4G network services and
management services.
Building technology and content solutions which are easy and simple to use for everyone,
especially, Telstra would like to build the largest and fastest national mobile network in
Australia. As Telstra, a well-know brand company stated with slogan “the more connected
people are, the more opportunities they have. That’s why we help create a brilliant connected
future for everyone, everyday” and purpose “Caring, collaboration, trust, simplicity and
courage are at the heart of our core aims” (Telstra Corporation Limited, 2016).
Passing a lot of fluctuations of global economic in the past decades, nowadays, according to
Telstra’s website, calculated on May 2017, current share price of company is $4.39 with total
current share price $16,770,678. In addition, Telstra delivered 17.4 million mobile services,
6.8 million fixed voice services and 3.5 million retail broadband services, thus, Telstra had
overtaken other competitors: Optus and Vodafone to become a leading technology company
in Australia.
2 Financial ratios analysis
2.1 Profitability
2.1.1 Net profit margin

Net Profit Margin (NPR) measures how much each dollar of revenue of a company can
convert into profit, which is available for its shareholders (Hancock, Bazley and Robinson,
2015). Higher net profit margin means Telstra is more efficient at control cost and converting
sales into actual profit. Figure 1 shows the NPR of Telstra from 2014 to 2016:

Net Profit Margin

22.37%

17.02% 16.37%

2014 2015 2016

Figure 1 - Net Profit Margin from 2014 to 2016 (Appendix 1.1)

Telstra’s net profit margin fell slightly from 17.02% to 16.37% from 2014 to 2015 then
increased significantly by 6% to 22.37% in 2016. In fact, the profit margin of Telstra slightly
in 2015 but it does not mean that Telstra performed worse at converting sales to profit
available to shareholders. Telstra’ sales revenue went up steadily over three years. Therefore,
the main cause is attributed to its substantial growth of cash investment activities ($4562
million) and its significance increase in borrowing repayment costs for financing activities
($1981 million dollars) in 2015. These investments were fruitful which was reflected by a
sharp growth of 6% of net profit margin from 2015 to 2016.

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2.1.2 Gross profit margin

Gross Profit Margin Ratio measures the proportion of gross profit to total sales revenue that
the company has left after subtracting the direct costs related to goods and services sold
(Hancock, Bazley and Robinson, 2015). Figure 2 shows the Gross Profit Margin of Telstra
from 2014 to 2016

Gross Profit Margin


74.14%

73.42%

71.95%

2014 2015 2016

Figure 2 Gross Profit Margin from 2014 to 2016 (Appendix 1.1.2)

In other words, the higher the gross profit margin indicates that Telstra is more likely to make
sufficient return to pay for other indirect expenses and generate a net. It can clearly be seen
on figure 2 that Telstra’s profit margin fell gradually in 2014 to 74.14%, in 2015 to 73.42%,
and in 2016 to 71.95%. Therefore, it can be argued that Telstra has less amount of remained
profit after subtracting COGS to pay for other expenses to generate profit in 2016 than 2014.
Telstra sales revenue increases constantly over three-year period. Therefore, the main reasons
for worsen gross profit margin is because of the increase in Telstra’ cost of goods and
services purchased (COGS) driven by strong demand for Iphone 6 offerings in 2015 and
significant increase in service cost, commission fees and dealer commissions related to
Network applications and services (NAS) in 2016 (from $323 million to $2393 million).

2.1.3 Return on Asset


Return on Assets Ratio is an indicator of how efficient Telstra use its assets to generate profit.
In other words, the higher the ratio of net profit on assets, Telstra is able to generate more
profit with less investment (Hancock, Bazley and Robinson, 2015). The line chart (figure 3)
illustrates the Return on Assets of Telstra from 2014 to 2016:

Return on Assets
13.81%

10.98% 10.60%

2014 2015 2016

Figure 3 Return on Assets (Appendix 1.3)

As seen on figure 3, Telstra’s Return on Assets Ratio has the similar patterns to Net Profit
Margin Ratio in figure 1. Telstra’s Return on Assets slightly decreased slightly by 0.38% to
10.60% in 2015 and rose significantly by 3.31% to 13.81% in 2016. It might be the results of
increasing in profit in 2016 as a result of Telstra’ significant investments in 2015. Looking
over the three-year period, Telstra is making more profit from its assets in 2016 than in 2014.

2.1.4 Return on Equity

Return on equity (ROE) was used to measure how efficient Telstra is at utilising
shareholders’ equity to generate profit (Hancock, Bazley and Robinson, 2015). Figure 4
exhibits the Return on Equity of Telstra from 2014 to 2016:

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Return on Equity

38.57%
32.35%
30.30%

2014 2015 2016

Figure 4 Return on Equity from 2014 to 2016 (Appendix 1.4)

Between 2014 and 2016, ROE of Telstra declined slightly by 2.05% to 30.30% in 2015 and
rose substantially by 8.27% in 2016. The significant increase in 2016 was a result of good
investment plans executed in 2015. Overall, Telstra has a good ROE, which shares the same
movement patterns as net profit margin, and ROA. Over three year period, the increase of
return of equity shows that Telstra does a very effective job of using the money that
stockholders have invested into the company to create more profit for them.

2.2 Efficiency (asset utilization)


2.2.1 Receivable Turnover

Receivable turnover shows how many times company can collects all their account receivable
during the period of time by calculate sales divided account receivable. The higher ratio, the
longer day a business takes to their bills. Figure 5 shows the Receivable Turnover of Telstra
from 2014 to 2016:
Receivable Turnover
5.81
5.76

5.46

2014 2015 2016

Figure 5 Receivable Turnover from 2014 to 2016 (Appendix 2.1)

From Telstra Corporation Limited’s annual report (2015, 2016), this ratio has decreased
slightly from 5.76 to 5.46 in the recent 3 years and Telstra can collect their receivables in
around 2 months (67 days) because of a growth up from global connectivity through
wholesale carrier data, the acquisition of Pacnet, China digital media portfolio and nbnTM’s
progress rollout.

2.2.2 Days in inventory

Days in inventory
26.4

22.7
22.3

2014 2015 2016

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Figure 6 Days in Inventory from 2014 to 2016 (Appendix 2.2)

Days in inventories measures the numbers of times a business needed to produce or hold and
sell inventories, which is calculated by inventories divided to average cost of good sold per
day. The purpose of this is analysis the liquidity of the inventories. The smaller number (the
less day), the better for company (strong sales). Telstra has an efficiency of 22.3 days in
12014 and increased to 26.4 days in 2016 but it still good new for business. The days’s
inventory is a little nearly a month, which means that Telstra will take nearly a month to sell
average inventories.

2.3 Liquidity

Starting 1.2:1 in 2014, Telstra’s current ratio had a big downturn on the business as a
significant drop off by 0.34 in 2015. Figure 7 shows the Current Ratio and Quick Ratio of
Telstra from 2014 to 2016:

CURRENT RATIO & QUICK RATIO

1.20
1.02
0.86
1.12
0.91

0.75

2014 2015 2016

Current ratio Acid test/Quick ratio

Figure 7 Current Ratio and Quick Ratio from 2014 to 2016 (Appendix 3)

By review the Telstra Corporation Limited's 2015 and 2016 annual financial reports, it can be
ascertained that in 2014, with the total current assets $10,438 million and the total current
liabilities 8,648 million, Telstra is given $1.2 for ever dollar of current liabilities. It is good
for big brand company. However, in 2015, Telstra’s current ratio had a big downturn on the
business as a significant drop off by under 1 from 1.2:1 to 0.86:1 and then it recovered on
next year 2016 with the ratio 1.02:1. This decrease is a result of declination in cash and cash
equivalents like Pacnet’s acquisition, term debt and increasing of customer debt as well as
inventories. Besides, matured liabilities date in 2015 and an enlargement of PAYG payments
led a reduction in current tax payables and also a growth up of current liabilities (9,188
million in 2016). According to definition, higher current ratio means greater ability to pays its
bills. Thus, it can be said that Telstra is improving their liquidity and efficiency because their
current ratio is improving.
Similarly, Telstra’s quick ratio shows the company’s ability for paying their short-term debts
and excludes inventories from current assets. Although this ratio was 1.12:1 in 2014, two
years later, it was a little bit under 1 (0.91:1 in 2016) means that Telstra do not have enough
immediate short-term assets to pay their liabilities but it still higher in the telecommunication
industries as compared to Optus and Vodafone.

2.4 Solvency

By using Interest Coverage ratio and Debt to Equity ratio, solvency ratio shows the gearing
leverage of entity.

Interest coverage
8.18 8.04

6.60

2014 2015 2016

Figure 8 Interest Coverage from 2014 to 2016 (Appendix 4.1)

The Interest Coverage measures the ability of company for paying the debt holders in a
timely manner based on calculating earning before interest and taxes (EBIT) divided by
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interest expense. Even at low point (6.6) in 2014, this ratio has increased by 1.44 in 2016
because of the reduction profit 561 million from the sale of CSL, fixed voice margins in
Telstra Retail and the effect of nbntm network’s immigration. Lower ratio, the risky company
is. Higher interest coverage ratio is, the more likely the company will be able to pay its debt
obligations. Telstra Corporation Limited still have a comfortable coverage interest.

Debt/Equity ratio
1.00

0.98

0.92

2014 2015 2016

Figure 9 Debt/Equity Ratio from 2014 to 2016 (Appendix 4.2)

On the other hand, according to Hancock et.al (2014, p.331), the debt to equity ratio analysis
the financial leverage of company and should be 1:1. Lower debt/equity ratio, more
financially stable company. Telstra has a healthy debt/equity ratio with 0.92 (indicated of
92%), which means that there were $0.92 debts for every $1 in shareholder equity. This was a
result of an increase in cash and cash equivalents counterbalance to gross profit and repaid
the buyback Pacnet in 2015 as well as maturities debt term.

2.5 Share market performance


2.5.1 Earnings per share ratio

Earning Per Share Ratio was used to assess the share market performance of Telstra. It
measures the net income earned per share of stock if Telstra distributes all of its profit to the
outstanding shares at the end of the year (Hancock, Bazley and Robinson, 2015). Figure 7
exhibits the earning per share ratio of Telstra from 2014 to 2016.
Earning Per Share
0.47

0.34 0.34

2014 2015 2016

Figure 10 Earning Per Share of Telstra from 2014 to 2016 (Appendix 5.1)

Earning Per Share (EPS) of Telstra remained stable in both 2014 and 2015 at 0.34 and increased
by approximately 138% to 0.47 in 2016. An increase in EPS ratio indicates that Telstra is
performing well in 2016 because it can generate higher dividends for investors or retain profit to
invest in future growth of the company. In order to assess if reported EPS ratios are reliable and
of high quality, it is compared with the operating cash flow per share from 2014 to 2016 because
there are less opportunities to manipulate operating cash flow by accounting gimmicks (Wayman,
2016). Operating cash flow per share (OPS) ratios of Telstra is 0.69 in 2014, 0.68 in 2015, and
0.67 in 2016. Even though Telstra’s OPS continued declining slightly from 2014 to 2016, they
are still much higher than EPS ratios. Therefore, EPS are true representation of the profitability of
the company. Telstra is predicted to have higher growth of net income, and have good capability
to pay higher dividends in the future.

2.5.2 Price earnings ratio

The price per earning ratio (P/E Ratio) measures the current share price of Telstra relative to
its earning per share. It means how much investors are willing to invest in the company in
order to receive one dollar of earnings (Hancock, Bazley and Robinson, 2015). Figure
illustrates the Price per earning ratio from 2014 to 2015:

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Price per earning ratio
18.1
16.4

11.1

FY14 FY15 FY16

Price per earning ratio

Figure 11 Price per earning ratio from 2014 to 2016 (Appendix 5.2)

The P/E ratio of Telstra increased slightly from 16.4 in 2014 to 18.1 in 2015 and decreased
by nearly 38.7% to 11.1 in 2016. As seen from the line chart (figure 11), the steep drop of
price per earning ratio means that investors were not expecting good prospect of growth of
Telstra in 2016 and want to pay less for investment in Telstra Company in order to receive
the same one-dollar of earning compare to previous years. It can be argued that the decrease
in net profit in 2015 made investors more reluctant in buying shares of Telstra.
3 Conclusion
Overall, the report has showed in detail about Telstra Corporation Limited’s background,
highlights financial ratios in order to identify their business risks and estimate future earnings
through analysis and interpretations the financial situation of company. Based on 2014-2016
annual report, net profit margin, return on assets, return on equity, current ratio, quick ratio,
price per earning ratio increased from 2014 to 2015 but then went down in 2016. Although
2014 and 2015 were a year in which receivable turnover, interest coverage and debt/equity
ratio increased, these ratios declined in 2016. On the other hand, gross profit margin
decreased over 3 years while days in inventory and earning per share increased between 2014
and 2016. These changes are because of significant investment expenses in net work and
other investment activities so the net profit decreased in 2015 and also the raising of revenue,
profits and dividends and the result of buyback in 2016. In conclusion, it is clearly showed
how Telstra has performed during the period 2014-2016.

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4 Recommendation
In this section of the report, recommendation for investors with regard to investment in
Telstra will be presented. Overall, Telstra is financially stable and its share performed slightly
higher than market expectations. Regarding financial stability, Telstra has good liquidity and
financial solvency. Telstra is able to use its assets to generate cash to pay for its expenses,
and interest obligations at timely manner (adequate current ratio, quick ratio and debt to
equity ratio). The company is likely to use its assets and investments by shareholders to
generate more return in the future efficiently (growing net profit, return on asset and return on
equity). In addition, Telstra share is performing well in the market. If investors invest in
Telstra, they will likely enjoy higher dividend. Telstra’ significant growth in earning per
share from 2014 to 2016 indicates that Telstra will have higher growth of net income, and
have good capability to pay higher dividends in the future. Moreover, the price per earning of
Telstra decreased steeply in 2016 means that Telstra’s shares are valued at lower price than
its fair value. Looking at other ratios discussed earlier, it is quite possible that Telstra’s shares
maybe under valued at the moment and it performance are much better than last period.
Therefore, it is a good time for investors to consider buying shares of Telstra because its
value will continue to rise in the future.

Investors are recommended to buy shares of Telstra but they should keep a conscious mind of
how Telstra will operate in the future and also be careful of the red flags in the efficiency and
solvency of Telstra. There are some ratios that were worse over the period including days in
inventory, receivables turnover, and debt to equity ratio. The increases in named ratios means
that Telstra’s operation is becoming less efficient and more costly. Telstra is allowing
customers to pay them later so it cannot make use of its cash and have to look for other ways
of financing, such as: borrowings. Telstra is suggested to decrease its operating expenses by
improving internal process. On the other hand, Telstra invested tremendous amount of money
on network related services, which incurs substantial amount of borrowing expenses and
investment expenses. These investments are bringing more profit now for Telstra but it can
also bring great threat to Telstra if it does not know how to improve its process and manage
costs efficiently. In addition, Telstra should also look for invest opportunities in new markets
and advertise its services more effectively to customers to increase sales revenue.
5 References
Financials.morningstar.com 2017, Growth, Profitability, and Financial Ratios for Telstra
Corp Ltd (TLS), viewed 12 May 2017,
<http://financials.morningstar.com/ratios/r.html?t=TLS>

Hancock, P, Bazley, M, and Robinson, P 2015, Contemporary accounting. 9th ed,


Melbourne: Cengage Learning New Zealand.

Molinsky, R 2016, Telstra 2016 financial results, viewed 10 May 2017,


<https://exchange.telstra.com.au/telstra-2016-financial-results/>

Telstra Corporation Limited 2014, Telstra Annual Report 2014, Telstra Corporation Limited,
viewed 2 May 2017,

<https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/telstra-annual-
report-2014.pdf>

Telstra Corporation Limited 2015, Telstra Annual Report 2015, Telstra Corporation Limited,
viewed 2 May 2017,

<https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/telstra-annual-
report-2015.pdf>

Telstra Corporation Limited 2016, Telstra Annual Report 2016, Telstra Corporation Limited,
viewed 2 May 2017,

<https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/telstra-annual-
report-2016.pdf>

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6 Appendix

Appendix 1 Profitability

Appendix 1.1 Net Profit Margin

Net Profit Margin (NPR) measures how much percentage of revenue a company can convert
into profit which is available for its shareholders. The formula of NPR is (Hancock, Bazley
and Robinson, 2015):

Net Profit After Tax


NPR =
Net Sales

(Total Revenue – COGS - Operating Expenses – Interest Expenses – Taxes)


=
Net Sales

Table: Telstra's Net Profit Margin from 2014 to 2016) (Financials.morningstar.com, 2017):

Year Net profit Margin


2014 17.02%
2015 16.37%
2016 22.37%

The table below presents the Net Profit Margins which were calculated according to the data
in annual report of Telstra:

FY14 FY15 FY16


Net profit (Profit attributable to equity holders of 4,275 4,231 5,780
Telstra)
Sales Income 25,119 25,845 25,834
Net profit margin 17.02% 16.37% 22.37%

Appendix 1.2 Gross Profit Margin Ratio


Gross Profit Margin Ratio measures the proportion of gross profit to total sales revenue that
the company has left after subtracting the direct costs related to goods and services sold. The
formula used to calculate Gross Profit Margin Ratio is (Hancock, Bazley and Robinson,
2015):

Revenue−COGS
Gross Profit Margin (%)=
Revenue

Table: Telstra's Gross Profit Margin from 2014 to 2016) (Financials.morningstar.com, 2017):

Year Gross Profit Margin


2014 74.14
2015 73.42
2016 71.95

The table below presents the Gross Profit Margin which were calculated according to the data
in annual report of Telstra:

FY Revenue COGS Gross


Profit
Margin
2014 25,119 6,495 74.14%
2015 25,845 6,870 73.42%
2016 25,834 7,247 71.95%

Appendix 1.3 Return on Assets

Return on Assets (ROA) aims to assess how efficient a company manage their assets to
convert into net income. The formula to calculate ROA is (Hancock, Bazley and Robinson,
2015):

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
ROA = ∗ 100%
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

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𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
= ∗ 100%
(𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟+𝐸𝑛𝑑𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑌𝑒𝑎𝑟)/2

The table below show the ROA provided on Financial Morning Star (2017):

Year ROE

2014 10.98

2015 10.6

2016 13.81

The table below shows how the ROA is calculated based on the data taken from annual
reports of Telstra:

FY14 FY15 FY16

Net Income ($m) 4,275 4,231 5,780


Average total assets ($m) 38,944 39,903 41,866
Return on Assets (ROA) (%) 10.98% 10.60% 13.81%

Appendix 1.4 Return on Equity Ratio (ROE)

Return on Equity (ROE) indicates how well Telstra ultilise the investments of shareholders to
generate profits. The formula to calculate ROE is (Hancock, Bazley and Robinson, 2015):

Net Income
ROE =
Shareholders′ Equity

Table: Telstra's ROE from 2014 to 2016) (Financials.morningstar.com, 2017):

Year ROE

2014 32.35

2015 30.3
2016 38.57

The table below shows how the ROA is calculated based on the data taken from annual
reports of Telstra:

FY14 FY15 FY16


Net income 4,275 4,231 5,780
Shareholders' Equity 13,822 14,103 15,871
ROE 30.93% 30.00% 36.42%

Appendix 2 Efficiency

Appendix 2.1 Receivable turnover

𝑆𝑎𝑙𝑒𝑠
Receivable Turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

Table: Telstra’s Receivable Turnover from 2014 to 2016 (Financial Morningstar.com, 2017)

Year Receivable Turnover


2014 5.76
2015 5.81
2016 5.46

The table below presents the Receivable Turnover which were calculated according to the
data in annual report of Telstra:

FY Sales Average Accounts Receivable Turnover


Receivable
2014 25,119 4,172 6.02
2015 25,845 4,721 5.47
2016 25,834 4,737 5.45

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Appendix 2.2 Days in turnover

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑


Inventory Turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐷𝑎𝑦𝑠 𝑖𝑛 𝑌𝑒𝑎𝑟 (365)


Days in Inventory = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

Table: Telstra’s Days in Inventory from 2014 to 2016 (Financial Morningstar.com, 2017)

Year Days in Inventory


2014 22.3
2015 22.7
2016 26.4

The table below presents the Days in Inventory which were calculated according to the data
in annual report of Telstra:

FY Cost of Goods Sold Average Inventory Days in Inventory


2014 6,495 410 23.04
2015 6,870 426.5 22.67
2016 7,247 524 26.39

Appendix 3 Liquidity

Appendix 3.1 Current Ratio

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Table: Telstra’s Current Ratio from 2014 to 2016 (Financial Morningstar.com, 2017)

Year Current Ratio


2014 1.20
2015 0.86
2016 1.02
The table below presents the Current Ratio which were calculated according to the data in
annual report of Telstra:

FY Current Assets Current Liabilities Current Ratio


2014 10,438 8,648 1.20
2015 6,970 8,129 0.86
2016 9,340 9,188 1.02

Appendix 3.2 Acid test/ Quick Ratio

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Inventory Turnover = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Table: Telstra’s Quick Ratio from 2014 to 2016 (Financial Morningstar.com, 2017)

Year Quick Ratio


2014 1.12
2015 0.75
2016 0.91

The table below presents the Quick Ratio which were calculated according to the data in
annual report of Telstra:

FY Current Assets Inventory Current Quick Ratio


Liabilities
2014 10,438 362 8,684 1.17
2015 6,970 491 8,129 0.79
2016 9,340 557 9,188 0.96

Appendix 4 Capital Structure

Appendix 4.1 Interest Coverage

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𝐸𝐵𝐼𝑇 (𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠)
Interest Coverage = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

Table: Telstra’s Interest Coverage from 2014 to 2016 (Financial Morningstar.com, 2017)

Year Interest Coverage


2014 6.60
2015 8.18
2016 8.04

The table below presents the Interest Coverage which were calculated according to the data in
annual report of Telstra:

FY EBIT Interest Expense Interest Coverage


2014 7,185 1,113 6.45
2015 6,762 846 8.00
2016 6,310 796 7.92

Appendix 4.2 Debt/Equity Ratio

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
Debt/Equity Ratio = 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

Table: Telstra’s Debt Equity Ratio from 2014 to 2016 (Financial Morningstar.com, 2017)

Year Debt/Equity Ratio


2014 0.98
2015 1.00
2016 0.92

The table below presents the Debt/Equity Ratio which were calculated according to the data
in annual report of Telstra:

FY Total Debt Total Equity Debt/Equity Ratio


2014 13,316 13,960 0.95
2015 13,887 14,510 0.96
2016 14,378 15,907 0.90

Appendix 5. Share market performance

Appendix 5.1 Earning per Share ratio

Earning per Share Ratio is one of most important indicator for performance of Telstra. It
measures the net income earned per share of stock if Telstra distributes all of its profit to the
outstanding shares at the end of the year. Earning per share is calculated by subtracting
preferred dividends from net income and dividing by the weighted average common shares
outstanding, as follow (Hancock, Bazley and Robinson, 2015):

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 −𝐷𝑒𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑡𝑜 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠


EPS = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Table presents the earning per share ratio provided by Financial Morning Star (2017):

FY14 FY15 FY16


Earnings per share (AUD) 0.34 0.34 0.47

The table bellow shows the earning per share ratio calculated with data from annual reports
of Telstra from 2014 to 2016

FY14 FY15 FY16


Net Profit Attributable to common shareholders ($ Million) 4,275 4,231 5,780
Number of shares (Million) 12,464 12,264 12,216
Earnings per share (AUD) 0.34 0.34 0.47

Example: EPS (FY14) = 4,275/12,464 = 0.34

Operating Cash Flow per share was also calculated in order to determine if the EPS of Telstra
represented the profitability of the company fairly without much influence by accounting

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gimmicks. The table below shows Operating cash flow per share calculated by using data in
annual reports of Telstra from 2014 to 2016

Table Operating cash flow per share of Telstra from 2014 to 2016

FY14 FY15 FY16


Operating Cash Flow ($) 8,613,000,0 8,311,000,0 8,133,000,
00 00 000
Number of shares 12,464,000, 12,264,000, 12,216,00
000 000 0,000
Cash Flow per share 0.69 0.68 0.67

Appendix 5.2 Price per Earning Ratio

Price per Earning Ratio (P/E ratio) measures how much money an investor is willing to invest
in a company in order to receive one dollar of current earning. In other word, it shows how
expensive the share is. The formula to calculate it is:

𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒


P/E ratio = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Table presents the price per earning ratio calculated using data from annual reports of Telstra.

FY14 FY15 FY16


Earnings per share (AUD) 0.34 0.34 0.47
Price per share 5.56 6.14 5.21
Price per earning (P/E) ratio 16.4 18.1 11.1

Example: P/E ratio (FY14) = 5.56/0.34 =16.4