financial performance Essay

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BFF 5959 Accounting and Finance for International Managers
Telecommunication companies

Due date: 17 April 2014

By:
Ange Dong (24831271)

Ee Heng Lim (25025287)

Lecturer: Eric Lee

Word count: 2089

Table of Contents:
Contents

Introduction:
This report will analyze selected three telecommunication companies, which are Telstra (TLS), Reverse Corp Limited (REF) and SingTel Optus Pty Ltd (SGT) from Australian Stock Exchange (ASX). Company’s data will be tabulated from 2009 to 2013 and to evaluate company’s profitability, efficiency, liquidity, capital structure and market performance. Next, by examine and comparing the past performance and position of these companies, it would provide a clearer insights for different type of investors based on the company’s nature.

Part 1. Company Analysis
Telstra Corporation limited (TLS)
1.1 Profitability:
Year/Ratio
2009
2010
2011
2012
2013
Net profit margin
15.99%
15.58%
12.88%
15.46%
14.95%
ROE
32.80%
30.58%
26.76%
34.11%
30.24%
ROA
11.96%
11.81%
10.91%
11.78%
12.03%
Figure 1: TLS profitability ratio (Fin analysis, 2013)

Overall, Telstra made positive net profit margin over last five financial years. As shown in figure 1, its profitability declined sharply in 2011 but soon recovered in 2012. A decline in EBIT can be attributed to higher expenses per dollar of sales, heavily investment or rising operating costs. Consequently, ROE and ROA declined in 2011, means less return generated per dollar of investment in assets and equity. This could be due to the decline of net profit, or increase of asset and equity investment. However, the average ROE and ROA during last five years are 30.89% and 11.69%, present a quite stable profitability. This reflects executives efficiently in managing the assets and equity of Telstra.
1.2 Efficiency
Year/Ratio
2009
2010
2011
2012
2013
Asset turnover ratio
0.64
0.63
0.66
0.64
0.66
Days receivable
43.47
43.22
45.26
45.64
47.73
Days payable
53.49
56.28
59.55
59.53
60.70
Figure 2：TLS efficiency ratio (Fin analysis, 2013)

Telstra has maintained its asset turnover ratio at an average of 64.7% over last five financial years, relatively high ratio indicate that Telstra is managing its current and non-current assets to generate higher sales revenue. Average of days receivables were 45 days whereas days payable were 58 days, it means Telstra spent less time to receive money than to pay out money. This suggests Telstra managers enacted efficient payment policy that minimizes the bad debt risks.
1.3 Liquidity
Year/Ratio
2009
2010
2011
2012
2013
Current ratio
0.80
0.83
0.87
0.93
1.05
Quick ratio
0.77
0.79
0.84
0.91
0.99
Figure 3: TLS liquidity ratio (Fin analysis, 2013)

As shown in figure 3, both current and quick ratios kept increasing over the last five years, with its current ratio averaging of 0.9 is below the arbitrary rule of thumb of 1.5, whereas quick ratio at an average of 0.86. The low current ratio may not indicate that Telstra have liquidity problems, since comparing current ratio with quick ratio, the percentage were almost same, due to the nature of telecom business which does not require high level of inventories, thus activity cycle is relatively shorter than other industries and hence is able to support a lower level of liquidity. Overall, the increased ratio indicates that Telstra did good job in its liquidity during last five years.
1.4 Capital structure
Year/Ratio
2009
2010
2011
2012
2013
Debt to Equity Ratio (D/E)
136.61%
114.62%
115.26%
130.58%
117.00%
Net interest cover
7.29
6.75
5.02
7.13
7.03
Figure 4: TLS capital structure ratio (Fin analysis, 2013)

The debt to equity ratio reveals that Telstra relied more on debt funding relative to equity funding, as its debt to equity ratios were above 100% during the period of 2009-2013. The sharp increase in D/E ratio in 2012
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