An assessment of the Telstra Corporation’s profitability, and short-term and long-term Liquidity.
All company accounts are prepared in accordance with the various accounting laws and regulations and are designed for a wide audience. Therefore, to obtain data for specific purposes it is frequently necessary to submit the numbers to specific analysis. Following is an analysis of the Telstra Corporation’s year 2000 and 2001 financial statements. This analysis is intended to, through the calculation of ratios, assess the short-term and long-term liquidity, in addition to the profitability of the Telstra Corporation.
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Short-term liquidity is the ability of the company to meet its short-term financial commitments. Short-term liquidity ratios measure the relationship between current liabilities and current assets. This helps us measure the Telstra Corporation’s ability to sell inventory, to collect receivables and to pay current liabilities. Following is the Current Ratio, the Quick Asset Ratio, the Stock Turnover Rate and the Debtors’ Turnover Rate. These measures are concentrated upon the current assets and current liabilities to assess the Telstra Corporation’s ability to meet their financial commitments as they become due.
For the 2001 financial year, the Telstra Corporation had $m6253 in total current assets and $m9279 in total current liabilities. This gives the company $0.68 forever dollar of current liabilities. This could be seen as an unsafe situation, but by looking into the 2000 financial year Statement of Financial Position, it can be ascertained that the company had $0.52 forever dollar of current liabilities. That is $m4889 in total current assets and $m9421 in total current liabilities. This shows that the Telstra Corporation increased its ability to pay debts as they become due by $0.16. (The Telstra Corporation Limited, 2001)
Quick Asset Ratio
The Quick Asset Test is a stringent test that indicates if a firm has enough short-term assets, without selling inventory, to cover its immediate liabilities. It is similar but a more strenuous version of the Current Ratio or “Working Capital”, indicating whether the company’s liabilities could be paid without selling inventory.
Using the same figures as above minus the inventories for both years gives the Telstra Corporation an “acid test ratio’ of 0.64:1 for the 2001 financial year and 0.40:1 for the 2000 financial year. These values are derived from subtracting the inventories of $m320 and $m295 for the 2001 and 2000 financial years respectively.
This ratio shows a difference of $0.24 between the financial years of 2001 and 2000, again giving the corporation an increased ability to pay debts as they become due without selling its inventory. (The Telstra Corporation Limited, 2001)
Inventory Turnover Rate
Every time stock is turned over, profit is generally made for the company. By review the Telstra Corporation’s 2001 and 2000 annual financial reports, it can be ascertained that for the 2001 financial year the Telstra Corporation had an inventory turnover rate of 202 days. By using the cost of goods for 2001 and working an average of the inventory for 2001, a figure of 1.81 was derived. To work it back into days this figure was divided into a year of 365 days to give the inventory turnover rate of 202 days. (The Telstra Corporation Limited, 2001)
By using the same process as above, but by using the 2000 and 1999 inventories to work an average, a figure of 1.90 was derived. By dividing this into 365 days, the 2000 financial year the inventory turnover rate was 192 days. This would indicate that the Telstra Corporation’s stock on hand-turned over less in 2001 than it did in 2000. With this being said, it would be hard to comment on these figures as a majority of the Telstra Corporation is based on service and not through retail sales. (The Telstra Corporation Limited, 2000)
Accounts Turnover Rate
The accounts receivable turnover measures the Telstra Corporation’s ability to collect cash from credit customers. This has been calculated for both the 2001 and 2000 financial years. For 2001 this rate was measured at 3.72 giving a days sales in receivables of 98 days. For 2000 the rate was measured at 4.42, giving days sales in receivables of 83 days.
These rates were derived from the sales revenue of the delivery of service, which is the “Revenue from the provision of our telecommunications service which includes, access to retail and wholesale fixed and mobile networks; telephone calls; and other services and facilities provided such as internet and data.” Where we have assumed that all these sales were on credit. (The Telstra Corporation Limited, 2001)
In addition to the above, the average net accounts receivable was derived from the current receivables of trade debtors by working an average on the rated year and its previous.
In addition to measuring short-term liquidity, most businesses have long-term debts which need to be assessed to measure the company’s ability to meet long term obligations. Long term liquidity or gearing is concerned with the financial structure of the company. Long term liquidity ratios measure the extent to which the capital employed in the business has been financed either by shareholders through share capital and retained earnings, or through borrowing and long term finance.
The gearing or debt ratio indicates the proportion of the Telstra Corporation’s assets that have been financed with debt. By analysing the 2001 and 2000 financial reviews it can bee seen that the Telstra Corporation had, in the 2001 financial year, a debt ratio of 63.38 meaning that 63.38% of the company’s assets are funded with debt. In the 2000 financial year a debt ratio of 61.67 was measured. This indicates that in 2001, the Telstra Corporation had more of its assets fund by debts than it did in the 2000 financial year.
These ratios were derived from the total assets of $m37,473 and $m30,339 for both 2001 and 2000 respectively and from the total liabilities of $m23,751 and $m18,737 for both 2001 and 2000 respectively. (The Telstra Corporation Limited, 2001)
The fundamental role of any business is to make money and to increase the profitability for the shareholder. The ratios that measure profitability play a large role in the decision-making process and relates the measure of profit to the amount of the relevant asset investment base.
Return on Investment
The return on investment measures the success the Telstra Corporation has at using its assets to earn a profit. In the 2001 financial year, with an operating profit of $m6,297 and total average assets of $m33,906, it gives the company an 18.6% return on assets. For the 2000 financial year, an operating profit of $m5,349 and total average assets of $m29,011, it gives the company an 18.4% return on invested assets. A result that makes the 2001 financial year only marginally more profitable than the 2000 financial year.
To address the calculated ratios above, figure 1 summarises the derived values into the following table.
Years: 2001, 2000
Current Ratio: 0.68,0.52
Quick Asset Ratio 0.64,0.40
Inventory Turnover Rate: 202 days, 192 days
Accounts Turnover Rate: 3.72, 4.42
Debt Ratio: 63.38%,61.76%
Return on Investment: 18.6%,18.4%
By analysing the short-term liquidity of the Telstra Corporation for both the 2001 and 2000 financial years, it can be seen that its current and quick asset ratios increased while the turnover rates decreased. It would be interesting to analyse the 2002 financial review to see if the same trend continues in the ratios which would indicate a stronger financial position. If the trend continues in 2002 with the turnover rates it would imply that corrective action would need to be taken.
Looking at profitability, it seems to have remained almost stationary. This may be associated with the increased investment on capital, as seen in the increased dept ratio, but the company has yet to receive a stable return on that equipment. With that being said, the Telstra Corporation appears to be financially stable receiving a return of 18.6% on its invested assets for the 2001 financial year.
Through the use of analysis and interpretation ratios above, the Telstra Corporation has been culminated together to give a calculation on the return on investment. His has been conducted by summarising the short-term liquidity and long-term liquidity, in addition to the profitability of the Telstra Corporation.
Deakin University Australia, (2001) MDA105: Managerial Accounting. Deakin Australia.
Telstra Corporation Limited,(2001) Telstra’s Annual Review 2001. Telstra Corporation.
Telstra Corporation Limited,(2000) Telstra’s Annual Review 2000. Telstra Corporation.
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