FBL5030: Strategic Changes and Firm Performance in an Organization

Solution Code: 1BDI

Question:STRATEGIC CHANGES AND FIRM PERFORMANCE

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ASSIGNMENT REQUIREMENTS

The following is a list of 10 organisations/ companies, one of which will be the subject of your analysis. CODE COMPANY ANZ Australia And New Zealand Banking Group Limited NAB National Australia Bank Limited QBE QBE Insurance Group Limited TLS Telstra QAN Qantas Airways Limited MGR Mirvac Group Stapled TPM TPG Telecom Limited HVN Harvey Norman Holdings Limited RIO Rio Tinto Group WPL Woodside Petroleum Limited
One of these ten companies will be randomly assigned to you for analysis. For thisinformation, refer to the Excel spread sheet on Blackboard (Bb).If working in groups, choose only one company from either partner.
Find the Excel files on Bb which contain the past 6 years of the financial statementsdata.Download your selected company data file for the analysis.
Research about your company. Find all important and relevant information incompany’s annual reports, company’s websites, or newspaper articles, etc.

Assignment Questions

Analyse the behaviour of any three significant items in the income statement for the period of six years. Discuss whether your organization’s performance relating to these items appears to be improving, deteriorating, or remaining stable over this period. Explain why you selected those items and what you recognize as the most relevant strategic reasons for the trend/s that you have recognized. Justify your answer.
Analyse the behaviour of any three significant items in the balance sheet for the period of six years. Discuss whether your organization’s performance relating to these items appears to be improving, deteriorating, or remaining stable over this period. Explain why you selected those items and what you recognize as the most relevant strategic reasons for the trend/s that you have recognized. Justify your answer.
Analyse cash flow statements of the last six years and explain any three major changes which have occurred in relation to investing, financing and/or operating activities of the business. Justify your answer.
Calculate two relevant ratios under the four chosen ratio categories (profitability,leverage, solvency, operational efficiency or market ratios) for the period of six years. Give conclusions for your ratio analyses based on the figures you have derived.
Identify any two items not included in (or derived from) the financial statements that you think would be important to someone considering whether the organization is performing well. Discuss your reasons for believing that these two items about the company would be important in making an investment decision. (HINT: you might want to consider items discussed in other sections in this unit)

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Solution:

Executive Summary

This report intends to provide an overview of Telstra Corporation Limited and conduct analysis of the several aspects of the financial statements of the company. This shall include various items from the cash flow statements, balance sheets and the profit and loss account for the last six years i.e. 2010 to 2015. The report intends to address the significant areas of performance by the company by conducting ratio analysis and itemized study of important items and thereby focusing on the areas to be improved by the company. External influences that do not cover the financial aspect but may affect the investor’s decision have been also identified and discussed. These include the market rating given by various credit rating agencies and the study of the industry in which the company belongs because the company does not function as an independent entity and its success and failure depends on lots of factors.

Introduction

Telstra Corporation Limited is the biggest market player in mobile telecom in Australia (Telstra 2016). The company was founded in the year 1975. The company privatized in the years of 1997, 1999 and the year 2006 in three stages. The company originated from the Australia post as one of the government departments. It operates mobile towers, pay television, internet access etc. Currently, Andy Penn is the Chief Executive Officer of the company. Warwick Bray is the Chief Financial Officer of the company. As of 2015, the total revenue of the company stands at $26.6 billion and the profit after tax stands at $4.3 billion (Thomson Reuters 2016). Telstra has been voted as the most respected company in the year of 2014 by a leading Australian newspaper. Telstra in order to win back its market share has separately allocated a huge sum of money which it intends to spend for the said purpose.

Analysis of Income Statement

Operating revenue: The operating revenue of the company has remained almost consistent over the past 6 years. Minimal growth is present in the revenue. Therefore, it can be stated that the company has tried to retain its customers in the given years but has not been able to attract new customers. This item was selected as the revenue is the main resource of the organization’s survival (Telstra 2016). Following chart shows the revenue and its growth year wise:

Depreciation charged to the profit and loss account has been on a reducing trend for the past 6 years which implies that the company has not invested any funds in the procurement of capital assets. This can be attributable to the nature of industry in which it is involved. However, it can also be commented that the company has not expanded its operations for these years and so, it idi not require any further capital asset. We can study the following chart

Operating Expense: We can observe that the operating expense has also remained almost consistent in the past 6 years. The main reason behind such consistency would be attributable to the consistent operating revenue. This can also be seen as a positive factor because it would ensure that the operating margin has not reduced in the years. These expenses are directly attributable to operations therefore, it can be stated that the company is operating efficiently even with consistent revenue.We may look at the following chart:

Analysis of Balance Sheet

Current Investments: The investments have significantly reduced over the period of 6 years. This shows that the company has relied less on current investments for the income. This also could be due to the fact that company has reduced the short-term borrowings to save on the interest cost. Current investments are important as the liquidity of the company can only be determined on the basis of short-term investments. They are strategically important to discharge the short term future liabilities.
Noncurrent investments: This has increased significantly over the last 6 years depicting the fact that company has invested in good return investments due to which company is earning more which is overall good for the growth of the company. We can also notice that the other income of the company has also increased in the years.This term derives its importance as these are generally items of high value which will not be redeemed in near future. The rate of return on these items is also high.
Account payable: This has increased marginally over the last 6 years by 4% which suggests that the company maintains a traditional account payable ratio towards its creditors which suggests a good financial capacity of the company to repay its creditors. Accounts payable is important as the short term liability needs to be paid off company’s regular payments depicts its financial ability to pay off its liabilities.

Analysis of Cash Flow Statement

Investments: There is a change of 95% in the last years in investments which is a part of investing activities. The company has actually been purchasing investments which are also reflected in the balance sheet. This could be due to a company getting the higher return on these long-term investments.
Investment cash inflow: Company has the change of over 50% in the last 6 years in income from investments. From the above point, it is clear that the company is purchasing long-term investments and in return as is evident from the return on investment, the company is being paid quite well.
Payment to suppliers and employees: This has increased to 17% in the last 6 years. This is attributable to the fact that sale of the company has increased due to which the production has gone up creating more suppliers and hence more liability which in turn creates more payments. These items seem to be in consonance natural business course of the company. This is a part of operating activities.

Analysis of Ratios

Ratio - Refer Appendix A-1 and A-2 at the end

Analysis

Gross profit ratio The GP ratio has been fluctuating over the last 6 years which is not a good sign for the company’s growth as the sales of the company have remained almost consistent and the falling GP suggests that the cost of goods sold of the company has increased.

Net profit ratio NP ratio, however, has increased in the last 3 years which implies that the company is operating efficiently. This suggests that company is able to hold its place in the market well.

Debt equity ratio Debt equity ratio is around 1 which suggests that company uses equity and outside debt almost equally to meet its financial needs. However, the ratio is always over 1 therefore, the debt financing has always remained higher and we can state that it is very important to have good earnings in order to meet the debt obligations.

Fixed Asset turnover ratio This has been increasing over the last 6 years suggesting that the company is able to generate more out of its fixed assets used in production.

Equity turnover ratio This has increased and then decreased again over the past 6 years indicating that the company uses how much equity to generate a particular level of sale. However, there is not much significant change as such. The performance of the company seems reasonable.

Payout ratio This has increased considerably since 2010 and then decreased again. However, we must understand if the company pays the dividend, then the market value of the company decreases. So, overall the shareholders of the company do not gain or lose in case of a dividend.

Dividend yield This reflects the ratio between the market price per share and the dividend per share declared by the company. This has actually decreased too much which is due to the fact that the Market price per share has decreased considerably over the last 6 years. However, looking at the dividend individually, the dividend has increased despite fall in the market share instilling confidence among its shareholders.

Solvency ratio The solvency ratio of the company is the measure company being solvent. In the given case the solvency ratio of the company has been almost stagnant at 0.49 which seems a good sign. However, this should be compared with other competitors to get the better idea.

Current Ratio The current ratio of the company was 0.8 in 2010 which improved above in 2014 to 1.2. However, it has declined to 0.9 which is still acceptable as the acceptable current ratio for any company is generally 1.

External Factors

Market rating/ credit rating The credit ratings given by various credit rating agencies must be considered before making an investment decision in large companies. This is because these are professional agencies who take into account all the monetary and nonmonetary factors which ultimately may affect the growth of the company or the industry of the company have immense expertise in understanding the business environment and the financial position based on policies of the government, other external factors, thus ensuring the investors of a safe investment. Business environment of the industry in which the company relates If the company has the strong financial background and appears free from all the negative financial indications, then the investor might consider the industry also in which the company relates. For example, take a sugar industry. The company seems strong but a recent circulation by the government has allowed the import of sugar at low prices which would directly affect the company’s profitability. Now, the investor might want to reconsider the decision of investing in that company even though as of now the company has strong financial base but soon the company may be severally affected by the change in the policy of import by the government due to which the company may not be able to earn healthy profits or may altogether come in losses.

Conclusion

After studying the above points, it looks that the company has been able to maintain and sustain the business it manages in Australia. The company has sustained the revenue collection and the profit of the company seems overall well managed. However, the one thing which may bother the current and the prospective customers is that the company has not been able to grow at a pace that is expected from the company of such size and capacity. The revenue has increased marginally by just 4% in the last 6 years which does not seem that impressive. In terms of profit also, the company has not been able to grow at much pace. However, one good sign is that the company has reduced the other overhead cost as the Net profit ratio has increased more than the gross profit ratio. This suggests that company has been able to reduce the other indirect costs incurred by the company in processes other than the manufacturing processes which implies that the controlling steps must have been taken by the management (Edmunds, (n.d.))

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