Computation of Key Financial Ratios covering performance areas of Profibility, liquidity, cash management and market relations

The main purpose of this assessment is to analyse the financial performance of Telstra Ltd which is engaged in the business of providing mobile phones, telecommunication and broad band services to the residents of Australia. The assessment would be computing key financial ratios of the business for the current year and would be covering different area of performance such profitability, liquidity, cash management and market relations (Telstra.com.au. 2019). Ratio analysis can be defined as a tool which provides valuable insights regarding the performance of the business relating different area of performance for the business.

Financial Factors

The ratios which are considered in this assessment are computed considering the annual reports of the business for the year 2018. The computation of key financial ratios is shown in the appendix section. The profitability ratio covers the return on equity estimate which is considered to be one of the key financial indicators of a business. The return on equity figure is shown to have decreased from the previous year analysis (Carraher and Van Auken 2013). The return on equity signifies the profits which are earned by the business using the funds of the shareholders of the business. The revenue and profits which is generated by the business has both decreased from previous year (Businesswire.com. 2018). The return on equity figure effectively shows that the ability of the business to meet the expectations of the shareholders of the company. In case of liquidity ratios, current ratio is considered which is an important indicator for the business (Kim, Kraft and Ryan 2013). The current ratio is also shown to have decreased during the year which suggest that the liquidity position of the business has slightly declined from previous year. This suggest that the business would not have proper funds at their disposal to meet their current obligations. The management of the company needs to appropriately make decisions in order to ensure that the liquidity position of the business can be improved.

The total asset turnover ratio of the business represents a part of the efficiency ratios of the business. The total asset turnover ratio represents the revenue which can be generated by the business using the total assets of the business. The total asset turnover ratio is shown to have declined slightly during the period (Delen, Kuzey and Uyar 2013). The market relation ratio is shown with the help of equity ratio which represent a relation between the total liabilities and total equities of the business. The equity ratio is shown to have declined during the period. The annual reports of the business show that the equity of the business has increased which signifies that the management of Telstra ltd has issued new shares during the period.

Analysis of Current ratio, Return on Equity, and Asset Turnover Ratio.

The ratio which are computed have been shown to have decreased during the period but the most significant change is noticed in current ratio which depicts the liquidity position of the business due to significant fall in the current assets of the company and it also means that the management might be facing a tough liquidity situation.

The above discussed factors are all financial factors which depicts the financial performance but the business has also performed significantly well in terms of non-financial factors such as the business has enhanced the scale of operations of the business which is shown to be 17.7 million retail mobile services and 3.6 million fixed broadband services. The company has operations in more than 20 countries. The non-financial factors which depict the performance of the business are listed below:

• The retail services for mobile phones has enhanced to be 17.7 million and the fixed broadband services has also enhanced to 3.6 million.
• The annual report for 2018 shows that the management of the company launched second generation of Telstra Tv exclusively on demand of the customers.
• The company is the first Australian carrier to offer both Narrowband and Cat M1 Iot Technologies.
• The company in terms of sustainability has a score of 74 in employee engagement survey which is an impressive record.

The stakeholders of the business expect that the business would be looking after their needs and take every step so that the expectations of the stakeholders are fulfilled. The recommendations which can be provided to the management of Telstra ltd for the purpose of improving the business structure of the company and for meeting the expectations of the stakeholders are listed below:

• The management needs to improve the profitability which can be done by reducing the cost of operations which at the moment is slightly high. The management needs to introduce management practices which can help in reducing the costs of the business.
• The stakeholders expect the management to enhance their earnings which can be done by increasing the level of profitability of the business and thereby also enhance the return on equity of the business.
• The management also needs to ensure that the liquidity position of the business is appropriate as this would help in meeting the current obligations of the business effectively. The management can take steps in controlling the cash flows of the business.
• The capital structure of the business needs to be improved by mixing proper proportion of equity and debt capital.
• From the perspective of the shareholders, the management needs to focus on wealtrh maximization principle so that the market value of shares can increase.

Conclusion

The performance of Telstra ltd for the year 2018 is shown to be appropriate but certain improvements needs to be brought about by the management. The ratio analysis shows that the management of the company needs to consider the profitability and liquidity position of the business effectively. The above discussion shows the importance of the key ratios which are considered in this assessment and how the same has impact on the decision-making process of the business. In addition to this, it can be advised to potential investors that the business is favourable for making investments even though the current profitability and liquidity is not appropriate. The main reason for the same is that the company follows an innovative model and has a potential 0of making significant profits in coming years. In addition to this, the company is expanding the range of products which is offered by the business which would further contribute to the profitability of the business.

The company which is considered is Telstra Ltd which has a core operation of serving the telecommunication needs of the people. The company provides mobile phone services and broadband services to the residents of Australia. The company has its main operations in Australia and the company also has operations in over 20 countries.

The business has been performing better in Australia, however the management needs to improve the performance of the business in different regions which is the main reason that the revenue of the business has declined slightly (Weil, Schipper and Francis 2013). The industry of Telecommunication in Australia is highly competitive in nature and the expected growth is 0.2% every year and the revenue which is collected is expected to increase to $ 37.8 billion.

The business of Telstra main focus is to improve the technology level so that the business can provide fast telecommunication services to the customers and ensure that the customers have the best quality of services. The company requires skilled employees who are motivated to perform their activities effectively. The management of Telstra ltd targets to further enhance the business and scale of operations of the business.

The management of the company is dedicated towards bringing about innovation which can be regarded as the biggest strength of the business. The remuneration strategy which is formulated by the business includes Executive Variable Remuneration Plan (EVP) in FY18 which includes STI and LTI arrangements. The wages and remuneration strategy which is adopted by Telstra ltd is appropriate in comparison to other competitors operating in the industry.

Reference

Businesswire.com. (2018). Australia Telecoms Industry Statistics and Forecasts 2018-2023: Telco Market Grows Slowly With Mobile Broadband Driving Growth – ResearchAndMarkets.com. [online] Businesswire.com. Available at: https://www.businesswire.com/news/home/20181127005716/en/Australia-Telecoms-Industry-Statistics-Forecasts-2018-2023-Telco [Accessed 13 Feb. 2019].

Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Kim, S., Kraft, P. and Ryan, S.G., 2013. Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), pp.783-823.

Telstra.com.au. (2019). [online] Available at: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/2018-Annual-Report.pdf [Accessed 13 Feb. 2019].

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.