Telstra has been an attractive investment proposition so far, its financial ratios in terms of profitability, liquidity and solvency are concerned. Though the figures in 2019 are on a declining mode, it is still to show off a stronghold in its financial scenario. The financial ratios are used for making such decision but such ratios could be misleading, still is one of the popular ways for contemplating business decisions. Telstra beside its finances is also a coherent name in delivering a higher level of ethical stance in terms of responsible business, digital innovations and environmental solutions.
Table Of Contents
Investment feasibility for Telstra:
Evolution of corporate reporting:
Key measures of ethics by Telstra:
The report would determine the financial feasibility of the Melbourne based Australian telecommunication organisation, Telstra providing services in terms of voice, internet, mobile, television and other services. The report would assess the financial feasibility in terms of profitability, liquidity and solvency of the organisation. The results would be used to adjudge whether Telstra would be a favourable investment and a proper decision would be attained to keeping in mind the limitation of the financial ratios. Besides financial proposition, the report would also go through the other sustainability factors that are required for the organisation for its rightful sustenance. It would also come up with certain key measures to be undertaken by Telstra in ensuring a higher level of ethical instincts.
In this section, a financial analysis would be carried forth in lieu of the financial elements such as profitability, liquidity and solvency for two consecutive years, 2019 and 2018.
The profitability element would be discussed in terms of operating margin, net margin and return of equity.
The operating margin for Telstra comes as 13.31% in 2019 while it was 19.86% in 2018 showing the operational efficiency of the organisation to retain suitable profitability after incurring the operational expenses (Deegan, 2014). The figure shows that in 2018, the organisational position was comparatively better owing to marginally higher revenue and lower operational costs while in 2019, the situation was in stark contrast.
The net margin of Telstra stands at 12.33% in 2018 which reduced to 7.73% in 2019. The figure shows off the organisational resources left behind after incurring the sorts of expenses to be distributed among the investors (Hopper & Bui, 2016). It indicates that the organisation expenses are higher in the current year with a lower revenue as a comparison to its previous year indicating the scenario to control the expenses.
Return on equity:
Return on equity (ROE) shows the organisational return for the investors based on their investment on the organisation. In this case, Telstra got an ROE of 24.33% in 2018 which reduced to 14.79% in 2019 implicating a lower return for the shareholders. It is generally considered higher the ROE, it is better for the organisation and a range of 15-20% is considered a good ROE. So though the ROE of Telstra is in a decline mode, it is still in the effective range of a good ROE making the organisation investment-worthy (Brewer, 2017).
The element of liquidity would be discussed in lieu of the current ratio and quick ratio.
Current ratio indicates the liquidity level of the organisation to meet its immediate obligations that need to be honoured within a year (Granlund & Lukka, 2017). Telstra had a current ratio of 0.83 in 2018 which slightly reduced to 0.76 in 2019. It is seen that Telstra is undertaking an aggressive approach to meet its business objectives by utilising the idle resources while raising the liquidity risk to an extent.
Quick ratio for Telstra has been 0.77 in 2018 which marginally reduced to 0.72 in 2019. The scenario depicts that Telstra has the requisite liquidity to meet its current obligations that might erupt immediately say within a month (Edwards, et al., 2015). So the current figures of quick ratio show that Telstra with its current liquidity level would be able to honour its immediate business obligations keeping away the risk of bankruptcy.
The solvency aspect of Telstra would be illustrated through the inventory turnover ratio, account receivable (days) and account payable (days).
Inventory turnover ratio:
Telstra has been able to enhance its inventory turnover ratio from 37.85 in 2018 to 44.27 in 2019 as a higher inventory turnover indicates better inventory management for the organisation (Messner, 2016). The figure below indicates that Telstra has been in a position to sell off its inventory owing to its efficient market proposition. So higher the inventory turnover ratio, it is better for Telstra to yield good results.
Account receivable (days):
The figures above tell about the capability of the organisation to collect its dues from the market and lower the days, it is suitable for the business. But Telstra has a higher receivable day which comes as 70.72 days and 70.78 days in 2018 and 2019 respectively. So there has not been any major difference in the figures over the years indicating that the collection department of Telstra is not good at negotiation to facilitate the payment faster (Maynard, 2017). The figures could be brought down by offering a discount to the debtors to initiate a faster payment.
Account payable (days):
Accounts payable days gives the number of days the organisation needs to pay off its debts and higher the days, it is better for the organisation (Granlund & Lukka, 2017). Telstra had 88.75 days in 2018 which reduced to 83.32 days in 2019. Generally, the businesses tend to pay off the debts at a later stage owing to the credit agreement as in case of Telstra. It is seen that the telecom organisation has been paying off its debt little earlier than the previous year. It might be due to a favourable credit agreement with the creditors offering a suitable discount initiating early payments.
The profitability, liquidity and solvency scenario of Telstra shows that the organisation is running well, managing its assets effectively and extracting suitable profitability not only for itself but for its shareholders as well. The profitability aspect shows that though in 2019, the figures are on a declining phase it is in the safe range of effective organisational profitability. It indicates that the organisation is doing well in the market and have a sustainable future (Granlund & Lukka, 2017). The liquidity aspect shows that the organisation is equipped to honour its dues avoiding the risk of bankruptcy.
Further, the higher inventory turnover ratio shows the frequency of the stocks getting rewind indicating healthy demand of the product and services of Telstra in the market. So it would be wise to invest in Telstra going by its financial ratios for a better return in future (Ikerd, 2012). Besides the financial workings, Telstra is also actively involved in laying down sustainable and transparent ethical means to have a tolerant, peaceful and coherent society indicating its strong branding and reputation in the market.
Limitation of financial ratios:
The investment decision on Telstra has indeed been undertaken based on the figures derived from the financial statement by working out the financial ratios (Brewer, 2017). But the financial ratios are not full-proof as they are subjected to the following limitations –
Telstra might make some year-end change in its financial statement to look at the financial figures impressing as part of window dressing measurers.
The financial ratios do not abide by the inflation as it considers the historical costs keeping aside the future value of the figures (Hopper & Bui, 2016).
The financial ratios avoid the qualitative aspect of the organisation upholding the financials only.
The financial ratios do not tend to solve the financial issues of Telstra rather provide vague guidance (Messner, 2016).
There are certain rules and regulations in finance that could be exploited by the organisations for working out its financial ratios giving an incorrect assumption.
So, it is seen that though the financial ratios enable to have the investment decision it is not devoid of any flaws, any sort of decision would be made keeping in mind the above factors as well.
In the 21st century, financial reporting is not the ultimate say in reporting as the organisations have to abide by the sustainability factors as well. So the following aspects need to be reported to show the sustainability measures undertaken by Telstra –
The following measures could be rightly attributed as fair ethical practices undertaken by Telstra:
The report concludes the fact that Telstra is quite strong in its financials making it a suitable investment proposition. Be its profitability, liquidity or solvency, all the elements are likely to give the telecom company a fillip to enhance its proposition in the upcoming days making it investment-worthy. But the decision is based on financial ratios which are worked out based on historical data. So the potential investor needs to be aware of such facts. It is seen that Telstra lays down a helping hand in having an ethical business scenario focusing on the aspects of responsible business, digital innovations and environmental solutions. So, from each avenue, Telstra is a wise investment proposition giving the impression of having a sustainable future in commercial terms.
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Edwards, A., Schwab, C. & Shevlin, T., 2015. Financial constraints and cash tax savings. The Accounting Review, 91(3), pp. 859-881.
Granlund, M. & Lukka, K., 2017. Investigating highly established research paradigms: Reviving contextuality in contingency theory based management accounting research. Critical Perspectives on Accounting, 45(2), pp. 63-80.
Hopper, T. & Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research, 31(5), pp. 10-30.
Ikerd, J., 2012. The essentials of economic sustainability. CT ed. Bloomfield: Kumarian Press.
Jänicke, M., 2012. “Green growth”: From a growing eco-industry to economic sustainability. Energy Policy, 48(2), pp. 13-21.
Maynard, J., 2017. Financial accounting, reporting, and analysis. London: Oxford University Press.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting practice. Management Accounting Research, 31(12), pp. 103-111.
Telstra Exchange, 2020. Sustainability Report 2019 | Telstra Exchange. [Online]
Available at: https://exchange.telstra.com.au/sustainability/
[Accessed 13 May 2020].
Vaughan, D., 2011. The importance of capabilities in the sustainability of information and communications technology programs: the case of remote Indigenous Australian communities. Ethics and Information Technology, 13(2), pp. 131-150.
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