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Profit and loss at Telstra

Published annual reports are becoming more reader friendly. Interpreting and analysing financial statements is something you can learn to do.

Outcomes
Brief overview of profit and loss at Telstra
Revision
More

HSC Topic 2: Financial Planning and Management is covered in the Board of Studies NSW Syllabus (June 1999). The specific outcomes for this section are:

Outcomes

H4.2 evaluates management strategies in response to internal and external factors
H5.1 selects, organises and evaluates information and sources for usefulness and reliability
H5.2 plans and conducts an investigation into business to present the findings in an appropriate business format
H5.4 applies mathematical concepts appropriately in business situations

Overview of profit and loss at Telstra

The majority of people living in Australia are stakeholders in Telstra. For years Telstra has been one of Australia’s largest and most continually profitable businesses. Currently more than two million Australians are Telstra shareholders and so have a direct financial interest in the profitability of the organisation.

Since 1991 significant structural and financial changes have taken place at Telstra, mostly in response to the external factors of deregulation, increasing competition and advancing technology.

In the 1991/92 financial year Telstra recorded an after tax net profit of $313.5 million ($313,500,000) on revenue of $12.2 billion ($12,200,000,000). That is a net profit ratio of 2.58 per cent which is extremely sub standard by today’s standards.

1991/1992 financial year
Total revenue	Net profit	Net profit ratio
$ 12,200,000,000	$313,500,000	.0258 :1 or 0258 %

For the staff, and the outside world, things were fine in 1991. Telstra was churning a strong and steady profit as the company always had. Telstra was in a good position. As the only Australian telephone company it had the market completely to itself. It had limited opportunities to grow, but then again, it was not faced with any major threats. There was no real reason to worry too much about controlling expenses or accounting to individual shareholders.

In 1992, the government allowed Optus and Vodaphone to compete in the then small and not so important mobile phone market. By 1997 the entire telephone market was deregulated. New innovative and aggressive competitors appeared including One Tel, AAPT, Sausage Software, Solutions Six and Davenet.

During the late 1990s mobile phones and the Internet became part of everyday life. Rather quickly the opportunities for Telstra became global in scope, but the company faced competition on all fronts.

Telstra had to respond. It dramatically cut expenses and improved its net profit and its net profit ratio. The extent of how significantly Telstra did cut expenses is reflected in the following graphs. These figures are extracted from half yearly profit and loss statements of past years.

The graphs below essentially tell an analyst that:

total revenue is continuing to rise, although at a slower rate than in previous years
net profit is also rising, at a faster rate than total revenue
the business has become financially more efficient during the past decade.

Telstra revenue column graph

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Revision

Based on the information in the previous section calculate Telstra’s ratio of expenses to revenue for the following periods.
1991/1992 financial year 97.42 : 1 or 97.42 %
1. 6 months to Dec 1997 ___________________
2. 6 months to Dec 1998 ___________________
3. 6 months to Dec 1999 ___________________
Now calculate Telstra’s net profit ratio for the same time periods.
1991/1992 financial year 2.58 : 1 or 2.58%
1. 6 months to Dec 1997 ___________________
2. 6 months to Dec 1998 ___________________
3. months to Dec 1999 ___________________
Based on what you know about the telecommunications industry, estimate revenue and expense figures for Telstra for the six months period to December 2000. Discuss your revenue and expense forecast in about 150 words.

Go beyond the basics presented here. Visit the Telstra web site . Examine the profit and loss statement, the balance sheet and the statement of cash flows. Read the notes accompanying each of the three statements. List the trends that you can identify.
Management in Australia, published in 1999 by Lansdowne Publishing is an outstanding source for background information on the massive restructuring process that took place during the 1990s at Westpac and Telstra. Half of one chapter explains, in non-technical language, some of the reasons for the financial changes that occurred during that decade. This book provides case study information that you can use throughout the course.

Study hint

Public companies continue to make the financial sections of their annual reports more reader friendly. Read them to find out more about the financial strategies managers are currently using, and then, refer to those strategies when writing responses to exam and assessment questions on financial management.

Take a few minutes to investigate web sites and financial statements of public companies. After reviewing the Telstra web site, visit the BHP web site .