ACF5903 Assignment 2

Putu Calista Gitta Kalyana (27284530)

1. Introduction
TPG Telecom Limited is a company operating in telecommunication services in Australia. This report aims
to evaluate the performance of the company, particularly in how well the company generates profit by using
its assets. Three financial ratios are used to determine the company’s performance: ROA, net profit margin
ratio, and asset turnover ratio. The company will be rated on a scale of 1 to 10 (10 = excellent, 5 =
satisfactory, 1 = very unsatisfactory).
2. Choices of Accounting Policies
a) Basis of measurement
The financial statements of TPG Telecom Limited are accounted on the historical cost basis except
asset and liabilities acquired through business combinations and financial instruments which are
measured at fair value. There is no change on this measurement basis in the financial year of 2013
to 2015.

b) Business combination policy

The accounting policy of business combination changed after 1 July 2009. After 2009, goodwill is
measured at the acquisition date as the fair value of the consideration transferred plus the recognised
amount of any non-controlling interests in the acquiree. The cost regarding business combination
is expensed as incurred. Meanwhile, before 2009 goodwill is measured as the excess of the cost of
the acquisition over the Group’s interest in the amounts of identifiable assets and liabilities of the
acquiree. Transaction cost regarding business combinations were amounted as part of cost
acquisition.

c) Foreign currency transactions

Transaction, as well as the asset and liabilities of foreign operations, in foreign currencies are
converted at the foreign exchange rate at the date of the transaction. The differences resulted in
conversion are included in the income statement. This would affect the income statement as can be
seen in 2015 when the employment cost of consumer segment increased significantly as the result
of decline in the value of Australian dollar relative to the Philippine peso. There is no change in
this policy between financial year of 2013 to 2015.

d) Segment Reporting
As the consequence of AAPT acquisition in 2014, the company added revenue from AAPT as a
separate operating segment. Later in 2015 report, the AAPT revenue was included within the
corporate segment.

e) Depreciation
Depreciation is measured by straight-line basis over the estimated useful lives of each part of an
item of property, plant, and equipment. The residual value, the useful life, and depreciation method
are reassessed at least annually.
The estimated useful lives of the assets are provided below:
  Network infrastructure : 3 – 25 years (in 2013 was 2.5 – 25 years)
 Buildings : 40 years
 Leasehold improvements : 8 years

f) Amortisation
Amortisation is measured by straight-line basis unless otherwise stated. Goodwill and intangible
assets with an indefinite useful life are tested for impairment at each balance sheet date. The
estimated useful lives of the assets are provided below:
 Goodwill : indefinite life
 Trademark : indefinite life
 Internally generated software : 2 – 20 years (at 2013 was 5 years)
 Indefeasible rights of use (IRU) of capacity: amortised over the life of the IRU
 Licenses : amortised over the term of the license
 Acquired customer bases : amortised on a reducing balance basis in line
with the expected economic benefits to be derived

3. Financial Ratio Analyses

Table 1 Financial Ratio of TPG Telecom Limited obtained from Morningstar Database

Net Profit Margin Asset Turnover

Financial year ROA (%) Ratio (%) Ratio (times)
2013 15.59 12.59 0.73
2014 11.88 17.68 0.64
2015 14.44 17.64 0.77

ROA
ROA is a percentage of Earnings Before Interest and Tax (EBIT) divided by Total Asset. This ratio reflects
the entity’s ability to convert sales revenue into profit and the entity’s ability to generate income from its
asset investments. It should be considered that the data provided by Morningstar calculated differently from
the conventional formula. The ROA formula operated in Morningstar calculation is [Net Income + Interest
Expense*(1-Corporate Tax Rate)]/[Total Assets - Outside Equity Interests]. Calculating with the common
ROA formula, the results are as below:
Table 2 Return on Asset (ROA) Ratio of TPG Telecom Limited obtained from conventional formula

2013 2014 2015

ROA (%) 22.38 20.40 21.56

The number of ROA calculated by conventional formula is different, yet the trend of ROA movement is
the same. It can be seen from Table 1 and Table 2 that ROA for financial year of 2015 increased relative to
financial year of 2014. This increment was due to increase by 32% in the numerator (EBIT) (from $255.88
million in 2014 to $338.8 million in 2015). EBIT rose because the revenue increased significantly compared
to the previous year.
The contrary happened in financial year of 2014, while the ROA decreased compared to financial year of
2013. Although the EBIT in 2014 was also increased (from $219.25 million in 2013 to $255.88 million in
2014), the increase is only 17% which is not significant compared to the average asset which keeps
improved. The slight growth of EBIT in 2014 was driven by the acquisition of AAPT which did increase
not only revenue but also caused significant increase in operating costs and employment costs.

Net Profit Margin Ratio

Net profit margin ratio is a percentage of net profit after deducting all of expenses, tax and interest divided
by sales revenue. This ratio reflects the proportion of sales revenue that results in the net profit.
Table 1 shows that the net profit margin was declined from 2013 to 2015. The drastic fall of net profit
margin ratio happened in 2014 as respective of 2013. The net profit margin ratio reduced from 20.59% in
2013 to only 17.68% in 2014 in contrast to the decline from net profit margin ratio in 2014 (17.68%) to net
profit margin ratio in 2015 (17.68%).
The decline was due to greater increment in denominator (sales revenue) compared to the increment in
numerator (net profit). The significant increase in the sales revenue of 2014 was the result of the acquisition
of AAPT. The AAPT revenue of $164.8m was for the five-month period post acquisition (1 March 2014 to
31 July 2014). The AAPT revenue contributed 17% of the total sales revenue in 2014. This increase in
sales revenue nevertheless was also compensated by the increase in expense. In 2014, highest expense was
from the employment cost which was the result of acquisition of AAPT.
Another thing that would affect the net profit margin ratio is the amount of depreciation. The depreciation
of 2014 also increased significantly due to acquisition of AAPT. In 2014, TPG’s depreciation expense
increased by $22.7m of which $21.5m was attributable to AAPT. It can be noted that the AAPT’s
depreciation expense far surpasses its current capital expenditure ($11.2m).
Asset Turnover Ratio
Asset turnover ratio is the ratio of sales revenue divided by average total assets. This ratio reflects the
effectiveness of entity’s investment of current and non-current assets in generating sales revenue. It should
be noted that the asset turnover ratio obtained from Morningstar database is calculated by dividing sales
revenue with the total asset at the end of period. The asset turnover ratio calculated by conventional formula
which is dividing sales revenue with the average of total assets give results as below:
Table 3 Asset Turnover Ratio of TPG Telecom Limited obtained from conventional formula

2013 2014 2015

Asset turnover ratio 0.74 0.77 0.81
(times

Table 1 shows that from 2013 to 2014 the asset turnover ratio decreased and from 2014 to 2015 the asset
turnover ratio increased slightly, while in the common formula the ratio rose from 2013 to 2015. The
explanation of this condition lies behind the discrepancy in the calculation of the asset. As mentioned
earlier, AAPT acquisition occurred in 2014. This event causes upsurge in property, plant & equipment value
(added $240.9m) as well as the intangible assets (added $157.6m). Although the acquisition also increased
the revenue, the increment has not been significant compared to the increment of total asset at the end of
the period. Since Morningstar used the total asset at the end of period which is obviously higher than the
average of total asset, the ratio in Morningstar would be smaller than the conventional calculation. In 2015,
the ratio in both calculations increased relative to 2014. The value exceeds the ratio in 2013 and 2014. This
was due to the considerable improvement of revenue in 2015, mainly contributed by corporate sector. The
growth in 2015 can be regarded as an indication that investing in acquisition of AAPT is effective in
increasing revenue.
4. Performance Evaluation
One method to evaluate company performance is by taking the performance of previous financial year as a
benchmark. Even though there was decline in financial ratios, particularly in 2014 where there was sharp
drop in ROA and net profit margin ratio, TPG can be regarded as still being able to maintain its performance
as its ROA successfully bounced back in 2015. The asset turnover ratio was also increasing each year
signifying that the company’s asset efficiency is highly satisfying. The only shortcoming in the financial
ratio of TPG is the net profit margin ratio. Low net profit margin ratio reflects the difficulties of the company
to generate considerable profit. However, it is understandable that there will be necessary adjustment as an
effect of acquisition of AAPT. From comparing all the ratio with previous year performance as the
benchmark, it can be assumed that the company has been able to manage the asset to generate revenue well
but still need to improve the ability to generate profit from the growing revenue. For this evaluation the rate
will be 8 out of 10 scale.
Conclusion
TPG Telecom Limited has an excellent performance in generating profit by using its asset. This was
indicated by the ROA that even though declined in 2014 remains to be able to bounce back to the
approximate value of the initial ROA. The asset turnover ratio demonstrates the most satisfying
performance in generating revenue using its asset. However, most of the revenue are still not producing
sufficient profit as indicated by net profit margin ratio which declined each year.
Appendix