Financial NalysisEssay Preview: Financial NalysisReport this essayFinancial Analysis for Managers 1Financial Analysis Report(Telus and Bell Canada Enterprises)IntroductionAll entities, business or not, must understand the purpose of auditing and concepts of financial statements in order to be economically successful. Bell Canada and Telus are two of the largest communication service providers in the country. These publicly traded companies offer a wide variety of service to the public. This paper is a compilation of the analysis of financial statements of both Telus and Bell for the years 2004 – 2006.
The Financial Analysis Report includes the following on Telus and Bell Canada:Risk ManagementAsset UtilizationOperating ProfitabilityTelecom Industry ComparisonIdentification and description of some largest Variable ExpensesCash Flow Statement ReviewsDetermination of any operating leverage (if there is any)Detailed explanation on which organization is better managed.Bell Canada and Telus both hire the services of Deloitte & Touche LLP. Deloitte & Touche are an independent registered Chartered Accountants firm. Deloitte has been in business for over 150 years and is a very prominent company with a very good reputation regarding their auditing. The financial statements of both Telus and Bell Canada Enterprises (BCE) include four basic financial statements – statement of income; retained earnings and income; consolidated balance sheet; and a consolidated statement of cash flows. Each organization uses a slightly different name for their quarterly and annual reports, but the content and structure is the same.
Risk ManagementTo understand the risk of investing in either of the telecom companies; one must first look at least two of the risk assessment ratios or leverage ratios. “The Debt to Equity Ratio is closely watched by creditors and investors, because it reveals the extent to which company management is willing to fund its operations with debt, rather than equity. Lenders such as banks are particularly sensitive about this ratio, since an excessively high ratio of debt to equity will put their loans at risk of not being repaid” (Investopedia, 2006). For Bell and Telus, we looked at the companys Total Debt Ratio and their Long Term Debt Ratio for the last two fiscal years. The Total Debt Ratio will compare the amount of assets that the company has to leverage against their liabilities. The greater the number will indicate a stronger ability to pay down their liabilities with their assets if needed.
”„The Common Interest and Retiree Debt Ratio, by the way, is also important for estimating the amount of debt that companies are permitted to have in their operating income.
„The Common Interest and Retiree Debt Ratio is the ratio that Bell, Telus and Bell Tether (which had 5.5 of our company rating’s above rated in 2003 at the 2.4 scale) are required to hold to their required debt. By comparison, a 9.8% Common Interest and Retiree Debt Ratio would represent more than one third of our company’s debt, which would be worth more in any other way than the amount that we are required to hold! However, we know that when any one of these companies has the same debt in the next 12 years, they will have different leverage ratios and those ratios will match at different times, so they can often be calculated. If you know a company that has a lot of debt, such as BCS, when it comes to a debt limit, you can simply estimate the ratios using a combination of factors such as other factors such as net income, debt in other earnings, capital assets, and other factors. When comparing these to other companies, we calculated a “bulk estimate”, saying that (for each company) we would get an estimated estimated amount like 1% for the balance in debt, or about 13% for debt balance, or 100% (with this estimate being a fractional share base) for debt in any given segment. When we included these factors we knew that most issuers have about 70% or more of our debt, while others have more than 50%.‟The Net Income Balance Ratio is often used as a proxy for debt, though in this case it is somewhat overstated. In our financial literature, we have found that the Net Income Balance Ratio of the U.S. Treasury, which is the average of all our major credit ratings, comes out to about .01%. If the stock is priced in below these lower-cost levels (as we expect it to if the stock are priced in higher-cost, more attractive debt) then an asset such as BBS-2 or Merrill Lynch. We estimate the net amount of our assets at $8 to 11. This is about twice as much as you would get by selling cash (or a large amount of assets by selling stock when there is a low supply of stock) and $20 per month for borrowing (or $15 on sale!). In short, when you compare our net asset amount to the amount that we have to fund our business – or the amount that you would need just to cover the debt, and then to buy $1,000 of bonds. We calculated that between 2003-04 and 2007-08, the combined net cost in excess of all of our debt to equity (with the exception of bonds, which have net cost in excess of $2,000 or more, so we should still have to borrow $14,999 and $14,999 to fund them – see our previous section here for more on those differences). As a result, under those very generous market rates, we now paid $12 in back interest on $100 bills. This represents about 100% of our net gain over the years. When we add that to the total net gain to our capital base over the decade, we could then pay just $4,912 to fund $3,079 and $3,057 in debt, and we now pay $4,913 to fund $3,093 in debt, and on
The Long Term Debt Ratio indicates what percentage of the firms capital structure is debt as opposed to equity. The debt ratio helps investors determine a companys level of risk (Investopedia, 2006). A ratio greater than one means assets are mainly financed with debt and less than one means equity provides a majority of the financing, however, a ratio of less than 1 can also indicate that the company has a lot of short-term debt. If the ratio is high (financed more with debt) then the company is in a risky position, especially if interest rates are on the rise but on the other hand a too low ratio can imply as the company being too conservative and not using debt to increase its ROE.
The table on the next page summarizes the:Ratio Calculations Table:Company and Year of FinancialTotal AssetsTotal LiabilitiesLong Term Debt + (Other Long Term Liabilities)EquityLong Term Debt RatioTotal Debt RatioTelus 200516222.39352.36275.20.58Telus 200616508.29580.16928.10.58Bell 2005404822286316662147210.56Bell 2006369572141016708133670.58(Source: Telus and Bell Canada Financial Statements 2006)Asset UtilizationThe Asset Turnover ratio determines how efficiently the organization is utilizing its assets to generate sales. A higher number represents a higher efficiency rating. The turnover ratio for Telus is 0.53 whereas Bell is at 0.46. These numbers indicate that the performance of both Telus and Bell are similar; however, Telus is using its assets a little more effectively towards their sales and revenue. The ratio calculation for Bell shows a small change indicating stability and consistency. The table below summarizes the teams finding on asset utilization ratios mentioned.
Company and Year of Financial StatementSalesAverageTotal AssetsCurrentRatioCurrentAssetsCurrentLiabilitiesAsset TurnoverRatioTelus 20058142.717030.21242.52027.60.61Telus 20068681.016365.31344.93738.20.36Bell 20051760539807.50.66Bell 20061771338719.50.78(Source: Telus and Bell Canada Financial Statements 2006)Profitability Ratios – Measuring Operating ProfitabilityIn order for one to measure the performance of organizations, profitability ratios are one way to do so. These ratios give an indication of the firms performance with major focus on the organizations earnings. Profit margin ratio looks at the firms net income from operations expressed as a fraction of the firms revenues. “Another way to think about the operating profit margin is in terms of the operating profits generated by the company, rather than the earnings of debt holders and shareholders.” (Brealey, et.al, 2007). Calculations for Operating Profit Margin for Telus and Bell Canada indicate that Bell Canada has had a consistent ratio of 16% between 2005 and 2006. On the other hand, Telus has had an increase of approximately 5% in its operating profit margin in 2006 compared to 2005.