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Telstra Corporation’s Profitability and Liquidity

An assessment of the Telstra Corporation’s profitability, and short-term and long-term Liquidity.

1.Introduction

All company accounts are prepared in accordance with the various accounting laws and regulations, and are designed for a wide audience. Therefore, to obtain data for specific purposes it is frequently necessary to submit the numbers to specific analysis. Following is an analysis of the Telstra Corporation's year 2000 and 2001 financial statements. This analysis is intended to, through the calculation of ratios, assess the short-term and long-term liquidity, in addition to the profitability of the Telstra Corporation.

2.Short-term Liquidity

Short-term liquidity is the ability of the company to meet its short-term financial commitments. Short-term liquidity ratios measure the relationship between current liabilities and current assets. This helps us measure the Telstra Corporation's ability to sell inventory, to collect receivables and to pay current liabilities. Following is the Current Ratio, the Quick Asset Ratio, the Stock Turnover Rate and the Debtors' Turnover Rate. These measures are concentrated upon the current assets and current liabilities to asses the Telstra Corporation's ability to meet their financial commitments as they become due.

2.1Current Ratio

For the 2001 financial year, the Telstra Corporation had $m6253 in total current assets and $m9279 in total current liabilities. This gives the company $0.68 for ever dollar of current liabilities. This could be seen as an unsafe situation, but by looking into the 2000 financial year Statement of Financial Position, it can be ascertained that the company had $0.52 for ever dollar of current liabilities. That is $m4889 in total current assets and $m9421 in total current liabilities. This shows that the Telstra Corporation increased its ability to pay debts as they became due by $0.16. (The Telstra Corporation Limited, 2001)

2.2Quick Asset Ratio

The Quick Asset Test is a stringent test that indicates if a firm has enough short-term assets, without selling inventory, to cover its immediate liabilities. It is similar but a more strenuous version of the Current Ratio or "Working Capital", indicating whether the company's liabilities could be paid without selling inventory.

Using the same figures as above minus the inventories for both years gives the Telstra Corporation an "acid test ratio' of 0.64:1 for the 2001 financial year and 0.40:1 for the 2000 financial year. These values are derived from subtracting the inventories of $m320 and $m295 for the 2001 and 2000 financial years respectively.

This ratio shows a difference of $0.24 between the financial years of 2001 and 2000, again...

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