Cash Flow Essay: Rio Tinto, Woolworths, And Telstra.

Select three companies listed (above) on the ASX, each one from a different industry, metals and mining, telecommunication services, and consumer staples. 

1. Compare their Statements of Cash Flows and provide a brief report on your findings relating to the major categories of operating activities, investing activities and financing activities. 

2. Explain the differences between the direct and indirect methods of presenting cash flows from operation activities and provide a brief report on which methods are employed on your selected 3 companies.

Read the following article (attached to the Assignment): Carslaw, C & Mills, J 1991, 'Developing Ratios for Effective Cash Flow Statement Analysis', Journal of Accountancy, vol. 172, no. 5, November, pp. 63-70. 

Carslaw and Mills group cash flow ratios into four categories as follows: (1) cash return (2) quality of earnings (3) solvency (4) capital expenditure commitments. 

1. Employing 'Carslaw and Mills' ratios analysis approach, calculate the ratios for each of your 3 companies and write a report evaluating their performance over two years and comparing them with each other. 

2. Choose one company out of the three which uses a different ratio analysis approach from the Carslaw and Mills' approach in its Annual Report. Compare the Annual Report ratios with the ones you have calculated using Carslaw and Mills' approach. 

3. Does the Company's method of ratio analysis give a different impression of its performance? Discuss the advantages and disadvantages of the two different approaches for the company's management group and for their shareholders.

You have to select one company from the 3 selected companies in Question 1 and work on this company in Question 2 Part A and B. You have to choose from the same companies as you selected in Question 1.

Based on the information provided in the company's Annual Report for Financial Year 2017, you have to answer the following sub-questions. 

1) How many independent directors are there?

2) What is the number of directors of each gender?

3) Qualifications of three directors. Also provide your opinion of the advantages of these qualifications.

4) Provide a summary of the experience of these three directors and your opinion of the advantages of this experience. 5) Are these 3 directors on other boards and if so, what kind?

As an in-house accountant of the selected company, you were asked to prepare a report to be used in its annual general meeting. 

. The report needs to discuss the following matters using the information found in the company's annual report for 2017 and the past years if necessary. 

1) The current profitability level of the company, and how stable its profitability level has been for the past several years. 

2) How its dividend payments have been, and how has the company's equity been growing in the recent years? 

3) Is the company recognising any opportunity for future growth (e.g., new business segments and/or new services)? 

4) Is the company recognising any challenge in the current business activities (e.g., the rise of competitors)?

Operating Activities of Rio Tinto, Woolworths, and Telstra

Cash flows from operating activities:  

In case of Rio Tinto the major category of cash flows in operating activities include cash from consolidated operations, dividend received from equity accounted units, interest payment, dividend paid to holders of non-controlling interests and payment of tax. In 2017 the company collected cash of $16,670 million from consolidated operations and received dividend from equity accounted units of $817 million. Net interest paid is $897 million with payment of dividend to holders of non-controlling interests of $399 million. The company also paid tax of $2,307 million in 2017 (Gordon et. al. 2017).      

Woolworths Group on the other hand reported cash receipts of $65,498.9 million from customers along with payment of $61,474.8 million to suppliers and employees of the company in 2017. $234 million and $668.1 million were paid as interest and taxes respectively also reported under operating activities of the company (Penman and Yehuda, 2015).

In 2017 Telstra reported $7,775 million as net cash generated from operating activities. The operating activities cash inflows and outflows for the company include receipts of $31,288 from customers; payment of $21,997 million to the suppliers and employees of the company; revenue grants received by the company is $235 million and income tax paid $1,751 million.  

In investing activities an organization generally shows the amount of cash paid to acquire any assets and receipts of interest from investments of the company. The cash flow statement of Rio Tinto has disclosed that $2,373 million of net cash has been used in investing activities in 2017.The company has purchased property, plant and equipment (PPE) worth $4,482 million and financial assets of $723 million (Harris, 2016). Major cash inflow from investing activities of the company include $disposal of subsidiaries and joint ventures for $2,675 million and sale of property, plant and equipment of $138 million in 2017.

Woolworths Limited has disclosed that it has received $279.8 million from sale of PPE in 2017 and $200.7 million from sale of subsidiaries and investments. The company has invested $253.2 million for development of PPE and $1,633.6 million for acquisition of PPE. Small payments of $23 million has been made for acquiring intangible assets (Campbell, 2015).

Telstra in 2017 has invested $5,321 million for capital expenditures, i.e. acquisition of PPE and intangible assets. The company has also made a cash payment of $63 million and $76 million for acquiring business interests and other investments respectively.

Cash flow statements of Rio Tinto shows that the company has used net cash of $9,141 million on financing activities that includes payment equity dividend to the shareholders of the company $4,250 million and $2,795 million as repayment of borrowings. Also the company has used $2,083 million for buy back of its own shares (Weber, 2018).

Woolworths Limited in its cash flow statement has reported that the company has used net cash of $1,729.3 million in 2017 out of which $1,406.5 million for repayment of borrowings and $540.9 million for payment of dividend. The company has also received $184.1 million as borrowings in 2017.

Investing Activities of Rio Tinto, Woolworths, and Telstra

Telstra in 2017 has used net cash of $6,104 million in financing activities. Again most the cash used is for repayment of borrowings of $4,571 million and payment of dividend $3,736 million with $1,502 million being used for buy back of shares. The company has also collected $4,710 million from borrowings in 2017 (Hribar and Yehuda, 2015).

In direct method the cash flows, both receipts and payments from operating activities are directly shown under different heads such as cash collected from customer and cash paid to suppliers etc. Indirect method on the other hand uses addition and subtraction method by taking net income from income statement to determine the net cash flow from operating activities (Fazzini, 2018).

All the three companies, i.e. Rio Tinto, Woolworths Limited and Telstra Corporations have used direct method to present their cash flow statements. It important to note that the only difference in cash flow statements between direct and indirect method of presentation is in cash flow from operating activities. Thus, the other two major types of cash activities are not affected by the direct or indirect method of cash flow presentation (Papanastasopoulos, 2018).

Cash return (Cash flow before tax x 100/ Equity invested)
Companies	Rio Tinto	Woolworths	Telstra
Cash flow before tax 2017 (Net cash from operatoons before tax)	16,191.00	3,790.10	9,526.00
Average equity (opening equity + closing equity) /2
Openng equity	45,730.00	8,781.90	15,907.00
Closing equity	51,150.00	8,976.10	14,560.00
Opening plus closing equity	96,880.00	17,758.00	30,467.00
Average equity (opening equity + closing equity) /2	48,440.00	8,879.00	15,233.50
Cash return (Cash flow before tax x 100/ Equity invested)	33.42%	42.69%	62.53%

Out of the three companies cash return is highest for Telstra as can be seen in the above table with 62.53% followed by 42.69% for Woolworths Limited and 33.42% of Rio Tinto (Pappa, 2015).

Quality of earnings ratio (Cash flow from operations / Net income)
Companies	Rio Tinto	Woolworths	Telstra
Cash flow from operations	13,884.00	3,122.00	9,526.00
Net income	8,851.00	1,482.00	3,874.00
Quality of earnings ratio (Cash flow from operations / Net income)  Times	1.57	2.11	2.46

As can be seen in the table above that the quality of earnings of Telstra is 2.46 times which is by far the most out of three selected companies. Woolworths Limited’s quality of earnings ratio with 2.11 times is also very good. Rio Tinto has 1.57 times of quality of earnings ratio which is also quite good as anything greater than 1 for the ratio is considered good for an organization (Dalnial et. al. 2014).

Solvency ratio {(net income + Depreciation) / all liabilities}
Companies	Rio Tinto	Woolworths	Telstra
Net income	8,851.00	1,482.00	3,874.00
Add: Depreciation	4,375.00	1,037.60	4,441.00
	13,226.00	2,519.60	8,315.00
All liabilities	44,611.00	13,039.70	27,573.00
Solvency ratio {(net income + Depreciation) / all liabilities}	29.65%	19.32%	30.16%

Again Telstra has highest solvency ratio with 30.16% followed by 29.65% of Rio Tinto and 19.32% of Woolworths Limited. It is clear that the ability of Telstra to discharge its obligations is better than other two companies (Phillips, 2016).

Capital expenditure commitment (cash flow from operations / Capital expenditures)
Companies	Rio Tinto	Woolworths	Telstra
Cash flow from operations	13,884.00	3,122.00	9,526.00
Capital expenditures:
Purchased of PPE	4,482.00	1,886.80	3,725.00
Purchase of financial assets	723.00
Purchase of intangible assets		23.00	1,596.00
Capital expenditures	5,205.00	1,909.80	5,321.00
Capital expenditure commitment (cash flow from operations / Capital expenditures) Times	2.67	1.63	1.79

Capital expenditure commitment of Rio Tinto with 2.67 times is highest out of the three companies selected suggest that the ability of Rio Tinto to discharge its capital obligation. Telstra Corporation has a capital commitment expenditure of 1.79 times followed by Woolworths Limited of 1.63 times (Kaur, Aggarwal and Gupta, 2017).  

Ratios as provided in Annual Report 2017 of Telstra Corporations are provided in the table below.

Telstra
All amounts are in $ million
	2016-06	2017-06
Revenue	25,834	25,912
Gross Margin %	71.9	57.7
Operating Income AUD Mil	7,110	2,067
Operating Margin %	27.5	8
Net Income AUD Mil	5,780	3,891
Revenue	100	100
COGS	28.05	42.29
Gross Margin	71.95	57.71
Rate of tax	31.57	31.4
Net margin	22.37	15.02
Asset turnover ratio	0.62	0.61
Return on Assets	13.81	9.11
Interest Coverage ratio	8.04	8.75
Current Ratio	1.02	0.86
Quick Ratio	0.9	0.7
Debt/Equity	0.92	1.02

From the above ratios it is clear that the emphasis in ratio calculations in annual report of the company was more on profitability, liquidity and solvency position of the company. In contrast Carslaw and Millis emphasized on the importance of developing ratios taking into consideration of cash flow statements and income statement of an organization. Thus, the emphasis was equally divided in cash flow statement and income statement. Thus, obviously there is significant difference between the ratios calculated in this document as per Carslaw and Mills journal on developing ratios for effective cash flow statement analysis (Mohanram, Saiy and Vyas, 2018).

Financing Activities Rio Tinto, Woolworths, and Telstra

The ratios calculated in the annual report shows the profitability, liquidity and solvency position of the company whereas the ratios calculated in this document is more on the quality of earnings, cash return and ability of the company to generate cash from business operations  (Lin et. al. 2015).         

In order to complete this part of the document Telstra Corporation has been chosen.

Telstra Corporation as per the annual report 2017 has 9 non-executive or independent directors.

The company has 9 female and 13 male directors in total. It is a quite a diverse board both as per the gender equality and presence of independence directors.

John P Mullen: Mr Mullen is a non-executive director of the company since July, 2008 with extensive experience and knowledge of international transportation. His experience helped the company to achieve better operational efficiency in managing the resources of the company.   

Andrew Penn: Andre Penn’s career span over 30 years in Executive position of number of multi-nationals before joining Telstra. His experience and managerial skill has helped the company to expand its business over the years.  

Joe Pollard: With extensive knowledge in legal services Joe Pollard and his department provides legal services to Telstra Group.

John P Mullen in total has 33 years of experience, i.e. 25 years’ experience in different companies before appointed as non-executive director of Telstra in 2008. Andrew Penn as already explained has in total 30 years of experience. Joe Pollard has experience of more than 25 years.  

No, none of the three directors are on any other Board except Telstra Corporation.

Telstra Corporation is one of the foremost companies in all across the globe when it comes to Telecommunication industry. The financial performance and position of the company are of significant interests of all its stakeholders. The annual report 2017 of the company contains the financial statements of 2017 with corresponding figures of 2016. Taking into consideration the information provided in the annual report of the company a brief discussion on the financial performance, position, growth in equity and expected future growth is made here.

The income statement of the company reflects the ability of the company to generate revenue and profits over the years. In 2014 the company’s revenue was $25,119 million that increased to $25,912 million in 2017. The net income from continuing operations of the company however, over the years have decreased. In 2014 the company earned net income of $4,549 million. In the next year it reduced to $4,286 million and $3,832 million in 2016. However, in 2017 the company has been to reverse the declining trend in profitability slightly by earning a net income from continuing operations of $3,874 million. Thus, it would not be incorrect to state that the profit of the company has not been stable over the years.   

The company has been regular when it comes to payment of dividend to the equity shareholders of the company. In fact each year the quantum of dividend has increased. In 2014 the company paid a dividend of $3,567 million that has increased to $3,736 million by the end of 2017. As a result the shareholders’ equity has also grown year after year. In 2017 the shareholders’ equity stands at $14,541 million whereas it was merely $13,822 million in 2014.

Each year the company invests significant amount of cash on investment activities to expand its business operations. Purchase of plant, property and equipment along with acquisition has always been a strategy of the company to grow its business. In 2017 the company has used a net amount of $4,279 million on investing activities.     

The company has continued with its strategy of providing top quality services to the customers at relatively low prices. There has been no significant changes in its strategy but the company certainly recognizes the challenge of rising competition in the market and hence, always looking to improve its services.

References: 

Campbell, J.L., 2015. The fair value of cash flow hedges, future profitability, and stock returns. Contemporary Accounting Research, 32(1), pp.243-279.

Dalnial, H., Kamaluddin, A., Sanusi, Z.M. and Khairuddin, K.S., 2014. Detecting fraudulent financial reporting through financial statement analysis. Journal of Advanced Management Science, 2(1).

Fazzini, M., 2018. Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave Macmillan, Cham.

Gordon, E.A., Henry, E., Jorgensen, B.N. and Linthicum, C.L., 2017. Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2), pp.839-872. [Online] Available at: https://link.springer.com/article/10.1007/s11142-017-9387-1 [Accessed 20 September 2018]

Harris, P., 2016. A Case Study Of The Cash Flow Statement: US GAAP Conversion To IFRS. Journal of Business Case Studies (Online), 12(1), p.1.

Hribar, P. and Yehuda, N., 2015. The mispricing of cash flows and accruals at different life?cycle stages. Contemporary Accounting Research, 32(3), pp.1053-1072.

Kaur, M., Aggarwal, N. and Gupta, M., 2017. An Investigation into Returns from Financial Statement Analysis among High Book-to-Market Stocks. Indian Journal of Economics and Development, 13(2), pp.353-358.

Lin, C.C., Chiu, A.A., Huang, S.Y. and Yen, D.C., 2015. Detecting the financial statement fraud: The analysis of the differences between data mining techniques and experts’ judgments. Knowledge-Based Systems, 89, pp.459-470.

Mohanram, P., Saiy, S. and Vyas, D., 2018. Fundamental analysis of banks: the use of financial statement information to screen winners from losers. Review of Accounting Studies, 23(1), pp.200-233. [Online] Available at https://link.springer.com/article/10.1007/s11142-017-9430-2 [Accessed 20 September 2018]

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Penman, S.H. and Yehuda, N., 2015. A matter of principle: Accounting reports convey both cash-flow news and discount-rate news. [Online] Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407127 [Accessed 20 September 2018]

Phillips, F., 2016. Withholding Financial Statement Analysis Formulas When Instructing and Testing: A Desirable Difficulty. [Online] Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2835694 [Accessed 20 September 2018]

Weber, M., 2018. Cash flow duration and the term structure of equity returns. Journal of Financial Economics, 128(3), pp.486-503. [Online] Available at: https://www.sciencedirect.com/science/article/pii/S0304405X18300667 [Accessed 20 September 2018]