Financial Nalysis

Financial Analysis for Managers 1

Financial Analysis Report

(Telus and Bell Canada Enterprises)

Introduction

All 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 Management

* Asset Utilization

* Operating Profitability

* Telecom Industry Comparison

* Identification and description of some largest Variable Expenses

* Cash Flow Statement Reviews

* Determination 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 Management

To 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 company's 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 Long Term Debt Ratio indicates what percentage of the firm's capital structure is debt as opposed to equity. The debt ratio helps investors determine a company's 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 Financial Total Assets Total Liabilities Long Term Debt + (Other Long Term Liabilities) Equity Long Term Debt Ratio Total Debt Ratio

Telus 2005 16222.3 9352.3 6275.2 6870 0.48 0.58

Telus 2006 16508.2 9580.1 4751 6928.1 0.41 0.58

Bell 2005 40482 22863 16662 14721 0.53 0.56

Bell 2006 36957 21410 16708 13367 0.56 0.58

(Source: Telus and Bell Canada Financial Statements 2006)

Asset Utilization

The 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 team's finding on asset utilization ratios mentioned.

Company and Year of Financial Statement Sales Average

Total Assets Current

Ratio Current

Assets Current

Liabilities Asset Turnover

Ratio

Telus 2005 8142.7 17030.2 0.48 1242.5 2027.6 0.61

Telus 2006 8681.0 16365.3 0.51 1344.9 3738.2 0.36

Bell 2005 17605 39807.5 0.44 3683 5587 0.66

Bell 2006 17713 38719.5 0.46 3684 4702 0.78

(Source: Telus and Bell Canada Financial Statements 2006)

Profitability Ratios - Measuring Operating Profitability

In order for one to measure the performance of organizations, profitability ratios are one way to do so. These ratios give an indication of the firm's 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 firm's 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.

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