Risk-return analysis guide

1 Review of listed risks
In this section, you need to review the risks listed in the annual report. Avoid making up your own risks. We are after external risks. Investment decisions, financing decisions, health and safety, compliance and human resource management are all internal risks; ignore them.
Competition is not a risk; it is the reason the company is in business.
Climate change is not a risk.
For Telstra, this is on page 12. Key risks that should be discussed in depth would be ‘Major Regulatory Change’ and Network resilience’.
Telstra’s monopolistic grip on the market is constantly being eroded by government intervention. This is the result of efforts of lobby groups and perceived public pressure. Competitors of course benefit from these changes as they are able to carve out their little niche to play in. Network resilience/ reliability is constantly an issue when the company is operating on such a large scale and having limited staffing resource due to budget constraints.
2 Evidence of risk
Identifying the risk is only part of the story. You have to now show evidence of the risk. The evidence that you provide are for the risks identified in the previous section. No marks are awarded for risks that are identified without clearly showing evidence that they have impacted the company.
This can be done in a few ways; relevant newspaper articles, correlation with identified variables, trend analysis, comparison with competitors, etc.
Share price decrease can be visual way to show the impact of the risk in the past. This is where you obtain the majority of the marks allocated to this section. For Telstra, you are able to find many articles discussing the impact of regulatory changes and network resilience.
Do not address the steps taken by the company to address the risks.
Please take time to investigate and document your findings.
3 Review of shareholder returns
The total return to the shareholder is the capital growth plus the dividend received.
Use beginning and ending share price for the reporting period as stated in the annual report. If they are not presented there, you have to source them. Use closing unadjusted prices. Take the full year of the reporting period; for example, 1st July 18 – 30 June 19. Calculate the one-year change in share price of the stock.
Use the dividend paid for the financial year as stated in the annual report. If the share is franked, you will have to gross it up to account for franking credits and include special dividends. Look at the payment date of the dividends. Dividends stated on the annual report are often the declaration date.
Use All Ordinaries (AORD) as your index. Follow the same period as your annual report. If you do not obtain a return of more than 5%, you have to try the following steps in sequence: 

  1. Use cumulative return
  2. Use a total return market index
  3. Use a sector specific index
  4. Use the financial year as your time period if your company has different reporting period
  5. Use the average 2 or 3 years return (last resort)

Calculating the total returns for the shareholder must be done paying particular attention to the following:

  • Time frames must match your annual report and index returns
  • The same index returns must be used in the next section
  • You have to include both the interim and final dividend and any special dividends paid for the period. Look at payment date
  • You have to gross the dividends up to include the franking credits. Franking credits are only applicable for this section. Do not include them in your cost of capital section

Use the following formulas:
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Video of an example will be available in your iLecture tab.

4 Review of capital projects
Finally, you have to review ALL capital projects undertaken in the annual report. Detail the description, amount and duration of the projects. Risk return discussions must always be done in relation to future capital projects. How are the risks identified affect the profitability of the future projects?
Companies can also be rolling out projects previously announced. You may need to look back at previous annual reports (include year and page number). Do not reference commentaries, stock reports or news articles.
If the shareholders deemed that the risk are too high, they would demand a higher return, and this will often result in the lower share price upon the project announcement.
Capital projects are not cost savings, such as staff cuts, efficiencies, reduced cost of inputs, etc. You should look for announcements of investments into projects like acquiring a business, machinery, new premises, etc.
For Telstra, this is mention on page 24 and 25. Capital investments into 5G, mobile sites and merger of Foxtel and Fox Sports. The market did not view these investments well as the future revenue may be easily disrupted by potential regulatory impact.
Ensure that you formulate a concluding paragraph to link your understanding of the risk return trade-off.

Financial statement analysis guide

1 Calculations
FSA is NOT about calculating ratios. It is about establishing a method for comparing the health of the company against its past and peers. Please do not spend most of your time doing the calculations; they do not carry a lot of marks. You should instead focus more on the interpretation and analysis of the ratios.
You should cover at least 4 ratios; one of them must be an analysis of the return on assets using the Du Pont System.
Ensure that you show all calculations and footnote the page number of the annual report where you obtained the figures.
2 Time series analysis
You need to do a time series analysis, looking back at least 3 years.
You only need to calculate the ratios for 1 year.
If your calculated ratios within 10% of the ones calculated in DatAnalysis Morningstar database, you may use all the figures from the database (for time series and cross-section).
If your figures are significantly different, you will have to calculate all the figures and show all workings.
Do not provide definitions for the ratios. Go straight into the discussion.
Explain the changes in the ratios with reference to company’s history or events. Do not merely state that the figures are improving or deteriorating.
3 Cross-sectional analysis
For cross-sectional analysis, it is unlikely that you will find a perfect match. You will have to look at all the four areas of: 

  1. Size,
  2. Age,
  3. Sector and
  4. Scope of operations

Do not merely state that the company is performing better or worse than its peer. State specific action of the company that contributed the better or worse performance.
Calculations of ratios without analysis and comment will receive a null grade for this section