Analysing and Interpreting Financial Statements

Analysing and Interpreting Financial Statements Dr. Christoph Stork

Quiz What is the difference between Net Income and Net Profit? What I the difference between: Cash received Income Profit What is the difference between: Money paid Cost Loss

Introduction Analysing financial statements is important for investors, creditors, regulators as well as managers running the company Similar to a GPS on open sea. It tells you where you are and the direction the company is going

Financial Statement Balance Sheet Income Statement Cash Flow Statement

Balance Sheet

Balance Sheet Financial snapshot taken at a point in time of all the assets the company owns and all the claims against those assets Shareholder s equity = assets - liabilities (equals the value of the shareholder s investment) Assets Liabilities Shareholder equity

Balance Sheet 2011 2012 Change Assets Cash + Accounts Receivable + Other current assets = Total current assets + Property, plant, equipment + other assets Listed by decreasing liquidity, i.e.speed item can turned into cash = Total Assets Liabilities Accounts payable + Other current liabilities = Total current liabilities + Long term debt + other long-term liabilities = Total liabilities Shareholder s equity Common stock Retained earnings Total liabilities and shareholder s equity

Quiz How does the shareholder s equity change if: The company takes a loan ZAR 1 million The company receives ZAR 10,000 payment from customer

Income & Cash Flow Statement

Income & Cash Flow Statement If balance sheet equals a snapshot then income and cash flow statements equal a video recording of two accounts of the balance sheet. Income statement: displays revenues and expenses for the financial year (Revenues - expenses = net income) Cash flow statement provides detailed look at the changes of the companies cash balance over time

Accrual Accounting 1) Identify the revenues for a period 2) Match the corresponding costs Revenue is not the same as cash received! Revenue is recognised as soon as the effort required to generate the sale is substantially complete...and payment certain... Example: an increase in accounts receivable from one year to the next implies that more revenue was made than cash received.

Depreciation Fixed assets often last longer than 1 year, i.e. they contribute to revenue generation for longer than 1 year Example: a newly purchased Taxi. Treating the purchase as an expense in the year the taxi was bought would mean that in this year the net profit would be lower and in subsequent years higher Distortion can be avoided by using depreciation: spreading the cost of the Taxi over its expected life

Taxes Often companies file two financial statements, 1 for the shareholders and 1 for Ministry of Finance Shareholders: accurately portray the company s financial performance Tax: minimise taxes Example: depreciation - using the most rapid method of depreciation over the shortest useful life that the tax authority allows

Cash Flow Cycle

Cash Flow Timely conversion of cash into inventory, accounts receivable and back into cash is the lifeblood of any company If severely interrupted, company might become insolvent Cash flow does not equal profit Cash in does not equal revenues Cash out does not equal expenses

Quiz A company can make a profit in a financial year and still be insolvent: How?

Cash Flow Definitions Net Cash Flow = Net Income (Profit)+ Non-cash items Also known as cash earnings More or less net income + depreciation (both taken from income statement) Cash Flow from Operating Activities = Net Cash Flow +/- changes in current assets and liabilities Companies have to report this in most countries Avoids changes in current assets and liabilities to distort the picture Remember! Net Income= Revenues -Expenses, increase in current assets (inventory e.g.) are expenses, so one would slap that on top.

Value Problem Market vs. Book Value Property bought 50 years ago is more worth than it is in the book for e.g. Value of a brand name and consumer loyalty Shareholder s equity does not refer to the future but the end of the last financial year Market value= shares(outstanding)* share price Economic Income vs. Accounting income Difference between realized and unrealized income Example: shares bought and dividends accountant - only dividend is income; economist-also change in value of shares is income Imputed Costs Income statement does not take into account the cost of equity (dividends)

Analysing the Income Statement How did the company do in the last period? How might it do in the future?

Performance Measures Net Income (bottom line): revenues - expenses Operating Income: profit from day-to-day operations excluding taxes, interest income and expenses, and what is known as extraordinary items (unusual in nature and infrequent in occurrence). EBIT (E-bit): Earnings before interests and taxes (measure free of financing) EBITDA (E-bit-da): Earnings before interests and taxes, depreciation and amortization (measure free of financing and accounting)

Ratios Return on Equity (ROE) Net Income / Shareholder s Equity Efficiency with which the company uses owner s capital Profit Margin Net Income / Sales Fraction of each ZAR of sales that trickles down the income statement to profits Asset Turnover Financial Leverage Sales / Assets Assets / Shareholder Equity Sales generated per ZAR of assets (ideal produce income without assets) Challenge: strike a prudent balance: debt is cheaper than equity, equity is safer ROE = NetIncome Sales Sales Assets Assets Shareholder' sequity

Ratios Profit Margin and Asset Turnover are inversely related - sell more cheap or sell less dear! Liquidity Ration=Current Assets / Current Liabilities (the lower, the riskier) P/E Ration = Price per share / Earnings per share P/E is not a good performance measure since price subject to expectations. It is the price for 1ZAR of current earnings = future earnings and the risk associated with those earnings

Exercise Workgroup: Calculate for Telecom Namibia and MTC 2010/2011 RoE Profit Margin Financial leverage Interpret the Ratios

MTC: Key Financial Indicators (Group) 2005 2006 2007 2008 2009 2010 2011 Revenue N$ million 769 937 1,113 1,232 1,390 1,407 1,453 Shareholders Equity N$ million 646 903 999 1,136 1,153 1,166 1,121 Taxation N$ million 146.5 171.3 177.0 180.7 198.8 187 160 Net profit after tax N$ million 293 337 340 358 388 397 319 Capital Expenditure in million N$ 160 188 340 286 260 410 237 Total assets N$ million 915 1,169 1,329 1,608 1,632 1,791 1,696 Dividend N$ million 110.0 80.0 245.0 220.8 369.5 383.6 364 Dividend as % of after tax profit 37.5% 23.7% 72.1% 61.7% 95.4% 96.7% 114.2% Return on equity 45.4% 37.3% 34.0% 31.5% 33.6% 34.0% 28.4% Profit Margin 38.1% 36.0% 30.5% 29.0% 27.9% 28.2% 21.9% EBITDA margin 61% 60.2% 52.2% 50.9% 53.8% 55.8% 53.2% Active SIM cards in 1000 403.7 555.5 743.5 1,009 1,284 1,535 1854.7 Full-time Staff 276 272 296 397 416 395 407 Monthly ARPU in N$ 159 141 125 102 90 54 Source: MTC Annual Reports

Telecom Namibia (company): Key Financial Indicators 2005 2006 2007 2008 2009 2010 Revenue N$ million 1,055 1,058 1,061 1,081 1,130 1,161 Taxation N$ million 48.1 61.8 27.9 33.1 9.2 18 Net profit after tax (N$ million 84.6 112.3 23.2 80.1 25.6 69.7 Total assets N$ million 1,267 1,781 2,040 2,231 2,325 2,534 Shareholders Equity N$ million 627 980 1,015 1,062 1,088 1,158 Dividend N$ million 24 17 0 0 0 0 Asset Turnover 1.20 1.68 1.92 2.06 2.06 2.18 Return on Equity 13.5% 11.5% 2.3% 7.5% 2.4% 6.0% Financial Leverage 2.02 1.82 2.01 2.10 2.14 2.19 Profit Margin 8.0% 10.6% 2.2% 7.4% 2.3% 6.0% DELs in 1000 incl. public phones 139.0 136.2 138.2 145.4 148.7 157.1 No of Public Phones 4930 6086 4,200 3,860 3,726 2,949 Full-time Staff 1,463 1,306 1,069 1,025 1093 1073 Source: Telecom Namibia Annual Reports

Return on Equity Te le com Namibia MTC 60% 50% 48% 45% 51% 51% 52% 46% 40% 30% 20% 10% 9% 7% 11% 15% 21% 13% 0% 2000 2001 2002 2003 2004 2005

Top 10 Telcos from S&P + MTC and Telecom Namibia 2005 Re turn o n Eq uity Industry Ave rag e MTC BT Group Plc France Te le com Ve rizon Communcations Inc NTT Docomo Inc Te le com Namibia SBC Communications Inc Te le fonica SA Nippon Te le g raph & Te le phone Te le com Italia SPA - NEW Vodafone Group Plc De utsche Te le kom -70.5% -7.4% 8.9% 46.1% 42.2% 23.9% 19.3% 16.2% 13.5% 12.3% 11.9% 9.3% 8.3%

Profit Margin Te le com Namibia MTC 40% 35% 30% 27% 30% 34% 34% 25% 20% 20% 21% 15% 12% 10% 5% 5% 3% 5% 7% 8% 0% 2000 2001 2002 2003 2004 2005

Top 10 Telcos from S&P + MTC and Telecom Namibia 2005 Profit Ma rg ins Industry Ave rag e MTC NTT Docomo Inc SBC Communications Inc Ve rizon Communcations Inc Te le com Namibia Te le fonica SA BT Group Plc France Te le com Nippon Te le g raph & Te le phone Te le com Italia SPA - NEW De utsche Te le kom Vodafone Group Plc -26.9% 6.9% 34.0% 12.9% 12.2% 10.2% 8.0% 7.8% 7.7% 7.0% 5.8% 3.9% 2.2%

Financial Leverage Te le com Namibia MTC 3.50 3.00 3.0 2.7 2.8 2.8 2.8 2.7 2.50 2.00 1.50 2.2 1.9 2.4 1.6 2.0 1.4 1.00 0.50-2000 2001 2002 2003 2004 2005

MTC

September of 2011. Voice Calls Data SMS N$ Million N$ Billion N$ Million Billion SMS Billion Minutes Sept-09 Sept-10 Billion MB Sept-11 Sept-09 Sept-10 Sept-11 Sept-09 Sept-10 Sept-11 Data is gaining more momentum as a result of the investment in an advanced network and the commercial activities around our NetMan product that enhanced our focus since June 2010.

SUBSCRIBERS Postpaid 101.3 110.1 Prepaid 94.8 82.2 66.7 40.2 48.3 363.6 507.2 676.8 926.4 1188.7 1433.2 1744.6

REVENUE 2011 Prepaid 54% Postpaid 31% Roaming 5% Interconnect 5% 4% Other 1% REVENUE 2010 Prepaid 54% Postpaid 31% Roaming 5% 5% Interconnect 4% Other 1%

SUBSCRIBER GROWTH RATE 38% 34% 36% 27% 20% 21% 18%

REVENUE VS EBITDA (NAD 000 000) 1,389.5 1,409.2 1,454.7 1,232.2 1,112.7 687.3 860.9 936.8 748,0 785,8 774.1 503.5 281.0 401,8 494.4 568,1 583,6 627,1 687,0 706,2 679.1 2003 2004 2005 2006 2007 2008 2009 2010 2011 EBITDA Comparison to previous year Revenue EBITDA

CAPEX VS NET PROFIT AFTER TAX (NAD 000 000) 387 397 410 337 340 340 358 319 292 286 260 235 237 188 150 136 160 74 67 80 95 2003 2004 2005 2006 2007 2008 2009 2010 2011 Intangible Assets

EBITDA MARGINS 60.6% 58.5% 57.4% 55.8% 55.8% 52.4% 50.9% 53.8% 53.2% 49.4% 50.1% 46.7% 2003 2004 2005 2006 2007 2008 2009 2010 2011 EBITDA% Comparison to previous year EBITDA%

CAPITAL EXPENDITURE AS A % OF NET INCOME AFTER TAX 100% 103% 80% 67% 74% 49% 58% 55% 56% 2003 2004 2005 2006 2007 2008 2009 2010 2011

DIVIDENDS PAID 1900.9 1536.9 1153.3 783.8 369.5 383.6 563.0 364.0 48.0 48.0 128.0 80.0 110.0 238.0 80.0 318.0 245.0 220.8 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dividends Paid - Accumulated Dividends Paid

Depreciation and Amortization MTC s depreciation increased by N$ 84 million to N$ 303 million for the financial year ended 30 September 2011. This was due to the high capital investment made during the last few years.

INCOME TAX PAID 1204.1 1043.6 898.2 754.0 643.0 493.0 58.0 58.0 169.0 111.0 336.0 167.0 157.0 150.0 111.0 144.2 145.4 160.5 2003 2004 2005 2006 2007 2008 2009 2010 2011

STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2011 Notes 2011 2010 2011 2010 N$ 000 N$ 000 N$ 000 N$ 000 REVENUE 3 1,452,850 1,406,725 1,452,850 1,406,725 OTHER INCOME 1,849 2,497 2,107 2,132 1,454,699 1,409,222 1,454,957 1,408,857 Changes in inventories of finished goods 81,349 79,784 81,349 79,784 Direct costs 278,214 237,320 278,214 237,321 Sales and marketing 73,554 75,892 73,554 75,892 General and administration 104,758 92,616 103,921 92,222 Personnel costs 142,694 137,777 142,694 137,777 Depreciation 174,942 154,861 174,868 154,787 Amortisation 128,252 64,319 128,252 64,319 PROFIT FROM OPERATIONS 3 470,936 566,653 472,105 566,755 Finance income 4 13,027 18,772 13,024 18,766 Finance costs 5 5,103 1,667 5,103 1,339 PROFIT BEFORE TAXATION 478,860 583,758 480,026 584,182 Taxation 7 160,008 187,008 160,294 187,052 PROFIT FOR THE YEAR 318,852 396,750 319,732 397,130 Other comprehensive income - - - - Taxation thereon - - - - 318,852 396,750 319,732 397,130 Profit attributable to: Equity holders of the parent 318,852 396,750 319,732 397,130 Total comprehensive income attributable to: Equity holders of the parent 318,852 396,750 319,732 397,130 - Basic and diluted 8 1,275,4 1,587,0 1,278,9 1,588,5 1,456 1,535 1,456 1,535

STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2011 Notes 2011 2010 2011 2010 N$ 000 N$ 000 N$ 000 N$ 000 ASSETS NON-CURRENT ASSETS Property, plant and equipment 9 939,733 1,022,717 937,059 1,019,969 Intangible assets 11 224,535 218,228 224,535 218,228 Investment in subsidiaries 12 - - 2,508 2,345 Long term deposit 22.3 75,113 38,886 75,113 38,886 1,239,381 1,279,831 1,239,215 1,279,428 CURRENT ASSETS Inventories 13 73,140 90,229 73,140 90,229 Trade and other receivables 14 138,753 153,444 138,724 153,415 Cash and cash equivalents 15 245,015 267,348 245,004 266,215 456,908 511,021 456,868 509,859 TOTAL ASSETS 1,696,289 1,790,852 1,696,083 1,789,287 Share capital 16 25,000 25,000 25,000 25,000 Retained income 1,096,089 1,141,240 1,095,557 1,139,828 Total equity 1,121,089 1,166,240 1,120,557 1,164,828 NON-CURRENT LIABILITIES Long term liability 17-45,940-45,940 Trade and other payables 19 1,087 3,059 1,087 3,059 Deferred taxation 18 268,318 279,114 268,333 279,040 269,405 328,113 269,420 328,039 CURRENT LIABILITIES Trade and other payables 19 192,005 200,811 191,976 200,583 Deferred revenue 20 89,564 81,783 89,564 81,783 Taxation 24,226 13,905 24,566 14,054 305,795 296,499 306,106 296,420 TOTAL EQUITY AND LIABILITIES 1,696,289 1,790,852 1,696,083 1,789,287

STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER 2011 Notes 2011 2010 2011 2010 N$ 000 N$ 000 N$ 000 N$ 000 Cash receipts from customers 1,469,390 1,385,520 1,469,648 1,384,860 Cash paid to suppliers and employees (699,975) (565,253) (698,939) (564,499) Cash generated from operations 21.1 769,415 820,267 770,709 820,361 Interest paid (5,103) (1,667) (5,103) (1,339) Interest received 13,027 18,772 13,024 18,766 Taxation paid 21.2 (160,483) (145,360) (160,489) (145,350) Net cash flows from operating activities 616,856 692,012 618,141 692,438 Purchase of property, plant and equipment (127,267) (231,708) (127,267) (231,708) Acquisitions of intangible assets (109,353) (178,325) (109,353) (178,325) Proceeds on disposal of property, plant and equipment 3,598 592 3,598 592 Proceeds on disposal on intangibles 1,598-1,598 - Construction deposit paid (36,227) (38,886) (36,227) (38,886) Net movement in subsidiary company loan - - (163) (141) Net cash flows from investing activities (267,651) (448,327) (267,814) (448,468) Long term liabilities raised - 45,940-45,940 Dividends paid (364,003) (383,626) (364,003) (383,626) Net cash flows from financing activities (364,003) (337,686) (364,003) (337,686) AT BEGINNING OF YEAR 267,348 361,334 266,215 359,916 AT END OF YEAR 15 245,015 267,348 245,004 266,215

Telecom Namibia

Comparative Growth Technical 2005 2006 2007 2008 2009 2010 Port Capacity (Network Switch Capacity) 195,023 208,178 223,238 233,903 231,760 229,947 Percentage Digital 100% 100% 100% 100% 100% 100% Direct Exchange Lines (DEL s) Analogue, ISDN & DID slots 138,880 136,042 138,105 145,294 148,606 157,037 (Including public telephones) Manual 117 121 66 66 66 26 TOTAL (DELs) 138,997 136,163 138,171 145,360 148,672 157,063 Waiting List 3,521 3,844 3,100 2,829 1,410 629 DEL Penetration 6.9% 6.5% 6.5% 6.6% 6.6% 7.3% Population 2,028,238 2,080,972 2,135,077 2,190,589 2,247,544 2,143,410 # of Public Phones 4,930 6,086 4,200 3,860 3,726 2,949 Public phones per 1000 2.4 2.9 2.0 1.8 1.7 1.4 Number of Households (projected) 383,916 393,898 404,139 414,647 425,428 405,725 Penetration per Households 36.2% 34.6% 34.2% 35.1% 34.9% 38.7%

Financial 2006 2007 2008 2009 2010 Company N$ 000 N$ 000 N$ 000 N$ 000 N$ 000 Revenue 1,058,072 1,060,687 1,080,491 1,129,828 1,160,663 Operating profit 175,497 67,223 102,967 58,536 103,964 Profit after Taxation 112,294 23,217 46,943 25,598 69,712 Accumulated Retained Profits 539,123 860,897 907,840 933,438 100,031 Fixed Assets 831,315 1,472,304 1,593,404 1,598,143 1,600,530 Long term Liabilities 119,764 75,079 157,817 200,998 546 871 Equity 992,210 1,015,427 1,062,370 1,087,968 1,157,680 Capital Projects 170,009 346,145 260,649 167,297 159,350 Equity to Debt Ratio 8.28 13.52 6.73 5.41 2.11 Return on Fixed Assets 13.50% 1.57% 2.94% 1.60% 4.35

ADSL Telecom Namibia has been blessed with an unmatched copper wire line network that stretches across the length and breadth of the country. This is the network which supported the company s earliest telecommunication services. Today, this copper-based network continues to be an invaluable medium, delivering the Company s broadband technologies such as ADSL. ADSL is a data communications technology known as Asymmetrical Digital Subscriber Line that provides a faster data transmission over copper telephone lines. ADSL access has the highlights with high bandwidth, reliability and security. ADSL was initially rolled out in December 2006, and was intended to provide short term solution serving as an early start of the service. The solution presented many restrictions in terms of capacity and flexibility due to non-availability of supporting networks. With the supporting network (MPLS and Metro Ethernet network) roll outs, the ADSL expansion continued to expand to other regions throughout the country including remote areas. Sites with minimal backhaul capacity were also redesigned and migrated to high bandwidth networks to avoid bottlenecks while ensuring high availability, and preparing the network for fixed broadband access (FBA)services. FBA were completed and packaged and have since grown in popularity. A 10MB package was added at the end of the financial year. To deliver such a broadband package to urban customers, an additional 5,431 ports were added to the ADSL DSLAM infrastructure. Currently 109 DSLAM s cater for a 22,382 ports capacity in total of which 13,274 were connected at end of the year. All DSLAM s are now backhauled by means of the new IP/MPLS standards and network. ADSL services have made remarkable progress as seen in the number of ports rolled out countrywide and the number of customers acquired to date. Currently there are 22 657 numbers of ports.

Notes Group 2010 N$ 000 Group 2009 N$ 000 Company 2010 N$ 000 Company 2009 N$ 000 ASSETS Non-current assets Plant and equipment 3 1 549 772 1 543 702 1 549 772 1 543 702 Intangible assets 4 50 758 54 441 50 758 54 441 Goodwill 5 13 246 13 246 -- -- Investment in subsidiary 6 435 427 267 363 Loans advanced 7 114 599 69 004 -- -- Investment in associates 8 75 176 129 788 115 017 135 098 Derivative financial instruments 9 6 441 17 088 6 441 17 088 Finance lease receivable 10 25 574 21 826 25 574 21 826 1 835 566 1 849 095 2 182 989 2 039 518 Current assets Inventories 11 65 398 49 499 65 398 49 499 Trade and other receivables 12 170 932 185 652 170 932 185 652 Derivative financial instruments Amounts owing by fellow subsidiaries 13 Amounts owing by holding company 13 105 -- 105 -- Current tax asset 21 -- 1 079 -- 1 079 Short-term portion of finance lease receivable 10 14 683 9 937 14 683 9 937 Cash and cash equivalents 15 99 186 37 839 99 135 37 787 350 657 285 130 350 606 285 078 Total assets 2 186 223 2 134 225 2 533 595 2 324 596 -- 353 -- 1 124 -- 353 -- 1 124

EQUITY Capital and reserves attributable to the company s equity holders Share capital 16 154 530 154 530 154 530 154 530 Retained earnings 567 720 689 963 1 003 150 933 438 Total equity 722 250 844 493 1 157 680 1 087 968 LIABILITIES Non-current liabilities Post-retirement benefit obligations 17 78 725 68 554 78 725 68 554 Long-term liabilities 18 634 929 254 102 546 871 200 998 Deferred tax 19 439 236 433 676 439 236 433 676 Deferred revenue 22 27 309 20 200 27 309 20 200 1 180 199 776 532 1 092 141 723 428 Current liabilities Trade and other payables 20 171 248 186 067 171 248 186 067 Derivative financial instrument -- -- -- -- Current tax liability Short-term portion of long-term liabilities 21 18 11 325 24 684 -- 40 696 11 325 24 684 -- 40 696 Bank overdraft 15 -- 256 200 -- 256 200 Amount owing to fellow subsidiaries 13 -- 436 -- 436 Amount owing to holding company 13 39 000 25 001 39 000 25 001 Deferred revenue 22 37 517 4 800 37 517 4 800 283 774 513 200 283 774 513 200 Total liabilities 1 463 973 1 289 732 1 375 915 1 236 628 Total equity and liabilities 2 186 223 2 134 225 2 533 595 2 324 596

Statements of Comprehensive Income for the year ended at 30 September 2010 Notes Group 2010 N$ 000 Group 2009 N$ 000 Company 2010 N$ 000 Company 2009 N$ 000 Revenue 1 160 663 1 129 828 1 160 663 1 129 828 - Sale of goods 23 684 18 164 23 684 18 164 - Services rendered 1 136 979 1 111 664 1 136 979 1 111 664 Other operating income 28 385 14 132 28 385 14 132 Distribution costs (277 944) (340 261) (277 944) (340 261) Administrative expenses (625 977) (550 957) (625 717) (550 776) Other operating expenses (181 423) (194 387) (181 423) (194 387) Operating profit 23 103 704 58 355 103 964 58 536 Finance income 24 44 794 32 361 31 250 29 006 Finance costs 24 (47 538) (52 746) (47 538) (52 746) Share of results of associates after tax 8 (205 239) (115 857) -- -- (Loss)/Profit before tax (104 279) (77 887) 87 676 34 796 Taxation 26 (17 964) (9 198) (17 964) (9 198) (Loss)/Profit for the year (122 243) (87 085) 69 712 25 598 Other comprehensive income -- -- -- -- Total comprehensive (loss)/income for the year (122 243) (87 085) 69 712 25 598 Attributable to: Equity holders of the company (122 243) (87 085) 69 712 25 598