About the paper
The paper is commissioned to conduct a comprehensive financial analysis of UK based telecommunication company, BT Group PLC for the year 2011-2015. As part of this analysis, we will be using the tools of common-size statements and financial ratios. In addition, to perform the cross-sectional analysis, we will also compare the financial performance of the company with its competitor entities, Vodafone Group and Sky PLC.
Along with analysis of the financial performance using the above stated criteria, we will also perform broad economic environment analysis to adjudge the company’s performance in relation to the economic trends and will also evaluate the opportunities relating to future funding of the company.
Income Statement
Referring to past five year income statement of the company, we witness that the revenue figures of the company has decreased consistently. Over the five year period, the revenue of the company has declined by -12.46%. Following the available information in the notes to the financial statements, we witnessed that the major operating segments, BT Business , BT Wholesales and BT Global Services, that contributes majority of the proportion to the revenue figures, are witnessing declining trends and are thus responsible for the bearish run in the revue figures of the company
(BT Group PLC, 2015, Pg. 155)
Ironically, despite the consistent fall in the revenue figures, the profit margins of the company is increasing on account of decreased proportion of costs of sales and operating expenses, which are fueling the gross margins and net margins of the company. For instance, while the revenue figures have declined by -12.46% over the five year period, the proportion of cost of sales has also decreased, because of which gross profits have increased by 25.80% over the five year term period. Similarly, lower cost of sales along with controlled operating expenses also fueled the operating margins of the company, which increased by 25%. However, since the increase in profits is largely driven by cost controls rather than revenue figures, the growth in profit margins cannot be rated as sustainable.
Balance Sheet
Beginning the analysis of the balance sheet from the asset side,we found that over the years, the current asset position of the company has improved with their proportion to the total assets increasing from 17.03%in 2011 to 29.05% in 2015. The increase here can be rated as sustainable on account of a consistent increase in the cash and receivable, although declining proportion of inventories to total assets is a cause of concern. On the other hand, the proportion of the current liabilities to the total assets were fairly constant around 30%, and this, aligned with improved proportion of current asset signals toward the improved liquidity position of the company.
While witnessing the strength in the liquidity position of the company was encouraging, the trend in non-current assets were rather bearish. Over the years, the proportion of property, plant and equipment has remained fairly constant and by the end of 2015, it represented 52.69% of the total assets compared to 52.21% in 2011. For a telecommunication company, the trend may raise serious concerns for the shareholders as it indicates that the entity is not spending an increased amount of capital infrastructure and this is most likely to inhibit the company’s growth.
On the liabilities side, the most notable trend was in the non-current liabilities of the company with the proportion of long-term debt declining year-by-year and was recorded at 30.0% by the end 2015 compared to 40.60% in 2011. This signals that the company is relying on low-leverage capital structure to fund its operation. On the other hand, the proportion of shareholder equity to total assets is also on a declining trend and by the end of 2015, it was recorded merely at 3.05% of the total assets.
Overall, the balance sheet of the company revealed interesting trends as while the liquidity position of the company was found to be on a stronger side, all other aspects signalled poor business policies. For instance, while we saw that the revenue figures of the company is consistently declining year-by-year, rather than investing in the capital assets, the company is going against it as the proportion of capital assets to the total assets is on the decline. Moreover, we witnessed flaws in the capital structure of the company as while leverage proportion is on the decline, the proportion of shareholder equity is also falling consistently indicating towards tarnished confidence of the shareholders in the company’s operations.
Cash Flow Statement
While income statement and the balance sheet are made on an accrual accounting basis, it is the cash flow, which is made on the cash basis, will help us dig deeper into the true financial position of the company. Beginning with the operating cash flow, the company has generated a sustainable amount of operating cash flow every year that is sufficient enough to cover a major proportion of the investing and financing activities.
As for the investing cash flow, the amount of cash spent in investing activities is increasing consistently, however, the major concern is the constant decline in the expenditure made in property, plant and equipment over the period of 5 years, and especially for a telecommunication company, which largely relies on non-current asset infrastructure,the trend is surely a source of concern. Important to note, while during 2011, the company spent a total of £2645 million on property, plant and equipment, the amount plummeted to £2418 during 2015.
Finally, as for the financing activities, the cash flow statement revealed that over the years, the company has been retiring its outstanding debt more than what it has been issued. On the other hand, until 2014, the company was having a minimal reliance on equity financing, but an amount of £1201 million was raised through issue of common equity while the purchase of treasury stock witnessed an increase of £18 million compared to £302 million for the previous two years.
Overall, while the company’s operating cash flow is sustainable enough to cover dividend payments and investing needs, over the past years, the company has been drawing on its cash reserve to meet the deficit and because of this reason,the amount of cash reserve is decreasing since 2013.
Referring to Note 23 of the financial statement, we also found that the company has a restricted amount of cash which it had held overseas, and BT Group has explicitly disclosed that it will use this amount within a reasonable period of time.(BT Group PLC, 2015, Pg. 181)
Ratio Analysis
While in the previous sections we analyzed the raw financial figures of the company for the past five years, we will now turn those numbers into a standardized form using the tool of financial ratios. However, in order to achieve the cross-sectional analysis, we will compare the ratio multiples of BT Group with that of competitor firms, namely, Vodafone, Sky and Talktime. Highlighted and discussed below are the financial ratios of the company and its competitors for the period 2011-2015:
-Leverage Analysis
i) Current Ratio: Current Assets/ Current Liabilities
ii)Quick Ratio: (Cash+ Receivables)/Current Liabilities
Referring to the above figures, we can see that over the past five years, the liquidity position of BT Group has increased consistently on account of higher proportionate increase in the current assets relative to current liabilities. Beginning with the current ratio, the multiple increased from 0.56in 2011 to 0.97 in 2015. However, while the current ratio multiple of the company is higher than that of Talktime and Vodafone,it still falls short of Sky PLC, which by the end of 2015,had recorded current ratio of 1.08. It is considerable that while current ratio of Sky PLC was higher than that of BT Group, the former company had been witnessing consistent decline since past five years, while BT Group is witnessing a consistent surge in the current ratio multiple every year.
Therefore, in order to dig deeper into the liquidity position of the companies, we analyzed quick ratio. The ratio revealed that Bt Group is more liquid than Sky PLC as while the former recorded quick ratio of 0.88, the latter recorded 0.76 by the end of 2015. This confirmed that BT Group is most liquid of all the major companies in the telecommunication industry.
-Profitability Analysis
a) Operating Margin Ratio: Operating Profi/ Revenue
b) Net Profit Margin: Net Profit/ Revenue
Post performing the liquidity analysis of the company and the industry peers, we analyzed the profitability position and found the optimistic trend for BT Group. Beginning with the operating margin, the multiple increased from 12.65% in 2011 to 17.78% in 2015 on account of higher revenues accompanied by the controlled operating cost structure. The company also performed fairly well compared to the industry peers, though it faced tough rivalry from Sky PLC, which managed to record marginally higher operating margin at 17.83% during 2015.
Next, we analyzed net profit margin of the company and here also we witnessed optimistic results for the company with ratio multiple consistently increasing from 7.48% in 2011 to 11.96% in 2015. Important to note, even though the company managed to surpass net margins of Talktime and Vodafone PLC, however, its results were overshadowed by Sky PLC, which by the end of 2015, recorded net margin of 19.59%.
-Leverage Analysis
a) Total Debt-Total Capital
Referring to the above figures, we can see that amongst all the major companies in the industry, BT Group is operating with maximum leverage, so recorded at 92.36 as of 2015. Important to note, even though the leverage ratio of the company has declined since past three years, however, even the current level is relatively above than the industry peers. This confirms that while BT Group is earning high profits, but it is also trading with a high financial risk.
Management Effectiveness
a) Return on Assets:Net Income/Total Assets
The ROA multiple is one of the most prominent measures of accessing the effectiveness of the management of the company. Referring to the above figures, we can see that over the period of five years, BT Group PLC has witnessed only marginal improvement in its ROA multiple and even though it surpass the ratio multiple of Vodafoe and Talktime, it still lags significantly behind to that of Sky PLC, which had recorded ROA multiple of 20.88% as of 2015.
Conclusion
Overall, our analysis reveals that even though BT group PLC is having a strong financial standing and is experiencing improved liquidity and profitability margins. . Moreover, the company is running on bullish path relative to competitors such as Sky and Vodafone while it poses tough rivalry for Talk Time Inc. However, the major concern is the reluctance of the entity to invest in non-current assets while it is having a sufficient cash reserve to meet capital investment needs.
Therefore, it is recommended that BT Group should revise its cash allocation policy, and rather than increasing dividend payments every year, it should consider reinvestment of profits in capital assets to assist future growth potential.
References
BT Group PLC. (2015). Annual Report 2015. BT Group PLC.
Sky PLC. (2015). Annual Report 2015. Sky PLC.
Talktime PLC. (2015). Annual Report 2015. Talktime PLC.
Vodafone Group. (2015). Annual Report 2015. Vodafone Group.
