Accounting Essays | Financial Analysis
of BT Group Plc
BT Group is
one of the leading European companies providing telecommunication
services and equipment.
1.a
Appendix 1 gives a summary of BT Group's consolidated balance
sheet as on 31 March 2004. The company had £16,068m of fixed
assets comprising mainly of tangible assets at £15,487m. BT
had very less intangible assets as it had written off most of
the goodwill.
The company also had current assets and current liabilities
of £10,550m and £8,548m respectively and hence £2,002m of working
capital or net current assets.
Total assets less current liabilities
stands at £18,070m and are being financed through long-term
creditors, provisions and shareholders funds.
The company had £12,426m of long-term loan financed through
a range of US dollar, Sterling and Euro bonds. The company has
also £2,504m of provision for liabilities and charges relating
mainly due to deferred taxation (£2,191m).
The total book value
of shareholders funds is £3,094m. Provision for liabilities
and charges has reduced the book value of equity shareholders
by lowering profit and loss account. So we can say that provision
for liabilities is being financed by internal accruals.
BT Group has £109m of cash at bank and in hand. It also has
short term deposits and investments of £3,916m and listed investments
of £1,247m.
These are as good as cash as they be converted into
cash on a short notice. So BT has total cash and cash equivalents
of £5,272m. The total short and long term loans and borrowings
of £13,697m.
Thus BT has net debt of £8,425m (13,697 - 5,272).
The net debt to equity gearing ratio is expressed as net debt
divided by total shareholders funds.
Debt to equity ratio = 8425/3094 = 272%
This means that debt finances almost three times assets as being
financed by equity. Higher debt means that the weighted average
cost of capital is low as cost of debt is lower than cost of
equity.
But as BT reduces more debt, its weighted average cost
of capital will increase. The increase would be partially slightly
offset by lower cost of equity due to lower chances of bankruptcy.
1.b
Appendix 2 shows the main elements of consolidated cash flow
statement
BT Group is generating high amounts of cash inflow from operating
activities. During the year ended 31 March 2004, the company
generated £5,392m of net cash from operating activities.
BT is in telecommunication business which demands relatively high
level of absolute investments. Even after incurring £2,477m
of capital expenditure, BT was left with £2,017m of surplus
cash. The company also sold net short term investments of £1,123m,
leaving it with £2,489m of cash before financing.
The company has used cash generated above primarily to repay
loans. BT has reduced loans by £2,301m. If BT would not have
reduced its debt, then its net debt would have been £10,726m.
BT is trying to reduce its debt over the years. BT's operations
are generating surplus cash which it is finding it difficult
to employ into high return projects. Few years back there was
also concern about BT's high level of debt. So now BT is trying
to reassure markets by reducing its high debt.
1.c
Telecommunication is a very capital intensive business. BT had
built its business by taking large amounts of loans over the
years.
The business model is such that it has high fixed costs
and low variable costs. Like most of other high fixed costs
businesses, BT faced tough times when the competition reduced
prices as variable costs are less. During 2001 and 2002, BT's
operating profits declined while its interest payments increased.
This had a very negative impact on its share price.
BT also sold its mobile operations. Now a day major investment
in telecommunication services is in mobile telecommunication
only.
The non-mobile business doesn't need that high level of
frequent investments. BT's profile has now changed from a growth
company to a mature cash generating company.
The lack of right investment opportunities and decision to enhance
creditors and shareholders confidence has resulted in retirement
of debt. In 2004, BT paid net interest of £941m and its operating
profit before goodwill amortisation was £2,892.
Depreciation was £2,921m.
EBITDA = £2,892 + £2,921m = £5,813m
Interest cover ratio = Earning before interest, taxation, depreciation
and amortisation / net interest
Interest cover ratio = 5813/941 = 6.18
BT generated earnings more than six times net interest payments.
This shows that its debt levels are now very much within manageable
levels and is more like a cash rich mature company.
2.a Earnings per share
Appendix 3 gives the earnings per share in the last five years.
The basic earnings per share have fluctuated a lot in the last
five years from a high of 31.2p in 2003 to a low of -25.7p in
the year 2001.
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