Accounting Essays

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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