Financial Analysis And Management: Performance Analysis And Economic Assessment Essay

Question:

Describe about the Financial Analysis and Management for Performance Analysis And Economic Assessment?

Answer:

Introduction:

BT Group Plc, a telecom company, originally based on UK has been chosen for this assignment. The financial performance of the company shall be analysed based on the relevant financial information. The comparative analysis will address the company’s liquid position as well as the profitable condition. The effective working capital management will also be highlighted to understand the internal financial structure. BT Group’s financial performances shall be analysed with the help of the organisation’s stock market performances over the past five years. The market fluctuation is an effective indicator to know whether the business is doing favourable compare to other rival companies in the same market. This financial evaluation will surely identify the company’s growth as well as performance gaps which must be improved within the coming years.

BT Group is one of the world’s prominent telecommunication services providers, serving the ides needs of customers in the United Kingdom along with more than 170 countries worldwide (Btplc.com, 2016). The company mainly engaged in broadband, fixed-line services, television and mobile products and services along with networked IT services. The stable business has successfully managed to give dividend to their shareholders, which would expect to increase 10 to 15 percent in the next financial year.

Rationale of the study:

BT Group Plc has been chosen for indentifying the financial performance analysis. British Telecom is the leading telecom company of UK and the main competitors in their business is Vodafone Plc. The selection is apt because the company has been growing by every year. In the UK, BT serves over 20 million businesses and financial performance is also eye-catching for the investors because the company’s operating profit is 3145 million pound which was remarkable high compare to previous year. However, the company is maintaining diversified business strategy, which sometimes makes one business more profitable than the other does. But the company has successfully managed to deliver sustainable profitable revenue growth which ensured a broaden customer relationship worldwide. However, the company has been criticised due to price of the phone-line rental rises 33% since 2010. In addition, the poor broadband network is also not sufficient to support the growth of the industry and threatened the government’s ambition. Therefore, the financial growth was at risk and ratios have reflected the adverse results. So BT Group Plc Company is the perfect match for showing the ups and downs of the financial growth.

Moreover, all the financial data and information of BT Group are available in the official website of the company. In addition, the company is listed in UK Stock Exchange, so all the relevant financial details are easily available in that site also. BT is the ultimate place for creating and investing new technologies, attracting and keeping the best people. The main motivation is to drive innovation and operate in the leading markets and competing freely. Therefore, the selected company is the right choice for analysing its financial growth and performances over the last five years.

Performance analysis

The company’s financial performance is not favourable as far as the revenue is concerned which has been decreased 7 per cent in 2015 including a 206m pound negative impact from foreign exchange movements and it also declined 9m pound in transit revenue (Btplc.com, 2016). The company has been suffered hugely because the entire telecom industry’s growth has been deteriorated sharply by 11 per cent compare to 2013-2014. It is threatening because the condition of underlying revenue apart from transit in US and Canada also declined but it is at 3% only. As far as the operating cost is concerned, BT Group has represented its growth because it has been declined 8 percent in 2015 as well (Btplc.com, 2016). As a result, the operating profit has been increased by 103m pound, which is 24% compare to 2013-14 and EBITDA has increased by 1%. The favourable part is that the depreciation and amortisation has gradually been reduced by 16% (Refer to Appendix 1).

As a result, the cash flow is slowly decreasing in the year of 2015 compare to 2014. This is one of the major financial concerns of the company (Refer to Appendix 2).

Liquidity ratios

2011

2012

2013

2014

2015

Current ratio (Current assets/Current liabilities)

0.559089

0.489521

0.611769

0.742468

0.969312

Quick ratio (cash+ cash equivalents+ accounts receivable/total current liabilities)

0.445263

0.312031

0.416831

0.530936

0.758377

Financial leverage

12.23

18.46

33.65

Debt /Equity(Total long term debt/Total stockholder's equity)

4.866748

5.854244

9.464646

Profitability ratios

2011

2012

2013

2014

2015

Asset turnover (Net sales/Average total assets)

0.78

0.81

0.76

0.74

0.69

Return on Assets (Net Income/Average total assets)

5.75

8.43

8.57

8.12

8.2

Return on equity(Net income/Shareholder’s equity)

124.27

404.06


(Source: Btplc.com, 2016)

For in-depth financial analysis, it is required to analyse financial ratios of the company corresponding with the five years financial figures. Accounting ratios are useful to understand the financial condition of the company. These numerical representations of a business’s performances are significant for comparative profitability, liquidity and growth analysis. Therefore, inter firm comparison can easily be done with the help of financial ratios. However, it is relevant for short period and ignores the big financial picture, but the practiced accountant are still believing on this management accounting tool.

BT Group Plc Company has $65564 million market capital in 2015 (Btplc.com, 2016). In addition, the company’s earnings trend is also favourable. But the current ratio of the company is not good. Generally, 2:1 current ratio is likely to be considered as a good liquid position of the company. Here it is clearly shown that BT’s current ratio was equal to .97 in 2015. It has indeed an improvement compare to the corresponding past years, but it should still need to improve for manage the short-term obligations of the company more effectively. The “quick ratio” is representing the same results and it has been improved at .75 in 2015, but still need to enhance for improving the “margin of safety” that BT possesses to cover short-term debts. Furthermore, BT’s financial leverage ratio is quite higher at 33.65 which means that the company has less capable of acquiring additional assets in future. Normally, a “high degree of financial leverage” favours “high interest payments”, which adversely influence BT’s “bottom line earning per share”. In short, a degree of which an entity uses “fixed income securities” like in “debt and preferred equity” is called the “financial leverage” (Brigham and Ehrhardt 2013). Therefore, BT’s stockholders are in at high financial risk for higher amount of financial leverage shown in the financial records.

The above discussion clearly highlights that BT Group Plc Company’s liquidity can meet the short-term obligations in short period, but the level of financial health should be excelled and improved with the help of a proper planning of working capital management of the company.

The management of BT Group is quite concerned about the bad position of working capital. The condition has been deteriorating sharply since 2014. In normal circumstances, working capital will never go negative. In other words, the negative working capital of BT indicates that the company may be used their short-term liabilities for long-term purposes (Kaplan and Atkinson 2015). It can be assumed that the company may be used its current liabilities or funds for long term assets, bad debts, abnormal loss of inventory or consistently selling the telecom services or products as loss for getting more customer response and capture more market share in the near future (Olson 2015). Furthermore, the company has successfully implemented this strategy since the year of 2014. The fibre, DSL, and cable broadband connections to residents and small businesses in the UK have been increased the level of services in the UK market and successfully acquired 32 per cent share market of the fixed broadband market (Refer to Appendix 3).

However, generating more customer response, the company failed to maintain the stable positive working capital over the years. But it would difficult to say that these negative position of working capital is good for BT Group or not, because it will depend upon the reason due to which it is going negative. In the general perspective, a negative working capital is reflected a bad sign and the company have all the possibilities of facing financial crisis in the near future and even bankruptcy (?irec and Mo?Ќnik 2016). This capital management condition will be considered an effective, if the reason is investment of additional available cash in long-term investments or fixed asset without disturbing the operating cycle of the company.

Working capital

Particulars

2012

2013

2014

2015

WC=Current Assets-Current Liabilities

-19.73

-11.81

-7.95

-0.87

Source: created by author


Still having the negative working capital balance, the company is getting a good response in 2015. The consumer satisfaction has been improved by three area of innovation. These areas are mainly concentrated on “business zone activities, process improvement and colocation services” (Refer to Appendix 4)

The capital structure of BT Group is in 2015 are as follows:

Total debt to total equity

1208.91

Total debt to total capital

92. 36

Total debt to total assets

35.92

Interest Coverage

6.61

Long term debt to Equity

973.76

Long term debt to total capital

74.39

Long term debt to assets

.29


British Telecom Plc’s biggest competitor is Vodafone Plc. Both the companies are the most visible telecom operators across the world (Bianchini et al. 2016). Therefore, BT Group’s financial structure, market conditions and industry scenario must be analysed properly to evaluate the current financial performance of the company. The debt equity ratio of BT Group was -3.6 in 2010 when compared to 73.17 for the previous year, whereas the ratio of debt equity of Vodafone shows that its capital structure is less leveraged (Btplc.com, 2016). Therefore, the company’s financial risk also is lesser than the BT Group. In short, Vodafone Plc is in a healthy financial position as far as the capital structure is concerned. But in the recent times, the capital structure of BT Group is having the high debt equity ratio which means the company has sufficient shareholders fund to finance its comparatively long term liabilities (Chow and Lai 2015). However, the company decreased a considerable portion of debt in 2010 because the negative retained earnings made these ratio an adverse one. Now in 2015, the company is not made the dividend payout and this is the main reason for increased shareholder fund in the balance sheet of that year.

The UK economy has now recovered the recession stage since the region was very badly affected in 2008. Now it is evident that the country is growing by population and a stable demand for telecom services and products has been developed across several industry sectors in the nation (Gilan and Abbasi 2015). At this market situation, the current capital structure of British Telecom has largely encouraged to operate and provide their services outside UK, mainly in the developing countries like India and China (Jackson, Ostrom and Evans 2015). This opportunity has also drawn a serious attention of the management of BT, which directly influenced the share market value of the company.

The company is listed in the London Stock Exchange. BT Group has been one of the FTSE 100’S star performers over the past five years. BT’s share price has been risen approximately 270 per cent since year of 2010. These gains have pushed the company’s share price towards 500p level. The current market price of the company is 466.15. The daily price change towards the upward motion increased the value of earning per share of shareholders of the company. The current profit earnings ratio is 17.59, which is higher compare to other prominent telecom service provider of UK, Vodafone Plc. The new investors give a positive response towards the investment into this company because this industry itself has growing every day and a good amount of dividend is likely to be expected to earn by the future shareholders of BT (Locke, Lowe and Lymer 2015). The company’s “net profit in its second quarter” as ended up 30th September , 2015, rose to 525million pounds compared to the market forecast of GBP 481 million. Due to large involvement in the “foreign exchange movements and acquisition of disposal” which have been encouraged the investors to invest more into this business and thus gain the share price correspondingly.

Weaknesses of ratio analysis:

Ratio analysis is one of the powerful tools of the management accounting to achieve a general understanding of the results, cash flows, financial health of a business. However, financial ratios are survived with several limitations, which reduced its value and the relevant data integrity provided by this statement. These shortcomings are as follows:

Historical approach: The ratio analysis takes place based on the historical results (Minsky 2015). It does not say that the similar outcomes will continue into the future. However, these information can be used for evaluate the growth consistency compare to the historical results.

Level of “Inflation”: If the rate of “inflation” has changed in any of the period, then the relevant data will lose its relevancy and it will make the entire approach an ineffective (Robinson et al. 2015).

Operational changes: The company my change its underlying operational structure which may differ between the ratio ascertained previous years and the same ratios today, It would definitely yield a misleading conclusion. A company may introduce a “constraint analysis system, for instance, that might consider a low investment in fixed assets. In that context, the company might conclude the analysis based on previous financial ratios and lose the relevancy.

Different approach: The financial ratios can be calculated in different assumptions and bases (Sawyer 2015). For example, the inventory turnover ratio can be calculated based on the sales or cost of goods sold. The results, thus is varied with the different approaches. In addition, accounting standards also various “accounting policies”, which “impairs comparability” and hence this analysis is less significant in such situations. Here BT limited used “cost of goods sold” for the calculation of Asset turnover ratio. The company could also use “net sales” figure at the place of COGS and the result could have been different.

Seasonal factors: The seasonal factors cam also distorts this type of analysis. Understanding such factors that influence the business operation can decrease the chance of misinterpretation. Here BT limited has provided many season service offers, which directly influenced the company’s net sales figure and made changes the relevant ratios as well.

Business condition: This is essential to place this analysis in the perspective of the general business environment. For instance, “sixty days of sales outstanding might be considered as a bad in the rapidly growing sales”. But it also might be considered as great when consumers are in huge financial crisis and unable to pay their dues on time.

Strategy of the company: Financial ratios may be conveyed information adversely at comparison between two firms that are operating under separate strategies. For instances, one organisation may be following “low cost strategy” and thus is willing to receive a “lower gross margin in exchange of more market shares”. On the other hand, that company is following “high customer service strategy where its value is higher and gross margins are also comparatively higher, then that company will never attain the revenue level of the first company”.

However, the entire study has been based on the financial ratios, the above limitations cannot be ignored. Here the company should improve the identified financial areas to enhance their financial performances in the coming years.

Recommendations:

The negative working capital management of BT needs to be improved for maintain a stable liquidity position of the company. It will also help to meet the short-term obligations. The investors would be happy to know that their invested capital can easily be converted into the cash for mitigating the short-term liabilities.
The current ratio along with the quick ratio needs to be improved for enhance the liquidity. For this, it is essential to get rid of unproductive assets from the balance of current assets.
Decreasing overhead costs has a direct impact on profitability. Therefore, BT Group needs to minimise indirect cost related to their services like advertising, rent, overhead expenses, professional fees and many more for enhancing the revenue figure at the end of the financial year.
Monitoring the accounts receivable is important to ensure that the collection from their customer is made on time. It also represents the better efficiency, which directly influence the stakeholders of the company in the long run of business.
Measuring profitability on the regular basis on the various products and services is an essential step which needs to be followed by the management of BT Group Plc. It is important to improve their broadband services more because the large demand of UK has not been fulfilled by the service the service the company is currently providing. Therefore, there is a high market demand which needs to be captured despite the fact that Vodafone is doing a sustainable business in the UK market.
The low debt equity ratio is always favourable for any business. However, the company is maintained the debt at 9.46. These must be decreased in the long run so that the company can reduce their financial risks proportionately. The investors will definitely show more interest into the company if the financial leverage gets reduced by the company.

Conclusion:

The above discussion and findings clearly indicated that British Telecom is doing great business in the telecom sector. The UK economy is also favourable for the company to grow in the market. Despite a prominent competition from the Vodafone Plc in this sector, the company is still managed to get a good customer responses providing high quality of telecom services. The PE ratio of the company should be in the bottom 20% of the entire market. Now the company’s PE ratio is 15.45% which is below the bottom figure. For improving more financial health of the company, it is essential to improve the liquidity position and profitability. For this the above recommended steps needs to be followed by the management of BT. At present the company is showing 300 percent of debt/ equity which is not acceptable by the investors because it enhanced their financial risks. Therefore, it is advisable that debt/ equity ratio should not be greater than twenty percent.

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