BT PLC and Vodafone PLC Telecommunication Companies - Sample Solution

Question: Choose two of the UKS Top three Telecoms companies from the list provided (Vodafone, BT Group BSKYB) and download the companies annual reports from the following links: BT Group PLC Vodafone PLC Produce the 2013, 2014 and 2015 ratio table for the companies you have chosen from the list above (Profitability, Liquidity and Efficiency ratios as performed in class.) Based on these ratios and any other additional information available from the annual reports, compile a report comparing the performance of the companies selected. Answer: Introduction BT PLC and Vodafone PLC both are telecommunication companies listed in FTSE 100 sector of mobile telecommunications. The former is the leader in the market and the other is having the scope to grow. Both have their own set of opportunities and threats. One is good in something and the other in something else. Vodafone after the demerger with Verizon was left with good amount of cash due to which its valuations is difficult, but with dividend factor it is solved. BT group has not merged or demerged itself but is into broadening the business in the new segments. Its earnings are backed by its huge amount of profits. It is already working in the sectors of phone, IT services and the broadband and also pay-tv. Comparison of performance of BT group plc and Vodafone group plc Financial ratios are used to assess how a company is performing. It is used to read and know the health of the enterprise. They are beneficial for all the users of the financial statements as it gives the information how well the company is doing. Other than these there are other factors which are used to calculate performance. BT PLC Debt - It is not uncommon for these companies to take loan for expansion of business, or covering the costs as the cost to build it is usually very high. The debt taken by this company is very high. The net debt shows decrease and also the interest coverage of this company is quite good. Dividend - The Company has shown increase of 469p in the last 12 months period which is merely a 6% increase. But, it can be seen that the dividends with this enterprise has been over 158% of increase, the shareholders are all in a goody position. The dividends have been of great amount for shareholders, which show the safe point of view for them. The increase is a result of long term hard work and determination. BT Group PLC The Increase in EPS is also an indicator of a good performance of the enterprise. With 31.5p in 2015 from 28.2 p in 2014 showing 12% increase is a good indicator. However, the value of shares increment is an indicator of the growth. It is to be noted, that the EPS for 2017. For year 2016 has fallen but it is expected that the growth is expected in the year to come, as the fall was temporary because of some right issues of the company. Profitability margins: Operating profit margin The ratio measure ho the company is able to cover its operating expenses and make profit. This ratio is increasing at a growth rate, showing that the company is easily meeting its operating expenses and is able to make profits. Net profit margin The ratio is increasing year on year thus making the way for much more profits left after deducting the operating and non operating expenses. This ratio is constant and the company is able to make appropriate use of its capital to generate the profits. Liquidity ratio Current ratio The standard ratio is assumed to be 2: 1. However, the ratio for the year 2015 is 0.96: 1, which is not a good ratio, as it not able to pay the short term liabilities instantly. Acid test ratio The acid test ratio is better than the current ratio, but then too, such amount is not enough to pay the short term liabilities. The ratio is not touching the standard ratio of 1: 1. Inventory turnover It shows the number of days in which an inventory is been sold efficiently. As per the ratios, the ratio was so good but in the last two years it has decreased. Asset turnover ratio This ratio is decreasing year on year basis. It means that the company is not using its assets properly. Receivable collection period It is the period in which the receivables takes to complete the payment procedure. The number of days is not very far. It is a good indicator that the goods sold are converted into cash easily. Trade collection period It is the period in which the outstanding liabilities are paid off. This period has increased at such a fast speed. It shows the incapability of the company to pay it short term debts. Vodafone Group Plc The debt for 2015 year is m 22, 435. and the interest coverage is at 1.62 times. The company does not have lower net debts to assets ratio as compared to BT group plc but it also dont have much funds as the profits are negative. The dividend given in 2015 year was 7.62p, whereas in 2014 it was 7.47p/ it has shown an increase in 2.0% increase on a year basis. The dividend is not much in value but it is showing a growth rate year on year basis. The dividends are not much covered by the earning of the company. It means that to pay dividends other sources of income is being used. EPS It has decreased from 2014 to 2015 from 223.84p to 21.75p, despite decrease in number of shares by the company through consolidation of 6 for 11 shares activated in 2014, February, there is no increase in the dividend. The condition of Vodafone is not too excelling in nature. Profitability ratios Operating profit margin The ratio is negative for the previous two years, but has shown positive results in 2015. It reflects the ability of the company that it is trying hard to cover up the expenses and make profits. Net profit margin has decreased significantly after the deduction of the operating expenses. It means that there are other indirect or non-operating expenses which are in large amount because of which even after meeting other expenses operating expenses, there is profit but the expenses are of great values. Return on capital employed was negative for previous last two years and only became positive in 2015. The company is not enough able to put its capital to use. Liquidity ratios Current assets ratio The ratio is fluctuating for the last three years. It also is not able to pay the current liabilities on a short notice. Acid test ratio This ratio has shown decrease in the last two years. It is either because of increase in current liabilities or decrease in the current assets. Efficiency ratio Inventory turnover This ratio has increased in the last three years. It shows that the products of this company are easily being sold. Assets turnover ratio It shows the efficiency of the company in using its assets to make sales or generate sales. The efficiency of the company has increased over the last few years. Receivable periods It is normal for all three years which shows the ability of the company in making a trip. Trade payable period This ratio too is appropriate as the company is at a constant rate to pay the trade payables for the year. Calculation of Ratios BT Group PLC Ratios Years 2013 2014 2015 Profitability Ratios Operating profit margin: 2,986 / 18,103 * 100 3,145 / 18,287 * 100 3,480 / 17,979 * 100 Operating income / Net sales * 100 16.49% 17.20% 19.35% Net profit margin: 1,948 / 18,103 * 100 2,018 / 18,287 * 100 2,135 / 17,979 * 100 Net profit / Total Revenue * 100 10.76% 11.04% 11.87% Return on capital employed: Net Operating profit / Employed capital * 100 2,986 / 17,275 * 100 3,145 / 17,211 * 100 3,480 / 19483 * 100 17.28% 18.27% 17.86% Liquidity ratios Current assets ratio: 4,674 / 7,604 5,706 / 7,687 7,471 / 7,708 Current Assets / current Liabilities 0.61 : 1 0.33 : 1 0.96 : 1 Acid test ratio: 4555 / 7604 4074 / 7687 5858 / 7708 Quick Assets / Current liabilities 0.59 : 1 0.53 0.76 Efficiency ratios Inventory turnover ratio Cost of goods sold / Average Inventory 12464 / 103.49 1550 / 92.48 1573 / 87.97 120.43 16.76 17.88 Receivable collection period 32.13 28.59 28.67 Trade payable period 90.61 667.83 647.39 Assets turnover ratio Net sales / Average total assets 18103 / 23820 18287 / 24862 17979 / 26044 0.76 0.74 0.69 Vodafone Group Plc Ratios Years 2013 2014 2015 Profitability Ratios Operating profit margin: (2202) / 38041 * 100 (3913) / 38346 * 100 1967 / 42227 * 100 Operating income / Net sales * 100 -5.788491365 -1.019663068 4.658157103 Net profit margin: 657 / 38041 * 100 59,420 / 38346 * 100 5917 / 42227 * 100 Net profit / Total Revenue * 100 1.727083936 154.9574923 14.01236176 Return on capital employed: (2202) / 109955 * 100 (3913) / 96801 * 100 1967 / 93676 * 100 Net Operating profit / Employed capital * 100 -2.00% -4.04% 2.09% Liquidity ratios Current assets ratio: 21649 / 28369 24722 / 25039 19847 /28897 Current Assets / current Liabilities 0.763121717 0.98733975 0.686818701 Acid test ratio: 17021 / 28369 20282/25039 16182/28897 Quick Assets / Current liabilities 0.6 0.81 0.56 Efficiency ratios Inventory turnover ratio Cost of goods sold / Average Inventory 26567 / 407 27942 / 445 30882 / 461 65.27518428 62.79101124 66.98915401 Receivable collection period 32.36 36.28 32.72 Trade payable period 52.97 59.03 57.7 Assets turnover ratio Net sales / Average total assets 38041/122713 38346 / 132227 42227 / 120648 0.31 0.29 0.35 Notes: The values taken are in m Revenue includes Gross revenue less Sales return. Operating income is derived from revenue less other operating expenses of the company. BT Group Plc 2013 = m 18,103 - m 15,155 = m 2,948 2014 = m 18,287 - m 15,142 = m 3,145 2015 = m 17,979 - m 14,499 = m 3,480 Vodafone group plc 2013 = m 38,041 - m 40,243 = (m 2,202) 2014 = m 38,346 - m 42,259 = (m 5,270) 2015 = m 42,227 - m 40,260 = m 1,967 Net Profit is Total Sales less all operating and non operating expenses and adding all direct income and indirect incomes to it. Employed capital = Total Assets Current liabilities BT Group PLC = 2013 = m 24,879 - m 7,604 = m17, 275 2014 = m24,898 - m 7,687 = m 17,211 2015 = m27,191 - m7,708 = m19,483 Vodafone Group Plc 2013 = m 138,324 - m 28,369 = m 109,995 2014 = m 121,840 - m 25,039 = m 96,801 2015 = m 122,573 - m 28,897 = m 93,676 Current Assets include all short term assets. Current liabilities include short term obligations. Quick Assets are Current Assets less Inventories and prepaid expenses. It is also calculate from adding cash and it equivalents, short term investments, short term receivables, short term marketable instruments. Cost of goods sold is the value of the costs incurred in making the product. It involves all the direct costs. Average Inventory is the opening and the closing inventory added together and divided by two. Receivable collection period and trade payable period is taken from financial ratios of the company. Average total assets are the total of total assets at the beginning and in the end of the financial period divided by two. The values for the ratios are picked from the Annual reports of the BT group PLC and Vodafone Group PLc for the years 2013, 2014 and 2015. Conclusion and Recommendation The BT group Plc is increasing the share prices, though not the dividend. It will result into more capital gain then. The profitability ratios are above average. The company is making enough profits to meet the operating or non-operating expenses. Talking about the liquidity ratios, the current asset ratio and acid test ratio are not in a good position. The standard ratio of current assets ratio is 2: 1 and 1: 1 for quick ratio. However for 2015, also the ratios are 0.96: 1 and 0.76: 1. The company is not having enough funds to pay the current liabilities on a short notice period. The efficiency ratio is also not in a good position. Only the inventory turnover ratio has got effective and changed for better. Now, the sales period of inventory is much earlier than before. Receivable period which is for receiving the debtors amount is constant and reflects the good position about the receipt of payment from debtors easily. Whereas, the trade payable period is approximately nearby two ye ars. It is because of fewer funds for payment of liabilities. The Vodafone groups shares are of less value than the BT plc and immediately sale is the good option in it. For this company the profitability ratios are not of good position. The operating profit is negative, because of which operating profit margin is also negative. It shows about how the company is not effectively able to cover all its expenses and also not able to use capital appropriately. The liquidity ratios are below the standard ratio because of less cash available and high expenses. Inventory turnover ratio is also quite good. The company doesnt take much time in selling its inventory. The receivable collection period and also the payable period are in a good position reflecting about the early receipt of payments from debtors and early payment to creditors. The asset turnover ratio is not of high value as the effective use of assets is not being done. The BT Group plc should focus on increasing he current assets and also cash, which will lead to faster payment to the trade payable. The Vodafone group plc should focus on reducing the operating and non-operating expenses in order to increase the profit and also to have control on the expenses. Additionally it should also focus on increasing the current assets. References Anon, 2016, BT Group plc, Accessed on 17th March 2016, Available at: https://financials.morningstar.com/income-statement/is.html?t=BTregion=usaculture=en-US Vodafone, 2014, Annual Report 2014, Accessed on 17th March 2016, Available at: https://www.vodafone.com/content/annualreport/annual_report14/downloads/full_annual_report_2014.pdf Vodafone, 2015, Annual report 2015, Accessed on 17th March 2015, Available at: https://www.vodafone.com/content/annualreport/annualreport15/assets/pdf/full_annual_report_2015.pdf Oscroft A, 2016, Which is best for 2016, Accessed on 17th 2016, Available at: https://www.fool.co.uk/investing/2016/02/18/which-is-best-for-2016-bt-group-plc-vodafone-group-plc-sky-plc-or-talktalk-telecom-group-plc/ Anon, 2016, Vodafone group plc, Accessed on 17th March 2016, Available at: https://financials.morningstar.com/ratios/r.html?t=VODregion=usaculture=en-US Sakya P, 2014, Vodafone or BT PLC, Accessed on 17th March 2016, Available at: https://www.fool.co.uk/investing/2014/10/23/vodafone-group-plc-vs-bt-group-plc-which-is-the-better-dividend-investment/ BT group plc, 2015, Annual return 2015, Accessed on 17th March 2016, Available at: https://www.btplc.com/Sharesandperformance/Annualreportandreview/pdf/2015_BT_Annual_Report.pdf BT group plc, 2014, Annual return 2014, Accessed on 17th March 2016, Available at: https://www.btplc.com/Sharesandperformance/Annualreportandreview/pdf/2014_BT_Annual_Report_smart.pdf BT group plc, 2013, Annual return 2013, Accessed on 17th March 2016, Available at: https://www.btplc.com/Sharesandperformance/Annualreportandreview/pdf/2013_BT_Annual_Report_smart.pdf