Should you buy shares in BT Group?

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I recommend before reading this post that you zoom out (“cmd-” on a mac) as the text will be easier on the eye.

I’ve recently been studying ratios in my financial accounting module and with an exam in January I thought it would be beneficial to my revision to use my current knowledge of fundamental analysis to determine how strong BT Group is as a company, and to see whether it is worth an investment. Since deciding to analyse BT’s balance sheets on the 23rd November 2012 the share price has risen +2.9% from 226.7p to 233.5p (2nd Dec 2012).

I went onto the London Stock Exchange website and used the balance sheets provided for BT group to calculate these key ratios of profitability, efficiency and liquidity from 2011 to 2012 (year end 31st March).

(Definitions at bottom of page, with ratio equations)

Ratios 2012 2011
Profitability
Operating Profit 15.4% 12.8%
Return on Capital Employed 19.8% 15.6%
Return on Shareholders funds 162.1% 80.7%
Efficiency
Receivables Days 66.5 days 60.5 days
Net Asset Turnover 1.28:1 1.21:1
Liquidity
Current Ratio 0.48:1 0.55:1
Acid Test 0.47:1 0.54:1
Gearing 91.1% 88.3%
Dividend Cover 2.86 2.84

Lets start with Profitability.

Operating profit:

  • Change: Risen from 12.8-15.4%. This shows that the company is more profitable then the year before.
  • Reason for change: Expenses could be lower, indicating better management in the company. This is backed up by the half-year results in 2012 (document) showing underlying operating costs seeing a reduction of 10%, in line with the previous trend.
  • Verdict: Good, although cost cutting often leads to only short-term gains.

Return on Capital Employed:

  • Change: +4.2%. More efficient use of capital employed.
  • Reason for change: Better decisions by managers to use debt/equity effectively.
  • Verdict: Good

Return on Shareholders Funds

  • Change: +81.4%.
  • Reason for change: strong increase in net profit of £500m from 2011 to 2012. A result of less financial costs, therefore management could be lowering the amount of debt that BT is burdened with.
  • Verdict: Excellent

Efficiency.

Receivables Days

  • Change: 6 days. BT Group is receiving it’s short-term borrowings 6 days quicker then the previous year.
  • Reason for change: More efficient recall of credit. BT might be hassling customers on credit to pay back quicker, or on time.
  • Verdict: Good, means BT has more credible cash flow.

Net Asset Turnover

  • Change: 0.07:1. Negligible.
  • Reason for change: More efficient use of assets. Though change negligible to be credited.
  • Verdict: Need to investigate industry average to determine performance.

Liquidity.

Current Ratio and Acid Tests

  • Change: -0.07:1.
  • Reason for change: A vast increase in current liabilities (+2224million) indicating possible short-term debt problems.
  • Verdict: Although change is small it is worrying that the ratio is under 1. Ideally you want 1.5:1 Current ratio and 1:1 acid test. The current ratios could indicate liquidity problems.

Gearing

  • Change: +2.8%.
  • Reason for change: Increase in amount of debt. This is worrying as high levels of gearing puts large risk on the business in the long-run. Can be good for shareholder returns if profit remains strong.
  • Verdict: Ideally we are looking for 50% gearing, but we must investigate industry average and shareholders returns first.

Dividend Cover

  • Change: +0.02
  • Reason for change: Negligible change, but figures show that the dividend is easily covered by profits and therefore it is likely BT will keep paying good dividends into the near future.
  • Verdict: Good.

What do these ratios say about BT Group?

From the verdicts I think I can openly say that BT Group should be a good investment. The profitability looks strong, as does efficiency, the only bad point I can place on the ratios is that the current liability rise and gearing rise might be an issue – loading a company with debt will, although arguable, almost inevitably end in trouble.

You cannot value BT Group on two years balance sheets alone.

It is important to note, however, that I’ve reached the verdict of BT Group being a good investment by only analysing it’s balance sheets from two years (2011 and 2012) and without looking at other industry ratios and comparing how BT Group fares against others in it’s sector – such as BskyB.

I’m not going to now analyse BskyB’s balance sheet as well, but it’s important to take account of the fact that you need to be aware of the general sector conditions to be able to value a company successfully. It may be that the sector operating profit ratio fell by 20% from 2011 to 2012, but BT Group’s rose 2.6%, showing they are performing much better then their competitors.

Technical Analysis

A quick look at BT Group’s graph shows an initial resistance at 235.9p. Should BT Group break that resistance it is likely to continue to rise up to 243.1p, it’s second resistance. That would be a total ROI of +4.1% if invested in today.

Broker’s view

Strong Buy 8
Buy 3
Neutral 10
Sell 1
Strong Sell 1
Total 23

(Source: The Share Centre)

Seems quite positive from the stockbrokers, with target prices ranging from 220p (Citigroup) to 300 (Credit Suisse).

News

With BT Group’s recent acquisition of the rights to show 4 years of premiership rugby from the season 2013-2014 it could indicate increasing momentum in BT’s recent growth. The long term effects of this acquisition are soon to be seen, BT are going to hope for more subscribers to their BT vision service after spending £151m for the rights. (Source: Telegraph)

I hope this post has been somewhat enlightening into BT group and accounting ratios. I’m not liable for any investment decisions made by the readers of this blog as a result of this post.

-Ed

Below are some basic definitions and the ratio equations for the above, for those who are lost in the accounting language.

Definitions:

  • Operating profit is the profit after net revenue and expenses, but before tax and finance costs.
  • Revenue is the amount of make made through sales.
  • Trade receivables are a form of credit, where the customer owes the company money.
  • An Asset is defined by achieving four characteristics. Probable future economic benefit; past transaction; controlled by the business; and can be measured in monetary terms.
  • A Liability is money owed i.e. debt.
  • Current defines that the asset or liability is short-term (i.e. inventory is a current asset, a bank overdraft is a current liability)
  • Non-current means longer term, in the case of debt it is defined as debt outstanding for longer then a year. A non-current asset would be Property, or Machinery. A non-current liability would be long term borrowing, i.e. corporate bonds.
  • Capital employed shareholder capital and reserves plus non-current liabilities.

Ratio Calculations

  • Operating Profit: Operating Profit/Sales revenue (%)
  • R.O.C.E.: Operating Profit/Capital Employed (%)
  • Return on shareholders funds: Net profit after tax/Average ordinary share capital and reserves (%)
  • Receivables Days: Trade receivables/sales revenues x 365
  • Net Asset Turnover: Revenue/Capital employed (xx:1)
  • Current Ratio: Current assets/current liabilities (xx:1)
  • Acid Test: Current assets-inventories/current liabilities (xx:1)
  • Gearing: Non-current liabilities/capital employed (%)
  • Dividend Cover:Earnings for year available for dividend/dividend (times)
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6 thoughts on “Should you buy shares in BT Group?

  1. Ed
    Hmm… How does this figure if you look at their pension Liabilities? http://www.ft.com/cms/s/0/b0e69c52-dd01-11df-884a-00144feabdc0.html#axzz2DzQKK28u
    This is almost Greek to me but would seem to suggest what your Grandma would call ‘fur coat, no knickers’!

    And some more general questions that have arisen from either discussions with my lodgers over a cuppa or when I have been cooking my tea and listening to the radio. No immediate answers required – I know you have plenty of coursework – but when you have a view to share:

    a) Would a more mutual/co-operative approach to business – even a vintage approach – to economics and business benefit the country? Or are we too indebited to even try?
    http://edmayo.wordpress.com – see his blog on failing businesses.
    Could there be a C21 way rather than holding to the good, ol’ boy values of the Thatcherite era?

    b) A company I worked for (nameless) looked for a 30% margin on all goods-made-for-sale. A well known fashion house makes T-shirts for £5 and sells them for £70. Is this good business or just good profit.

    c) Should we bring our social budget sit closer to our industrial budget viz the German economy?http://www.bbc.co.uk/news/business-17213556

    Auntie Mariexxxxx

    1. Unfortunately I’m not a paid subscriber to the FT, so cannot read the article. However judging by the fact it was last edited in October 2010 it’s quite out of date. This article by the telegraph is more current.

      [Edit – only saw a preview of your full post]
      Three really good topics of discussion, will look to provide you with some sort of weighted debate on each, need to do some research around them first.

  2. You can subscribe free for limited articles if that is any use – but my question is, what magic happened in between? Can you really reverse a situation that quickly or are you just shuffling lines on a balance sheet? Was it jiggery poggery with ages ie everyone gets it later? Was it changes in terms and conditions applied retrospectively? As you can see I am a cynic because I just don’t think things add up? Any answers welcomeand I’ll see if i can cut and paste the old article.
    Puzzled, pensioned (minimally) and unable to retired! Auntie Marie

    1. It’s very likely that they simply borrowed the money. With interest rates set close to zero and demand for corporate debt bonds being high (as investors move away from equity) it’s very cheap for companies to borrow at the present time.

      I don’t really have access to the kind of software that can answer your question with certainty, but that is my best guess.

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