Business Analysis of EE Telecommunication Company - Case Study Example

Business Analysis Case study of EE telecommunication Company Contents Business Analysis 1 Case study of EE telecommunication Company 1 Executive summary 3 About EE telecommunication company 4 Type f business it engages 5 4G network 5 Mobile payments 5 HD voice calling 5 Broadband 6 Recent events affecting the company’s operation 6 Main theories behind capital structure 7 Modigliani and Miller’s Theory 7 Trade-Off Theory 7 Pecking Order Theory 8 Market Timing Theory 8 Net Income Theory 8 Net Operating income Theory 9 Capital structure ratio and market comparison 9 Conclusion 10 Bibliography 12 Executive summary The growth in the mobile industry in recent years has experience a drastic growth and in spite some report that depicts a stunted growth in this sector, we still anticipate a growth in 2017. Simple technologies like wearables for instance, those integrating augmented or viral reality might take some fewer years to turn to be an intricate one as wholly robotic cars are out. However, one thing is irrefutable; penetration and using the ecosystem to keep on growing in numerous segments is still a challenge. The report evaluates the annual report of EE Telkom Company and its competitor O2 Network. We perform the ratio analysis for the financial period 2013 to 2016 to ascertain the trend performance o the company and evaluate whether the business sis viable in terms of the going concern assumption or whether the business is risky as depicted by decline in the company liquidity ratios. The trend analysis for EE telecom ltd depicts growth in revenue and retained earning which implies that there is a growth in company’s financial performance. Financial Forecasting for a business is significant in financial statement analysis because of is helpful in preparing the assumptions that the core financial reality with regards to business will be same for some time I the future. The forecast exemplify where the busyness will stand if the status quo of the company is maintained. In ascertaining the effect of the change with regards to changes in the market situation or client preference, we attain great understanding of the financial statement of EE limited and 02-network Company The significance of preparing and examining the financial statement of the co any is that will help managers and stakeholders to identify the problem that expert deem as the leading cause of business shut down. In making similarities of the financial period 2013/16 for both companies, we might establish trend, select the relevant management verdicts, and reconsider the financial forecast prior to small problem turning to big problem that might affect the going concern assumptions. About EE telecommunication company EE is the leading Britain mobile network company, internet serivice provider and a subsidiary of BT group holdings. The company was created in 2010as a joint venture with Deutsche telecom and orange S.A through the merger of their corresponding T-mobile and orange business in Britain. EE is the largest mobile network operator in UK with almost 31 million clients and the largest 4G operator services in Europe. The company headquarter is located in Hatfield in UK. EE Company is the leading telecomunicaton company in UK and the most advanced digital communication company, which delivers the mobile and fixed communication service. The company has almost 554 retails stores and services more than 32 million links across its mobile, fixed, and whole networks. The growth in the use of smart phone across the globe provide signs of constant chances for telecom firms inclusive of wireless and broadband carries, network assets/ infrastructure firms and firms that manufactures devices. However, it is anticipated that there might be a change to the manner to which these opportunities will be manifested. Within the carrier division, venture in emerging markets has in the past focused on the connectivity first, which permitted carriers to leverage their core strength inclusive of their network, Nevertheless, in the year 2017, it is anticipated that a change towards segments with high potential of growing that will surpass the carriers core connectivity businesses. The two likely areas of concentration are the content and the IoT. The opportunity of delivering content to any TV is eventually turning to be real, enabled by improved I network technologies and high seen connectivity as well led to content at the carrier level. Type f business it engages The company engages ion a mobile service provision and they mainly provide the following services 4G network The company launched the 4G service in the UK and was approved by Ofcom on 21st August 2012 (Anton, 2006). The company’s 4G network together with its countrywide marketing campaigns and rebranding of its retails stores was launched in 30th October 2012. Mobile payments The company launched the Mobile payment in partnership with Barclaycard that introduced the UK’s first contactless mobile payment system for clients (Bandt, 2002). The company entered into a contract with iZettle to sell the company’s mini credit/debit card records that permit small business clients to make payment via their mobile phones. The device in the first place went on sales 297 retails stores and trough the EE telesales channel HD voice calling The company launched the HD voice calling in the year 22nd June 2010 through its network. The technology in the first place trilled on orange network prior to expanding to rest of the UK by end of the summer. Broadband The company inherits the Orange UK broadband service and on April 2013, the company had almost 900000 broadband clients. The company as well offers the TV service over the broadband. Recent events affecting the company’s operation Subsequent to the outcome of Brexit, the demand for telecom and its services might be weakened or even get worse as UK economy becomes stunted. With reticent recession result as a direct outcome of the UK conclusion on leaving EU, this will depict an impact on the client and business market proportionately (Connolly, 2006). The magnitude of the decline in economic activities and the telecom demand is not likely to quantify. However, even a reticent reduction will make the UK telecom companies like EE to reconsider its business strategies to guarantee they remain competitive in the market and might upheld the market portion as clients rein in their sending and shift to low cost service providers. The EE Company will be affected since; the UK spending power will efficiently decline because of the weak pounds against the US dollars and Euro. The company might as well be deprived the right of entity to EU research and development finance inclusive of the high profile emerging technology like the 5G and IoT. For instance, the Horizon 2020 plan depict a €80bn budget that will cover the IoT, cloud computing, clean energy, security, robots and Automation as well as smart cities (Dlabay, 2007). The UK state might conclude on stepping in to fill any financing need, but there is no assurance and the state’s capacity to provide extra funding will be limited by the possibility of UK stunted economic growth in the future as a result of Brexit which depict a negative impact on telecom companies like EE in Britain. EE Company will substantially be affected by Brexit since; the company is lacking geographical diversity, with vast majority of the firm’s Egg in the Britain become basket. The company is intensively exposed to recitation macroeconomic intricacies. With Deutsche Telekom (DT) holding a 12% stake in BT, the UK telecom company will experience disgruntle stakeholders that took a big hit in the worth of its holdings a result of BT share price declining and the current pounds/Euros exchange rates shift. DT will most likely remain in the market but as a company believes in the EUR projects, but there may be possibility that EE Company may leave the EU market in the long-term. Main theories behind capital structure Modigliani and Miller’s Theory The Modigliani and miller theory starts by assuming that the business depicts some set of forecasted cash flows. When the business prefers a specific portion of financial debt and equity, it just divides the cash flows between the investor (Industrial Systems Research , 2013). Investors as well as companies are assumed to depict same right of entry to financial market. As per the modiglailian and miller theory, the market worth of a firm is based on its earning power Trade-Off Theory The term trade off theory is mainly employed to explain a set of linked theory. In all of these theories, a verdict maker established the diverse cost and benefits of options to leverage strategies. The tradeoff theory assumes that one will get the advantage within the capital structure until the optimal capital structure is attained. The theory acknowledges the tax benefits from interest payment (Harold Bierman, 2003). The theory chiefly refers to the two concept; cost of financial distress and the agency cost. A main aim of the trade off theory is to justify the fact that business generally is financed partly by debt and partly equity capital. Pecking Order Theory As per the pecking order theory, firms depict a distinct preference for using the internal finance unlike the external source of finance. Fit the internal source of finance is not sufficient to fund the venture opportunities, firms may get external funding, but it will consider amongst the many external financial options in what to capitalize in the extra cost. The theory considers the market to book ratio as an approach to evaluating the venture alternatives. Market Timing Theory This theory state that firms time their equity in way that they issue new stocks when the price of the stock is overvalued and buy back the shares when they are undervalued. In this regards, the variance in stock prices affects the firm’s capital structure (Industrial Systems Research , 2013). Firms do not normally care if they fund with debt or equity capital, they just pick the kind if funding that at some point in time turns to be more valued by financial market. Net Income Theory As per the net income theory, the cost of debt is deeming as the cheap source of finance unlike the equity capital. The ire the company uses the debt capital in its capital structure, the less the total cost of capital. Debt is less costly source of capital because of the fact that interest is deducted from the net profit prior to tax. Afterwards, the firm will pay reduced taxes and hence it will minimize the weighted average cost of capital. The worth of the firm will be high due to low cost of capital due to use of advantage in the capital structure. Net Operating income Theory As per this theory, the worth of the firm is not affected by the change in debt capital structure; it assumes that the gain that the firm realizes by infusion of debt is negated by the growth in the rate of return by stakeholder. Capital structure ratio and market comparison Financial reports of the company are significant because it depict some very important information for examining the company business situations. Our report entails analysis of financial report for EE Telkom ltd and O2 Network Competitor of EE limited ltd limited for the financial period 2013/16. the analysis is categorized into three main sections; section one entails the background information for EE Telkom ltd limited, second part entails the trend analysis and last part entails the ratio analysis which will comprise the capital structure ratio in order to establish the company existing financial performance. The trend analysis is important in providing a proper comprehension in changes made in the company’s financial performance. The trend analysis for EE ltd and O2 Network limited depicts a growth in debt to equity ratio. The implication is that the financial performance for the company is improving with a growth in assets, liabilities and equity capital depicting a growth signifies expansion in business operations for EE limited Debt to Equity Ratio = Total Debt / Total Equity   2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 Debt/Equity             EE limited 1.16 1.24 1.33 1.26 1.00 0.96 O2 network 0.32 0.32 0.37 0.41 0.3 0.34 From the above capital structure ration, it is evident that EE limited depict the highest level of debt financing unlike the capital structure of O2 network. The implication is that, EE limited is having an optimal capital structure since, Under the Modigliani and Miller model, an optimal capital is a capital structure with more debt financing unlike equity financing (Porter, 2008). Conclusion The growth in the mobile industry in recent years has experience a drastic growth and in spite some report that depicts a stunted growth in this sector, we still anticipate a growth in 2017. Simple technologies like wearables for instance, those integrating augmented or viral reality might take some fewer years to turn to be an intricate one as wholly robotic cars are out. However, one thing is irrefutable; penetration and using the ecosystem to keep on growing in numerous segments is still a challenge. The growth in the use of smart phone across the globe provide signs of constant chances for telecom firms inclusive of wireless and broadband carries, network assets/ infrastructure firms and firms that manufactures devices. However, it is anticipated that there might be a change to the manner to which these opportunities will be manifested. Within the carrier division, venture in emerging markets has in the past focused on the connectivity first, which permitted carriers to leverage their core strength inclusive of their network, Nevertheless, in the year 2017, it is anticipated that a change towards segments with high potential of growing that will surpass the carriers core connectivity businesses. The two likely areas of concentration are the content and the IoT. The opportunity of delivering content to any TV is eventually turning to be real, enabled by improved I network technologies and high seen connectivity as well led to content at the carrier level. Bibliography Anton, D. (2006) Business Finance: The Fundamentals of Financial Management, New York: Cengage Learning. Bandt, A. (2002) Successful Strategic Human Resource Planning, London: John Wiley. Connolly, M. (2006) International Business Finance, London: John Wiley $ Son's. Dlabay, L. (2007) Business Finance, New York: Pearson Education. Few, C. (2009) Advances in Investment Analysis and Portfolio Management - Volume 9, New York: Cengage Learning. Harold Bierman (2003) Financial Management for Decision Making, Sydney: Pearson Education. Industrial Systems Research (2013) The Business Finance Market: A Survey - Page 76, London : Pearson Education. Lima, P. (2014) Business of Freelance Writing: How to Develop Articles, Sydney: Springer. Narayanan, V. (2004) Finance for Strategic Decision-Making: What Non-Financial Managers, New York: Cengage Learning. Porter, M. (2008) Competitive Strategy: Techniques for Analyzing Industries, New York: Cengage Learning. Roy, D. (2011) Strategic Foresight and Porter's Five Forces, London: Pearson Education. Sarnat, M. (2007) Financial Decision Making Under Uncertainty, New york: Springer. Wisniewski, J.W. (2015) Econometric Models in Business Management, london: Pearson Education. Zentes, J. (2012) Strategic Retail Management: Text and International Cases - Page 90, London : Cengage Learning. 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