The Rusting Reaction Process - Essay Example

Introduction to Company British Telecom or BT is one of the leading telecom companies in UK besides having presence in more than 170 countries. The company is registered on London as well as New York Stock exchanges with total capital of BT has a very rich history full of successes as well as failures as BT, in recent past, has been able to transform itself into a competitive organisation with focus on growth and achieving value for its shareholders. Its focus has remained on delivering next generation IT solutions to different segments of the economy and it is because of this reason that over 60% of the fortune 500 companies are the customers of BT. BT deals into different kinds of services including both in consumer segment as well as in business 2 business segments with focus on deriving maximum value for its customers, shareholders as well as other stakeholders. A closer look at the website of the company would suggest that its business is divided into three different segments. 1) Consumer 2) Small and Medium Business 3) Large Business and Public Sector Its consumer segment provides services such as Broadband, digital TV, home phones etc. consumers are also offered some bundled packages like Broadband and TV together. Its Small and Medium Business segment provide broadband facilities to the businesses along with offering other services such as web hosting & ecommerce as well as management of email and internet facilities at its clients. Its large business and public sector segment offer services such as networked IT services, Industry expertise, in-house facilities and other high end services. The following section of the report will present an analysis of the forecasted financial performance of the company as on 31.03.2009. For detailed working of the facts and figures, please see the attached appendix. Key assumptions Before making an analysis of the forecasted financial performance of the company, it is very important that we must outline key assumptions while making our forecasts. 1) Sales growth will be taken from the historical trends of the sales growth in last five years. Though the GDP growth Of UK can be considered as an alternative but since company works in more than one country therefore its historical sales growth will be taken while projecting the sales growth as on 31.03.2009. 2) All the cost items will be forecasted by taking their relationship with the sales i.e. as % of sales. 3) No dividends will be paid 4) No fresh injection of equity except increase in it through retained earnings. 5) Taxation is not being computed as per the laws enforced but as a % of the total revenue of the company. Forecasted Financial Performance Core Ratios In order to assess the core ratios of the firm, we have taken four most important ratios into account. First ratio is return on sales or net profit margin suggesting that the historical performance of the company is somewhat mixed and consistent and the predicted results have also suggested that the company has been able to maintain its profitability with upward trends. This also can be attributed to the decreased interest expenses. Asset turnover is the second key ratio which suggests how the assets of the company are managed in generating the value for the firm. The assets turn over of the firm consistently remained under 1. It may indicate that the firm has assets which are relatively new and are recorded at high cost. Since the company deals with providing services which require high investment into technology which is changing therefore high asset values of the firm may be justified. Asset leverage suggests the use of equity and debt in acquiring the assets of the company. The predicted figure suggests that the asset leverage has continuously declined due to the injection of fresh equity into the business as well as increased profitability. Asset leverage also indicates towards the fact that the management may have more inclination towards the use of the debt into acquiring the assets. The use of debt also suggests that the firm may utilize more debt to magnify its Earnings per share to generate more capital appreciation of its shares. Return on equity is the other critical indicator of the performance of the company. The return on equity has continuously declined because of the fact that the firm has injected more equity into the firm. Profitability Predicted profitability position of the company has shown some what mixed performance. The company does not report its cost of goods sold therefore to comment on the gross margin figure is not possible however its net operating profit margin has shown a declining trend. The historical rates also suggest that the operating profit margin of the company has remained 10% in last five years and has been in the consistent range of 10% to 15%. Profit after tax has shown improvements mainly due to the fact that the interest expense of the company has declined. Last year company injected fresh equity which allowed it to rely less on the debt therefore the reduction in the overall debt of the firm also resulted into decreased finance cost for the firm. Return on asset which is considered as one of the most important indicators of the ability of the company to manage the affairs of the company showed a declining trend. This is because of the fact that the forecasted assets of the company increased especially its current assets has shown considerable improvement. Due to this factor, the return on assets of the company has decreased. The other indicators of profitability especially the return on capital employed has shown considerable decline suggesting that the overall profitability of the company have declined. Operating Ratios It is very important to mention that the company is service oriented in nature therefore do not report its inventory figures. However, predicted receivables figures suggest that the company's overall receivable in days are equal to the 71 days which is bit on higher side considering the fact that the company also works in consumer segment where the mostly monthly plans are administrated with advance payments options also. Financial Structure The current ratio of the company has declined over the period of time. Its historical current ratio has remained below 1 however predicted financials suggest an upward increase in the current ratio of the firm. Working capital of the firm has remained negative over the period of time however due to increase in cash and cash equivalent of the firm. It is important to note that the firm has been able to manage a good mix of the debt and equity as it has a very balanced capital structure. The company has long as well as short term debt however with the continuous increase in the profitability as well as the injection of fresh equity in the firm, the predicted financial structure of the firm suggest a healthy outlook with more growth to come in the form of retained earnings. Conclusion The predicted financial position of the firm suggests a mixed performance with some indicators suggesting a positive outlook whereas some indicators are not satisfactory. The future trends also corroborate the historical performance of the firm as most of the predicted ratios are in-line with the historical ratios. Overall the forecasted financial performance of the firm is satisfactory. Appendix Sales Forecasts 2004 2005 2006 2007 2008 F-2009 Actual Sales 18.696 18.794 19.741 20.459 21.053 21.685 Growth 0.52% 5.04% 3.64% 2.90% 3.00% Cost Forecasts Items 2008 F2009 Depreciation rate 18.90% 18% SG&A/Sales 75.10% 75% Interest paid on debt 25.50% 20% Interest earned on cash 128.70% 130% Exceptional/Sales 0% 0% Marginal tax rate 12% 12% Dividend payout ratio 0% 0% Intangible /Sales 36% 30% Net fixed assets/Sales 72.70% 71% Current Assets / Sales 21.70% 20% Current liabilities/Sales 38.90% 40% Debt/Sales 53.95% 60% Deferred tax/Sales 20.90% 22% New Equity 594 0 Forecasted Income Statement ' Item GBP'000,000 2009 Sales 21684.6 Cost of Goods Sold Gross Margin ' ' 21684.6 Depreciation Manufacturer (2755.30) Amortization/Other (479.00) Sales, General &Administration Overheads (16263.40) Net Operating Profit (NOP) ' ' 2186.90 Interest Expense -1963.60 Interest Income 0.00 Other Financial Income 2537.6 Profit after Financial Items ' ' 4724.50 Exceptional Expense 0.00 Profit before Tax ' ' 4724.50 Tax (331.30) Net Profit after Tax (NPAT) ' ' 4393.20 Minority Interest 0.00 Dividends 0.00 Retained Profit for the Year ' ' 4393.20 No ' Assets ' GBP'000,000 Mar-09 Forecast B10 Cash and Deposits 14,068.8 B11 Marketable Securities 517.0 B12 Trade Receivables (Debtors): 4,221.2 B13 Inventory 115.8 B14 Sundry Current Assets - B15 Current Assets ' ' 18,922.7 B16 Land and Buildings - B17 Plant and Machinery 10,323.2 B18 Depreciation - B19 Net Property, Plant and Equipment 10,323.2 B20 Other Investments 863.2 B21 Intangibles/Goodwill 4,209.7 B22 Non Current and Fixed Assets ' 15,396.1 B23 ' B24 Total Assets ' ' 34,318.8 No ' Liabilities GBP'000,000 Mar-09 B28 Short Term Bank Loans - B29 Trade Creditors (Receivables) 8,049.3 B30 Other Creditors 255.5 B31 Other Current Liabilities 369.0 B32 Current Liabilities ' ' 8,673.8 B33 Long Term Bank Loans 13,010.8 B34 Long Term Liabilities ' ' 13,010.8 B35 Tax/Deferred Taxation 4,770.6 B36 Long Term Liabilities and Provisions 17,781.4 B37 Ordinary Shares (Common Stock) (6.0) B38 Profit and Loss Reserve (Retained Earnings) 7,869.6 B39 Shareholders' Funds ' ' 7,863.6 B40 ' B41 Total Liabilities and Equity ' 34,318.8 ' Item GBP'000,000 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Actual Actual Actual Actual Actual Forecast Core Ratios ' Return on Sales (NPAT/Sales %) 7.54 9.68 7.84 13.95 8.26 11.20 Asset Turnover (Sales / Total Assets) 0.70 0.68 0.80 0.85 0.72 0.63 Asset Leverage (Total Assets/Equity) 8.60 289.82 15.37 5.65 5.40 4.36 Return on Equity (NPAT/Equity %) 45.54 1,915.79 96.33 66.83 32.00 30.90 ' ' ' ' ' ' ' ' ' ' ' Profitability ' Gross Profit / Sales (%) 100.00 100.00 100.00 100.00 100.00 100.00 Net Operating Profit / Sales (%) 15.37 14.84 12.64 12.43 11.19 10.08 Profit before Tax / Sales (%) 10.42 12.47 10.33 12.16 9.39 12.73 Return on Capital Employed (ROCE) 18.51 35.58 25.98 23.87 15.45 10.48 Return on Invested Capital (ROIC) 21.84 28.19 26.83 16.85 15.74 11.73 Return on Assets (ROA) 10.79 10.13 10.10 10.53 8.03 6.37 ' ' ' ' ' ' ' ' ' ' ' Operating Efficiency ' Inventory Days - - - - - - Trade Receivables (Debtor) Days 101.30 82.91 77.64 72.66 77.13 71.05 Creditors Days - - - - - - Funding Gap Debtors Inventory-Creditors 101.30 82.91 77.64 72.66 77.13 71.05 ' ' ' ' ' ' ' ' ' ' ' Financial Structure ' Current Ratio 1.23 0.77 0.71 0.61 0.67 2.18 Quick Ratio (Acid Test) 1.22 0.76 0.70 0.59 0.66 2.17 Working Capital (Thousands) 2,002 (2,783) (2,758) (3,757) (3,181) 10,249 Gross Gearing (%) 442.70 12,636.84 618.23 201.08 208.80 165.46 Net Gearing (%) 272.30 7,430.53 468.95 175.21 172.86 (20.03) Solvency 2.32 2.62 0.91 0.98 0.81 1.11 ' ' ' ' ' ' ' ' ' ' ' Cash flow Ratios ' EBITDA / Sales (%) - 30.04 27.25 26.53 24.91 25.00 Net Operating Cash Flow/Sales 37.85 25.98 23.80 29.43 28.36 Cash Flow before Financing/Sales 16.38 15.77 2.23 (7.28) 50.56 ' ' ' ' ' ' ' ' ' ' Read More