Free Accounting Dissertations - Few Years Back There Was Also Concern About Bt’s High Level Of Debt. So Now
Few years back there was also concern about BT’s high level of debt. So now BT is trying to reassure markets by reducing its high debt.
1.c
Telecommunication is a very capital intensive business. BT had built its business by taking large amounts of loans over the years. The business model is such that it has high fixed costs and low variable costs. Like most of other high fixed costs businesses, BT faced tough times when the competition reduced prices as variable costs are less. During 2001 and 2002, BT’s operating profits declined while its interest payments increased. This had a very negative impact on its share price.
BT also sold its mobile operations. Now a day major investment in telecommunication services is in mobile telecommunication only. The non-mobile business doesn’t need that high level of frequent investments. BT’s profile has now changed from a growth company to a mature cash generating company.
The lack of right investment opportunities and decision to enhance creditors and shareholders confidence has resulted in retirement of debt. In 2004, BT paid net interest of £941m and its operating profit before goodwill amortisation was £2,892.
Depreciation was £2,921m.
EBITDA = £2,892 + £2,921m = £5,813m
Interest cover ratio = Earning before interest, taxation, depreciation and amortisation / net interest
Interest cover ratio = 5813/941 = 6.18
BT generated earnings more than six times net interest payments. This shows that its debt levels are now very much within manageable levels and is more like a cash rich mature company.
2.a Earnings per share
Appendix 3 gives the earnings per share in the last five years. The basic earnings per share have fluctuated a lot in the last five years from a high of 31.2p in 2003 to a low of -25.7p in the year 2001.
To analyse earning per share, it is better to first start with basic earning before goodwill amortisation and exceptional items. Appendix 3 also shows the basic earning per share before goodwill amortisation and exceptional items. As can be seen from the table, operating profits for the company have not fluctuated like basic earnings with the highest and lowest operating profits being £3,772m and £2,580m respectively in the five year period upto 2004 (BT, 2004).
The variation in basic earnings, post tax, results from £3 billion plus goodwill amortisation and exceptional items in 2001 and 2002. Additionally, year 2002 earnings benefited from £4 billion plus gain on sale of fixed assets and investments. These are non-recurring events and so earnings before goodwill amortisation and exceptional items should be taken more as representing the underlying business going forward.
2.b Five year dividend policy
Appendix 4 shows the five-year dividend history of the BT Group. In the five year period from 2000 to 2004, dividend decreased in the first three years and then increased in the last two years.
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