There are several indicators of company performance that the managers can turn to. Ideally managers should balance their assessment of the company’s overall performance with the evaluation of the company’s strategic business unit (SBU’s) (Scott, 1998). The following figure represents a summary of the issues that managers need to examine when it comes to evaluating company performance.
Market Share Analysis:
Fig: Value Creation roadmap (cited in Scott, 1998 pp.53)
Market Share:
BT since 2002 is continually losing market share. BT group share price has declined, from more than £10.00 in the beginning of 2002 to around £1.70 at the moment. The reasons for this include;
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The antagonistic competitive environment; There is stiff competition in the telecoms market () accompanied with the fact/result that during the past few years the company has experienced several hostile attacks from competition.
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BT’s global ambitions, predominantly in the internet arena, seem that have put the company into financial troubles. ().
- The relationship between supply and demand. The increased supply on the telecom market provides to the consumers a variety of choices/alternatives, driv prices down and gives competitive advantage to cost focus competitors.
Financial Statement:
- BT’s profitability increase in profits between 2001 (£1870 – loss) and 2003 (£2971m. – profit) in relation to sales which were fairly stable.
- BT’s short and long term liabilities – decreased from £39.548m. in 2001 to £25.635m in 2002 and then to £23.136m. in 2003.
Cash Flow:
“Cash tell you how successful the business is at synchronizing its different activities” (Scholls, 2002, pp.54).As it is specified in the cash flow statement, BT’s operating net cash outflow for capital expenditure and financial investment has increased from £1.749 m in 2002 to £1.712 m for the nine months ended 31 December 2003. In addition, the net cash inflow from financing shows a greater increase from £845 m to
£682 m.
Ratio Analysis:
“The calculation and presentation of ratios is a method of relating one number to another, so as to draw inferences about the position and performance of activity” (Broadbent and Cullen, 1993). It is perceived as essential for the purpose of this report since; it enables the control of differences thus making results comparable.
Net Profit Margin = Net Profit after tax/sales * 100%
Gross Profit Ratio:
Gross Profit Ratio = Gross Profit / turnover * 100%
The gross profit ratio is a useful control ratio, in that it represents the differences between the buying-price and the selling-price of the product.
By examining the figures it can be identified that there is considerable increase from 5.05% in 2001 to 15.64% in 2003.
The Net Profit margin represents the percentage of sales that is left over for profit once all other expenses have been met.
The Net profit margin has been increased from -9.15% in 2002 to 13.36% in 2003.
However mostly for 2001, as it can be observed from the profit and loss account this has been a result of the selling of fixed assets and investments rather than in increase on sales profitability or the decrease of service costs.
Return on Capital Employed Ratio (ROCE):
Operating profit
R.O.C.E = ---------------------------- * 100
Total sales – Current liabilities
ROCE is a very common and important measure of profitability both for internal and external assessment of management efficiency. The figure is quite satisfactory and it is positively altering continuously. Since the trend that the figure will keep increasing, BT’s management should make sure that it will reach and sustain a desirable rate. However sustaining this figure will represent a huge challenge for the company since ROCE “measures the return on the total business capital regardless of how it is financed” (Broadbent and Cullen, 1993) and in BT’s case this could be generated as result of profit increase that resulted from the sale of fixed assets. Given that, revenues from fixed assets are one-offs that were made in order to decrease debts and in turn boost shares values in the long term.
Current Ratio:
Current Ratio = Current Assets/ Creditors payable in less than 1 year
This ratio compares the ‘liquid’ assets of the business with the short term liabilities. The ratio reveals that the current assets cover the current liabilities. 1.19 times in 2003 in comparison with only 0.46 in 2001. The ratio seems to be improving year by year. Some academics suggest that the ideal current ratio is 2 times or 2.1. However BT’s 2003 current ratio is perceived as acceptable since as Atrill and McLaney (1997) argue; different types of business require different types of current ratio. BT will not need the same current ratio as manufacturing or organization because it does not need as much working capital to carry out its operations. Nevertheless, it needs the ratio to be quite high, since BT sells some of its services on credit and needs to show a degree of ‘liquidity’ in order to attract new shareholders. In addition since the company is forming partnership (with HP for instance) it can be an indication that the company uses its liquid assets productivity and does not tie them up in cash.
Gearing Ratio:
Long term loans
Gearing Ratio = __________________ * 100
Net Asset Value
This ratio compares creditors and net assets. The higher the gearing ratio, the greater the borrowing as proportion of the total long term financing and in sequence, the higher the risk for business failure. The state of business at the moment it is not encouraging. There is approximately an 18% increase between 2001 and 2003, but it can also be noticed an approximately 16% decrease between 2002 and 2003. Having analyzed the figures only three years is difficult to examine whether there is an increasing or decreasing trend in the given ratio. However, it is thought that this increase between 2001 and 2003 may be related to the reduction of total assets rather than to an increase of liabilities. It is believed that this should be taken into serious consideration since if the ratio starts to increase again the company will not be able to respond to any future unpredictable crises.
Conclusions:
After the analysis and evaluation of BT’s financial position it is believed that it cannot be argued that BT is in a “position of relevant strength”. BT has strengthened its position in terms of profits accompanied with the reduction of liabilities. Still, BT’s profit increases did not follow reduction of costs nor sales increases- the profitability increased primarily as a result of the sales of assets and investment. Additionally, even though BT’s market shares are quite stable during the past two years, BT shares do not give the impression of attracting investors.
Moreover, by analyzing the ROCE ratio a positive trend can be identified between capital employed and profits, which can be interpreted as effective use of capital by the organization.
Additionally, the ability of the organization to deal with liabilities needs to be questioned, since, even though there is an increase in the current ratio, the gearing ratio has increased approximately 18% between 2001 and 2003, which, as it is explained above it is not a ‘healthy’ sign for company.
References and Bibliography:
- Duncan Williamson. (1996), Cost & Management Accounting, Prentice Hall.
- Keith Ward, Sri Srikanthan, Richard Nell. (1991), Management Accounting for Financial Deciaions.Butterworth Heinmann.
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Atrill, P, Mclaney, E (1997) Accounting and finance for non-specialists, Prentice Hall Publications, 2nd edition, London
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Broadbent, M, Cullen, J (1993) Managing Financial Information, Butterworth Heinemann Publications, 1st edition, Oxford
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Chadwick, L 1998, Management Accounting, Thompson Business Press, 2nd edition, London
- Davies, D (1999), People and Information- Managing Financial Information Institute of personnel and Development, London
- Scott, M (1998), Value drivers, Wiley Publications, Great Britain
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Shlosser, M (2002) Business Finance- Applications, Models and Cases, Prentice Hall publications, 1st edition, Harlow
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Watts, J (1996) Accounting in the Business Environment, Pitman publications, 2nd edition, UK
