Financial Analysis of British Telecommunications

This report provides a detailed financial analysis of British Telecommunications, including recent developments, dividend policy, sources of finance, and ratio analysis. The report analyzes the impact of Covid-19 and the Italian Accounts Scandal on the company's financial performance. It also discusses the company's dividend policy and sources of finance, along with a ratio analysis of profitability, liquidity, and solvency ratios.

An individual report

Table of Contents
Introduction......................................................................................................................................3
Section-A.........................................................................................................................................3
Development 1: Covid-19......................................................................................................3
Development 2: Italian Accounts Scandal.............................................................................4
Section – B.......................................................................................................................................5
Dividend Policy......................................................................................................................5
Sources of Finances................................................................................................................6
Section – C.......................................................................................................................................9
Ratio Analysis........................................................................................................................9
Conclusion.....................................................................................................................................13
References......................................................................................................................................13
Books & Journals.................................................................................................................13
Appendix........................................................................................................................................15

Introduction
In order to conduct the present study British Telecommunication is taken into consideration.
British Telecommunications plc is a global broadcast communications organization. As one
of the world's driving correspondences specialist service providers, BT takes into account
clients in 180 nations. BT is additionally the United Kingdom's greatest fixed-voice and
broadband supplier, and offers TV and versatile administrations. BT comprises of four
principle business lines: Consumer, Enterprise, Global Services, and Openreach. The
respective company has made the profit amounting to 1.47 billion British pounds in the
financial year of 2020-21. Also, it has been constantly performing well with high level of
efficiency. For the purpose of study, the analysis of the financial performance British
Telecommunications are traced out. Also, the different risks and their management which
are related to the sources of finance and dividend policy has been critically assessed.
Section-A
Critically analyse any two recent developments in context to the financial environment which
has impacted on the performance and development of the company in the future aspect.
Development is a cycle that makes development, progress, positive change or the
expansion of physical, financial, ecological, social and segment parts (Mather, 2019). The
motivation behind improvement is an ascent in the level and personal satisfaction of the
populace, and the creation or extension of nearby territorial pay and business openings,
without harming the assets of the climate.
Development 1: Covid-19
The COVID-19 pandemic maybe more than some other occasion in mankind's set of
experiences has exhibited the basic significance that broadcast communications
framework plays in keeping organizations, legislatures, and social orders associated and
running. In view of the financial and social interruption brought about by the pandemic,
individuals across the globe depend on innovation for data, for social separating, and
telecommuting. British Telecommunication has been performing well as compared to
other business sectors. Although the profits have fell down to 666 million British pound
in the second half of the financial year of 2019-20 and it went up in the financial year to
856 million British pound in the first half of 2020-21.

Impacts on the financial performance of British Telecommunication because of the global
pandemic Covid-19.
Impact Details
Business consequences In the buyer business, incomes of British
Telecommunication declined by 7% as
compared to previous year, while the venture
unit saw a downfall of 9% which reduced the
efficiency as well as the consistency of the
company.
Impact on sales Reported income fell by 2% and adjusted
income fell by 3%. This was basically because
of the effect of guideline, decreases in heritage
items, key decreases of low edge business and
divestments.
Disruption in supply Also, the disruptions in the short term supply
of network equipment became a big hurdle for
the company to accelerate the business
operations on a serious note. The major impact
of this shortage in the supply has resulted into
the suspension of the new construction
projects.
Strategy implementation in order to mitigate the impact of the Covid-19.
British telecommunication immediately reduced its workforce considerably and shifted
from the office premises to work from home so that it can abide by the policies of the
government to tackle the situation of covid 19 (Moreale and Zaynutdinova, 2018). Also, the
respective company has tried to improvise the financial position of the company by reducing
the operating costs in the phase of the global pandemic situation. This helped the company to
lower down the product cost.

Development 2: Italian Accounts Scandal
In the Italian accounts scandal, British Telecommunication suffered dramatically which
posed a dramatically negative impact on its brand value. It occurred in the year 2015-
2016 which disclosed that the Italian prosecutors have claimed firm has allegedly
increased the revenues and displayed false supplier transaction. It reduced the confidence
of the investors dramatically and has led to a loss of nearly £ 530 million. This affected
the whole company’s goodwill value considerably and made an impacts on the efficiency
levels of the company. Also, no other company was majorly affected by this Italian
Accounting Scandal just like British Telecommunication.
Impacts on the financial performance of British Telecommunication because of the Italian
Accounting Scandal.
Impact Detail
Opinion of auditors The first and foremost impact came on the
reputation of the company when the external
auditor of the British Telecommunication
disclosed as “adverse opinion” on the internal
financial reporting of the company.
Loss suffered Because of the inappropriate behaviour in
context to the Italian unit suffered a written
down of almost 145 million British pounds.
Disclosure by external auditors and KPMG The accounting errors of an estimate of 530
million British pounds which was disclosed by
the internal and external auditors along with
KPMG. Also, this resulted in the drop of the
share price by 17% because of the scandal
slowdown and reduces the public spending on
the share market in UK.

Strategy implementation in order to mitigate the impact of the Italian accounting scandal.
 The company British Telecommunication made it sure that the enforcement of the
laws and policies must be done in such a way that there is no chance of any loophole
which may pop in. Because it was the first, foremost and only way to mitigate the
risk of such kind of scandals (Chris Kraft and PMP, 2018). Also, this type of strict
implementation of rules helped in building a culture of transparency in the
organization.
 In addition to this, with its effective and efficient public relation skills, BT tried to
rebuild its brand value in the market place so that it cam regain its lost goodwill and
reputation. The company prioritize building public relations.
Section – B
Dividend Policy
A Dividend policy can be defined as a profit strategy indulged in an arrangement of how
organization uses to structure its profit pay-out to investors.
In May 2020, having considered the different dividend interests, specifically the drawn out
interests of the investors, the Board closed the judicious choice was to suspend the last
profit for 2019/20 and all profits for 2020/21 in the form of dividends, and to re-base future
profits to a more maintainable level . This choice will make limit with regards to BT to put
resources into long haul, esteem upgrading openings, including the essential aim for a
change and modernisation program, combined with the more limited term effect of Covid-
19. The Board hopes to proceed with a dynamic profit strategy from this re-based level for
future years. It can be seen from the image below that the dividends paid to the investors
were reduced and the amount of dividends were re invested in the business in order to get
back on track.

For a specific period the company Therefore, it was a decision that came from the board of
directors of the company to suspend the final dividend of the year 2020. Also, it was
disclosed by the board of directors that they will be resuming the payment of dividend at
the rate of 7.70% per share along with 30% which will be payable at the interim stage.
Here, the dividend Relevant theory is applied and the priority was kept to be re invested in
business rather than paying out to the dividends, because the dividends are a cost to the
company and it also don’t increase the value of the stock(Dividend Relevance Theory, 2020).
Therefore, re investing is considered as a best option to deal with the earnings in an
efficient manner. Along with this the approach used in this is dividend signalling theory can also
be applied because in the future prospect, the company is planning to pay out the dividend to
its shareholders with an increased value. Therefore, it can be considered that the
dividends were interim as because of the global pandemic they have been made highly irregular
and were not given in a proper proportion to its shareholders. But in the annual reports, it has
also been mentioned that the dividends will be paid back to the stakeholders on a constant basis
once the business operations come back on its regular track. Therefore, this will help in deliver
value to the shareholders of the company in best possible way. The detailed elaboration of the
“Dividend Relevance Theory” is done below.
Dividend Relevance Theory
According to the relevance theory of dividend, the choice to pay a dividend has an impact on the
firm's market value, hence dividends are important. According to this idea, investors are often
risk adverse, preferring dividends today ("bird-in-hand") above potential share gains and

dividends tomorrow. According to the relevance theory of dividends, dividend policy has an
impact on share price.
The approach which is used in the Relevance Theory is the Dividend Signalling. This is a theory
that claims that a company's announcement of increased dividend payments sends strong signals
about the company's excellent future prospects. In practise, changes in a company's dividend
policy can be shown to affect its stock price, with an increase in dividends leading to an increase
in stock price and a drop in pay outs leading to a decrease in stock price. Many observers came
to the conclusion that, contrary to M&M's plan, shareholders prefer dividends to future capital
gains. The change in dividend pay out should be perceived by shareholders and investors as a
signal about the company's future earnings potential. A growth in dividend payment is often
regarded as a positive signal, as it conveys favourable information about a company's future
profits prospects, leading in a rise in share price. A reduction in dividend payment, on the other
hand, is perceived negatively. As a result, according to this idea, the best dividend policy should
be chosen in order to maximise shareholder wealth.
Sources of Finances
It can be defined as the provision that are made to fulfil the financial requirements for the
company mainly to cover short term requirement of working capital and long term requirement
for fixed assets as well as the investments (van Bergen, M., and et. al., 2019). Sources of finance
helps in making its sure that there are enough finances in order to operate the business operations
and for investment purpose. Also, for securing the long term investment with sources of finance.
Sources of finance for British Telecommunications
Just like other large business organization, BT also funds its operations with the help of
equity and debts as its key sources of funds. Also, it utilizes the funds that are generated from the
trading activities of the business.
The total of the shareholder’s equity is at £m 10,167 for the year 2019 and £m 14,763 for
the year 2020. In context to debt, BT is having short term as well as long term liabilities.
Particulars 2019 (£m) 2020 (£m)

Short term liabilities 9602 10986
Long term liabilities 27318 27318
Figure 1.1: Statement of Balance Sheet
Figure 1.2: Statement of Balance Sheet

Calculating the gearing ratio for British Telecommunication Plc for 2019-2020 shows a very
high level of debts in British Telecommunication Plc. This helps in analysing the financial
risk for the respective company.
Name of the Ratio Formula Calculation
Gearing Ratio Non-Current Liabilities /
Non-Current Liabilities +
Total Equity * 100
2019 2020
26518 / 26518
+ 10167 * 100
27318/ 27318
+14763* 100
Results 72.29 % 64.91 %
The gearing ratio shows 72.29 % of debt in 2019 while 64.91 % of debt in the year 2020.
It can be seen that the British Telecommunication was highly leveraged in the year 2019
with higher amount of debt. While on the other hand, the amount of leverage reduced to
a considerable value of 64.91 % showing that the business was able to reduce its
borrowings or debt in accordance to its equity.
Modigliani and Miller propose capital structure irrelevancy hypothesis, which states that a
company's capital structure has no bearing on its valuation. The value of a company is unaffected
by whether it is heavily leveraged or has a minimal debt component in its financing mix. Apart
from the risk associated in the investment, the operating revenue affects the market value of the
firm, according to the Modigliani and Miller Approach. According to the notion, the firm's worth
is unaffected by the capital structure or financing decisions it makes.
According to the Modigliani and Miller Approach, the value of a leveraged company (one with a
mix of debt and equity) is the same as the value of an unleveraged company (a firm that is
wholly financed by equity). If the operating profit margins and future prospects are identical.
That is, if an investor buys shares in a leveraged company, payment can be done at the same
price as if shares can be bought in an unleveraged company.
The company is having an optimal capital structure which states that it is having a
combination of debt and equity financing that majorly helps in maximizing the value of the
company and on the other hand it helps in minimizing the cost of capital. BT Is majorly aiming
to minimize the weighted average cost so that the company is bearing lowest cost for financing.

Section – C
Ratio Analysis
 Profitability Ratio
 Return on capital employed: It can be defined as an important ratio for the
purpose of finance, valuation and accounting as its key concepts (Styhre, 2020). It
is basically used for the purpose of comparing and contrasting the profitability of
the company in accordance to the amount of capital used.
Formula Calculation
Profit before interest and taxes /
capital employed * 100
2019 2020
3282 / 23428 *
100
3143 / 22905 * 100
Result 14.008 % 13.7218 %
INTERPRETATION: Although, the difference between the ratios of 2019 &
2020 do not hold much difference. In the year 2019, the ROCE was 14.008 %
stating a higher value of the company showing the capability to return back the
value to the shareholders as compared to the year 2020 with 13.7218 % indicating
a lower capacity to return back to the investors. Therefore, there was a downfall in
the performance.
 Operating Profit Margin: It is a type of profitability ratio that shows the amount
of percentage of profits that the company can generate out of its business
operations before reducing all the taxes and interest charges (Chatnani, 2018).
Formula Calculation
Operating Profit / Net Sales * 100 2019 2020
3421 / 23428 * 3283 / 22905 * 100

100
Result 14.60 % 14.33 %
INTERPRETATION: Although, the difference between the ratios of 2019 & 2020
do not hold much difference. The operating profit margin must be higher than 15%
which is considered as good. In case of critical comparison between both the years,
the operating profit ratio was slightly higher and better in the year 2019 with 14.60 %
as compared to 14.33 % in the year 2020.
 Return on equity: This ratio can be explained as the measure of level of
profitability of the business organization in accordance to the value of the equity
(Cowling, Liu and Zhang, 2018). This ratio can be calculated as return on the
assets subtracted from liabilities of the company.
Formula Calculation
Net income / shareholders’ equity 2019 2020
2159 / 499 + 3919 1734 / 499 + 9759
Result 0.488 0.170
INTERPRETATION: The ratio in the year 2020 was higher at 0.488 stating tat
the company was in a better situation to generate profits as compared to the year
2020 with the value of 0.170.
 Efficiency Ratio
 Inventory turnover ratio: This ratio is majorly used in order to measure how
many times the inventory is sold or it is used in the financial period of a financial
year (Barnett and Sergi eds., 2018). This particular ratio is calculated to analyse
that whether the business organization is having the excessive inventory as
compared to its level of sales.
Formula Calculation

COGS / Average Inventory 2019 2020
9715 / 969 / 2 8961 / 300 / 2
Result 20.05 59.74
INTERPRETATION: Comparing performance of both the years, 2019 was
comparatively better stating that the company is experiencing better cash flow with
20.05 as it was earning on high sales as compared to the year 2020.
 Receivable Turnover Days: This is an accounting analytical tool which is used
to measure how much is the company effective to extend loans or credits as well
as collecting debts (Jessel and DiCaprio, 2018). This ratio is basically ides by the
company in order to analyse the efficiency to utilize its assets in the business
operations.
Formula Calculation
Net credit sales / Average accounts
receivables
2019 2020
23428 / 3119 22905 / 2874
Result 7.511 7.96
INTERPRETATION: The company’s capacity to pay off its debts became
stronger in the year 2020 as the ratio went higher to 7.96 from 7.511 in the year
2019 respectively. Therefore, it can be considered that the performance was better
in the year 2020.
 Liquidity Ratio
 Current Ratio: This is a type of liquid ratio that helps in measuring the liquidity
status of the company in order to analyse the capacity of the company to deal with

the short term financial obligation for up to one financial year (Durguti, Kryeziu
and Gashi, 2020).
Formula Calculation
Current assets / current liabilities 2019 2020
10444 / 9602 11992 / 10986
Result 1.087 1.091
INTERPRETATION: The current ratio in the year 2020 was effective for the
respective company with less risk as the current assets were higher than the
current liabilities. While the ratio in the year 20119 which shows that the
company was having lesser assets as well as lesser liabilities compared to the year
2020.
 Quick Ratio: It is also known as acid test ratio that helps in measuring the to use its cash
as well as the quick assets to pay off the current liabilities of the business (Hanly,
Morales and Cassells, 2018).
Formula Calculation
Quick assets / current liabilities 2019 2020
10444 – 369 /
9602
11992 – 300 /
10986
Result 1.049 1.064
INTERPRETATION: The quick ratio in the year 2020 was better than the year
2019 because in the year 2019 the company was able to pay off its liabilities with
company's liquid assets less efficiently as compared to the year 2020. While this
was indicating a weak financial position on the basis of liquid assets.

 Gearing Ratio: These are those ratios that helps in measuring the financial leverage of
the business organization in order to critically analyse the degree to which the business
operations are backed through the equity capital and debt capital (Hassan, Rashid and
Aliyu eds., 2019).
Name of the Ratio Formula Calculation
Gearing Ratio Non-Current Liabilities /
Non-Current Liabilities +
Total Equity * 100
2019 2020
26518 / 26518
+ 10167 * 100
27318/ 27318
+14763* 100
Results 72.29 % 64.91 %
INTERPRETATION: The gearing ratio shows 72.29 % of debt in 2019 while 64.91 %
of debt in the year 2020. It can be seen that the British Telecommunication was highly
leveraged in the year 2019 with higher amount of debt.
Conclusion
From the above analysis done in the report, it can be concluded that the performance of the
company British Telecommunications has been satisfactorily well showing. The balance
sheet as well as the income statement presented a healthy financial position of the company.
It can be clearly seen that British Communication can be considered as a great and major
player in the telecommunication industry with considerable level of efficiency.

References
Books & Journals
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Hassan, M. K., Rashid, M. and Aliyu, S. eds., 2019. Islamic Corporate Finance. Routledge.
Online Reference
Dividend Irrelevance Theory, 2020. [Online] Available through:
< https://www.investopedia.com/terms/d/dividendirrelevance.asp/ >

Appendix
Both the financial statement namely “Statement of Income Statement” & “Statement of Balance
Sheet” are mentioned below of the both the financial year. (Source: Annual Reports of British
Telecommunication of the year 2019 & 2020)
Figure 1.1: Statement of Balance Sheet
Figure 1.2: Statement of Balance Sheet

Figure 2: Income Statement of 2020

Figure 2.1: Income Statement of 2019