Financial Analysis of BT Group Plc and Sky

SKY PLC Financial Data

Years 2013 2014 2015 2016 2017 
Current(6)  1,11  1,02  1,08  1,09  0,96 
Acid test(7)  0,87  0,80  0,88  0,86  0,76 
Cash(8)  0,61  0,43  0,33  0,49  0,40 

Gearing 

Years 2013 2014 2015 2016 2017 2014 2015 2016 2017 Long term debt to equity(12)  74,88  72,72  71,10  73,70  70,22
Interest cover(13)  6,33  8,06  3,95  4,23  8,93

BT PLC Financial Data

Liquidity ratio

Years 2013 2014 2015 2016 2017
Current(6)  0,61  0,74  0,97  0,74  0,63
Acid test(7)  0,60  0,73  0,96  0,72  0,61
Cash(8)  0,12  0,09  0,06  0,05  0,05

Gearing

Years 2013 2014 2015 2016 2017
Long term debt to equity(12)  101,52  103,44  95,85  67,13  73,50
Interest cover(13)  4,21  5,12  5,90  6,69  5,03

Liquidity Ratios

Liquidity ratios are used to establish the ability of an organization to pay its current liabilities.

Current Ratio

Current ratio enables one to determine the extent to which the entire current assets of a company can pay the current liabilities. The ratio is calculated as follows:

Current Assets ÷ current liabilities

For the case of SKY PLC, the company registered current ratios of 1.11, 1.02, 1.08, 1.09, and 0.96 for the years ending 2013, 2014, 2015, 2016, and 2017 respectively. On the same financial periods BT PLC had ratios of 0.61, 0.74, 0.97, 0.74, and 0.63. Evidently, SKY PLC posted a better performance than BT PLC in the five-year period. SKY PLC achieved more than the desired ratio of one except in the year 2017 when it had 0.96. Meanwhile, BT PLC realized less than 1 ratio in the entire time. Therefore, SKY PLC would readily pay its current liabilities to completion without the need to borrow or sell fixed assets (Peterson and Fabozzi 87). The scenario makes the firm more attractive to the investors and credit suppliers than the BT PLC that would struggle to pay its current liabilities.

Acid Test

The acid test is also known as the quick ratio. The ratio is used to establish if a firm can settle its current liabilities using the current assets other than the stock. The formula is:

(Current assets - Stock) ÷ Current Liabilities

Both SKY PLC and BT PLC failed to attain the financially desirable ratio of 1 in the entire five-year period. Therefore, the implication is that none of the firms can repay its current liabilities to completion without the use of the stock (Peterson and Fabozzi 87). However, SKY PLC had better ratios than BT PLC, thereby, indicating a greater ability to repay the short-term liabilities using the current assets other than the stock.

Cash Ratio

Cash ratio determines the ability to meet the current liabilities using only the cash at bank and the rest of the cash equivalents (Peterson and Fabozzi 129). Therefore, the other current assets such as accounts receivable and stock among other are not considered. The formula is:

(Cash + Cash Equivalents) ÷ Current Liabilities

From the cash ratios for both SKY PLC and BT PLC, it is apparent that the two companies had more current liabilities than the cash and cash equivalents combined. Therefore, they failed to achieve the ratio of at least 1 (Peterson and Fabozzi 91). Nevertheless, SKY PLC had better ratios than BT PLC, thereby, demonstrating a greater ability to repay the short-term creditors using the cash and cash equivalent.

Overall, both SKY PLC and BT PLC showed a reducing trend in their liquidity ratio except for the current ratio of BT PLC. Despite the downward trend, there were cases of increase in the ratios before the end of the period (Peterson and Fabozzi 147). For financial soundness, the companies need to embark on building their current assets to make them desirable and attractive to the credit suppliers and other providers of funds. In some cases, a corporation might also prefer to use short-term credit to spend the cash on some other activities such as expansion. To that extent, one might justify the less than one liquidity ratios because an organization can readily overcome it once it is through with the other projects. However, the primary disadvantage is that the external users of the accounting information might not perceive the company to be financially stable (Peterson and Fabozzi 104). The wrong perception might lead to lack of sufficient suppliers and even investors such as potential shareholders and lenders given that the organization has relatively low liquidity.

Gearing Ratios

The gearing ratios help establish if a firm is capable of repaying its long-term loans to completion.

Long-Term Debt Equity

The ratio shows the portions of the long-term debts that are financed by the creditors and the shareholders (Michael and Albert 60). The formula for the ratio is as follows:

Total liabilities ÷ shareholders' equity

From the gearing tables above, it is clear that SKY PLC had more long-term debt than the equity as a source of business funds. The firm had more than 50% of the ratio for the entire five-year period. Also, BT PLC posted a similar performance for the same period. It had an interesting outcome in the first two years when it realized more than 100% ratios. The implication is that the firm operated in negative equity that might have resulted from a fall in market value. The ratios imply that the two corporations preferred to use more debts than shareholders' funds. The advantage of such a scenario is that the businesses shareholders' enjoyed many shares of profits given that they were relatively few (Michael and Albert 61). Nevertheless, the companies also incurred much money for the purposes of repaying debts.

In as much as some companies might prefer to have more debts than the shareholders' equity, there are potential consequences. For instance, the debtors are entitled to the company's assets in the case of insolvency that leads to winding up. Besides, the need to pay interest leads to the deduction of the operating profits. However, the advantage is that a corporation can obtain sufficient funds for operations and further investment without having to reduce the shareholders' level of control.

Interest Cover

Interest cover ratio helps determine the ability of a company to pay interest on its borrowings (Michael and Albert 69). The ratio is of much concern to the lenders who would want to confirm that they will receive prompt payments of the money they lend out plus the interest. The formula is:

Earnings before interest and tax ÷ interest expense

From the above financial data tables, it is evident that both SKY PLC and BT PLC had sufficient amounts of operating profits that could be used to pay the interests on loans (Michael and Albert 74). The organization had got ratios of more than 1, a scenario that is impressive to the potential lenders.

Works Cited

Michael, Rist, and J P. Albert. Financial ratios for executives: How to assess company strength, fix problems, and make better decisions. Berkeley, CA: Apress, 2015. Print.

Peterson, Drake P, and Frank J. Fabozzi. Analysis of financial statements. , 2012. Print."