1

Accounting & Corporate Reporting Analysis Group Coursework:

UK FIXED-LINE TELECOMMUNICATIONS INDUSTRY

Figure 1: Cable & Wireless Share Price (Apr’10-Oct’11) Source: www.cw.com/investors

Cable & Wireless Worldwide is a global telecommunications company based in the UK.

From its 2010/11 Annual Report it appears confident in its business strategy, and its

headline data (EBITDA/trading cash flow) suggests it is in a healthy position. Yet six months

after the report’s closing date, its share price is in steep decline (Figure 1), it has issued

three profit warnings and the CEO has resigned (Appendix 1).

Aims & Objectives

Using Cable & Wireless as a benchmark our primary aims are to:

1. Explore the extent to which it is possible to read between the lines and numbers of a company’s annual report to locate the causes of poor performance.

2. Compare the reports of five entities operating within the same industry to observe which factors most impact their performance.

UK Fixed-line Telecoms Industry

Our reporting entities were selected on the basis that they represent a broad sample of

Telco’s (Telecommunications Service Providers) in the UK fixed-line sector: (See Appendix 2

for profiles on each company)

Cable & Wireless Worldwide1

BT Group

KCOM Group

TalkTalk2

Colt Group Telecommunications is an incredibly capital-intensive business. Network infrastructure and

operational systems must be constantly refreshed in order to be at the forefront of new, more

efficient network technologies and business processes. Management is charged with the

dual responsibility to grow capacity and at the same time drive down the price paid by the

consumer as directed by the regulator.

1 Cable & Wireless Worldwide demerged in March 2010, hence there is limited historical data on the

stand-alone business, despite the former group having traded for over 100 years. 2 TalkTalk also demerged from the Carphone Warehouse Group in March 2010.

Reporting Period:

April ’10 - March ‘11

UK Fixed Line

FTSE 250

Cable & Wireless

2

The fundamental criterion for a Telco’s success is its ability to generate sufficient free cash

flow from operations and raise additional external capital to reinvest back into the business.

Hence why EBITDA and free cash flow so often feature as key metrics in the headline data

of our annual reports.

In this study we will explore the free cash flows of five entities, considering (1) their ability to

generate cash from operations, (2) the extent of gearing and the returns from leveraging

external capital, and (3) how they reinvest capital back into their business. In doing so, we

hope to understand the contrasting business models and growth strategies in the UK fixed-

line sector and determine the areas where Cable & Wireless might be going wrong.

Comparing Strategies

From the narrative in our annual reports, we can observe the strategic aims of each entity as

well as some broader market trends affecting the industry as a whole.

Key points are summarised in the table below:34567

3 BT Group plc, Annual Report & Form 20-F 2011 (Chairman’s message) p.3

4 Cable&Wireless Worlwide, 2010/11 Annual Report (Our Strategy) p.2

5 Colt Group S.A., 2010 Annual Report (Vision, Mission, Strategy) p.1

6 KCOM Group PLC, Annual Report and Accounts 2010/11 (Our Vision) p.5

7 TalkTalk Telecom Group PLC, Annual Report (Chief Executive’s Review) p.6-9

3

From the above there is a consensus view on the need for continuous investment in network

technology and efficiency or ‘business process’ improvements i.e. drive down costs and

exploit new opportunities in better differentiated product-services in order to offset the

declining revenues from regulated (voice network) services.

1) Top-Level Performance Analysis

By contrasting and comparing various ratios we can begin to compare the overall

performance of the five companies. Starting with earnings before interest, tax, depreciation

and amortisation (EBITDA) as a percentage of revenue, we observe that each company has

seen a slight improvement from the previous year.

This graph tells us very little in isolation, except that BT is leading the industry in its ability to

generate gross margin and that Cable & Wireless is in a similar position compared to its peer

competitors. This is the start of the investigation process. We will now consider the

distribution of earnings i.e. where the cash generated by the business is employed by

working down the cash flow statements and hence, calculate the ‘free’ cash that remains.

Each entity defines ‘free cash flow’ differently, thus in order to make a comparison it is not

possible to use the stand-alone figure from the reports. The following charts represent our

own definition which we call ‘discretionary cash flow’ i.e. EBITDA less interest and tax,

dividends, working capital, CAPEX, pensions and exceptional items; to observe the extent to

which the company is able to finance its various activities by cash generated internally.

Distribution of EBITDA in 2011 (See Appendix 4 for notes and figures)

4

5

A full breakdown of where cash is being spent allows us to visualise the companies’ cash

flow and work out the percentage of what is left to be distributed at the management’s

discretion: to keep money in the bank, reduce debt or reinvest back into the business. In

C&WW’s case, it is negative hence they have increased their liabilities to pay dividends. This

is not immediately obvious from the balance sheet as it shows a decrease in liabilities overall

(following a heavy pension pay-out in 2010), but an increase in the amount of loans and

obligations under finance leases in both current and long-term liabilities (Appendix 5).

2) Gearing and Return on Capital Employed It is not only the ability to generate cash internally that is important for financing growth, but also the Telco’s ability to raise new capital through its shareholders and the banking stakeholders. Management must balance dividend payments and internally-funded CAPEX spending, whereby paying competitive and sustainable dividends to shareholders encourages further investment in the company by maintaining a steady, growing share price. This then provides an environment to leverage this equity to raise capital from the banks and keep the company expanding, thus taking the pressure off the shareholders for new capital. Gearing shows the extent to which a firm’s capital structure relies on borrowed funds in

comparison to shareholder’s funds.8 It is not necessarily a quality mark against the company

but more an indication of the management’s investment strategy.

KCOM, TalkTalk and most especially BT are highly geared, suggesting that a large

proportion of their capital is derived from borrowed funds. This could be seen as negative in

the sense that they have high debt and potentially high interest rates to pay. However, in the

case of BT and KCOM, each with a proportionately large asset base and a guaranteed

(regulated) market in their respective business operations (see history in Appendix 3), there

is little risk to the banks of a default hence interest rates would be comparatively low.

8 Mclaney & Atrill – ‘Accounting: An Introduction’ (Pearson 3

rd Edition, 2005) p.230

Gearing = long-term liabilities / share capital + reserves + long term liabilities x100

6

If we now consider the return on the capital employed (ROCE),9 BT and KCOM show a more

efficient use of capital, due to advantages within the core business model (discussed below).

But in 2010 C&WW were less efficient than their peers. Following restructuring they have

made a substantial improvement, but still they lag behind their competitors.

* Cable&Wireless: no values for the previous financial year due to demerger in March 2010. ** BT has negative equity in 2009/10 due to ‘recognition of actuarial losses on retirement benefit obligations’. *** TalkTalk provides no values for previous year due to its demerger from the Carphone Warehouse Group.

ROSF (above) illustrates the net benefits to the shareholders as a result of the decisions

taken by management and their ability to gear the company effectively. As a brief aside, it is

very clear from the ROSF comparison that BT and KCOM, both former incumbent Telcos

provide the best return for shareholders, whilst newer entrants are struggling to maintain

their position in the industry. Such concentration of investment capital in the former

incumbents is reminiscent of the old monopoly situation in the 1980s, which must be a

concern for OFCOM as it is their goal to maintain competition in the sector.

A possible cause for operational inefficiencies within Cable&Wireless can be seen in note 17

of their annual report which sets out the costs of assets and the depreciation applied

historically (Appendix 5). The largest asset is Plant & Equipment (£855m out of a total of

£983m). The original purchase price of these assets was £5376m. The historical

depreciation of £4525m would indicate that these assets are over 15 years old,10 suggesting

C&WW is managing a rapidly aging asset base, hence its high and increasing operating

costs and low gross margin in the ‘legacy’ voice network.

3) Capital Expenditure If we now consider the CAPEX breakdown (see below), management may need to revisit their decision to only invest 2% in network improvements if they are to reduce the sensitivity of the company to reductions in voice revenue. The charts below indicate that the bulk of Cable & Wireless’ CAPEX is either in new business activities (31%) or growing its ‘managed services’ (customer contracts: 57%) i.e. activities where it is essentially using its CAPEX to serve its customers’ own capital requirements. Profit margins for these activities look good at (61%) and (73%) respectively, but the EBITDA to CAPEX ratio is disproportionate, considering revenues from their core business i.e. its voice, indicating that C&WW is out of its depth in these new areas of activity thus failing to deliver shareholders’ expectations.

2010/11 IP and Data Applications and Hosting Voice and Legacy Total Revenue 999 263 995 2257 GM 610 191 264 1065 % Revenue 61% 73% 27% 47%

9 ROCE = net profit before interest and taxation / share capital + reserves + long-term liabilities x100

10 Calculated as the depreciation to date divided by the yearly write-off and depreciation rate, less

new CAPEX: £4525m / (£266m + £266m - £232m), Cable & Wireless Annual Report 2010/11 p.80

7

2009/10

Revenue 978 240 1047 2265 GM 605 174 296 1075 % Revenue 62% 73% 28% 47%

The above figures for C&WW,11 and those produced from its competitors’ reports in

Appendix 10 suggest revenues and gross margin from traditional voice services are

decreasing. The 2011 Ofcom report (Appendix 8) also supports this. C&WW as a

consequence of this trend states in their annual report that it is exiting its historical ‘core’

business and moving ‘towards the cloud’, thus no longer investing in lower costs structures

as a means of enhancing its EBITDA. The strategy seems sensible, yet recent turmoil

suggests the transition has been made prematurely and at the expense of essential

investment in their core network which delivers these higher-value ‘cloud’ services.

CAPEX Breakdown 201112

11

Cable & Wireless Annual Report 2010/11 p.31 12

See Appendix 11 for corresponding data.

- Cable & Wireless invests just 10% in maintaining its

network infrastructure, and 2% in cost-reduction

(efficiency) measures. 31% goes to new capability

assets in ‘cloud’ (Applications & Hosting)

- BT spreads its activities across a variety of services.

However it continues to invest heavily in its ‘platforms

and networks’. Access (23%) representing the new UK

high-speed broadband (fibre) network.

- Colt’s core network activity is in providing ‘data

services’ to businesses in which it invests 60%

- KCOM and TalkTalk comprise a single voice and

broadband network in which they clearly invest heavily.

8

Despite limitations in the amount of comparable data provided in the annual reports, the

above comparison still shows how out of step Cable & Wireless is with its peers, all of which

are staying true to their core area of competence by investing in network infrastructure,

hence the loss of confidence by shareholders and the subsequent collapse in share price.

Conclusion

Cable & Wireless is a well-established and asset-rich company, which when compared to its

peers is clearly underperforming. Analysts have been slow in recognising structural

problems in C&WW as it took three profit warnings to alert the market, yet there is a case to

be made that these issues were present in its first report as a newly formed entity. This

recent restructuring of two of our five entities (CW&W/TalkTalk) made a comprehensive

analysis difficult due to a lack of historical data. However, we can conclude that close

comparison reveals that the sector is generally in good health, with former incumbent telcos:

BT and KCOM clearly dominating (an issue for the regulator and a topic for further study).

Therefore, the problems of C&WW can be attributed to structural weaknesses in the

management’s strategy, namely their plans to offset the decline in traditional voice revenues

by investing in next generation services without sufficient investment in their core network.

With hindsight, a better strategy may have been for C&WW to reinvest in its core business to

reduce its overheads and improve margins on its voice network before migrating to new

‘cloud’ services.

In carrying out the report we reached the following conclusions about effective corporate

reporting analysis:

1. To get an accurate picture of a company’s state of health it is necessary to read the

notes in the pages at the back of the annual report first.

2. A broad understanding of the industry is required to analyse and compare company

reports operating in the sector.

3. Despite recognised accounting standards there are still inconsistencies in the way

reports are presented and therefore the numbers behind the ratios need to be

understood and sometimes redefined.

9

APPENDIX

APPENDIX 1: Cable & Wireless in the press

The Financial Times reporting on Cable & Wireless’ performance following the annual report.

Source FT.com: (Interactive timeline) http://www.ft.com/cms/s/0/9fffeb4a-a188-11e0-

baa8-00144feabdc0.html#axzz1cuxUOaeM

June 28th 2011

“Jim Marsh, Chief Executive of Cable & Wireless Worldwide, resigns after poor sales force it

to issue its third profit warning in 15 months and halve its dividend for 2011-12. He is

replaced by John Pluthero, chairman”.

June 21st 2011

“Cable & Wireless Worldwide's annual report reveals that the company has decided to curb

executive pay in 2011-12. It will scrap plans for a new scheme providing potentially large

share awards to top managers, and will reduce stock issuance to them under another plan”.

May 20th 2011

“Bosses at Cable & Wireless Worldwide are set to miss out on final payments from their

controversial long-term incentive plan, the FT reports. The fifth and final year of the plan is

not expected to provide any cash payments due to poor share price performance”.

March 31st 2011

“After the news that Tim Weller, Cable & Wireless' Finance Director is to leave the company,

The Times claims this follows the board's rejection of his advice to lower its profit guidance

before a positive trading statement in February. This statement was followed by a profit

warning two weeks later”.

March 24th 2011

“Shares in Cable & Wireless Worldwide fall by more than 14 per cent after it issues its

second profit warning in less than a year. Jim Marsh, chief executive, insists he will not

resign”.

July 20th 2010

“Cable & Wireless Worldwide warns of a "very significant slowdown" in UK public sector

contracts, triggering a 17 per cent drop in its shares. It blames a drying up of one-off

telecoms projects, such as extra bandwidth and site moves”.

March 2010

Demerger of Cable & Wireless Worldwide from Cable & Wireless Plc

10

APPENDIX 2: Company Profiles

ENTITY DESCRIPTION

Cable &

Wireless

Worldwide

A global telecommunications company, based in the UK which specializes in

providing communication networks and services to large corporations,

governments, carrier customers and resellers. Its services include managed

Voice, Data and IP-based services and applications in UK and internationally.

BT Group BT is one of the world’s leading communications services companies,

operating in the UK and 170 countries worldwide. Its core activities are the

provision of fixed telephony lines and calls (retail and wholesale), broadband,

mobile and TV products/services to consumers and SMEs as well as

managed networked IT services for multinational corporations, domestic

businesses and government organisations.

TalkTalk

Group

TalkTalk is the ‘value for money’ provider of fixed line broadband and voice

telephony services to consumers and business users. Serving over 4.8 million

customers in the UK they have grown their business to compete with BT. It is

split into TalkTalk, AOL Broadband and TalkTalk Business. The company

demerged from Carphone Warehouse Group in March 2010.

KCOM

Group

KCOM could be described as a BT in miniature, providing almost identical

services through its four ‘brands’ KC, Kcom, Eclipse and Smart 421, it has a

virtual monopoly of the Hull and East Yorkshire region, also providing voice

and broadband services to consumers and SMEs in other parts of the UK. It is

comparatively small, therefore more agile and has been quick to invest in

high-speed broadband and next generation services.

COLT

Group*

COLT, ‘City of London Telecom’ (est. 1996) is based in the UK but operates

mainly in Europe. It specialises in voice, data, and integrated IT-managed

services for businesses of various sizes. It operates with pan-European

assets, and aims to become the leading information delivery platform.

* Colt’s annual report is for the calendar year 2010 and states its currency in Euros.

**Virgin Media and Sky are both big players in the UK telecoms industry. They were not

considered in this report on the basis that fixed- line is not the core of their business.

APPENDIX 3: A Brief History of the Telecoms Industry13

BT was formed in 1982 when HMG privatised the former Post Office telecommunications

activity. The Conservative administration recognised that there was a need for increased

competition in the telecommunications sector and the cost to ‘digitise’ the UK network would

be beyond the UK Treasury’s ability to finance.

In parallel to the privatisation of BT, OFTEL (the precursor to OFCOM) was established and

granted an operators license to Cable & Wireless who established Mercury Communications

as a competitor to BT’s retail business. This arrangement became known as the “duopoly”

and continued until 1994 when the Telecommunications Act caused HMG to open the UK

market to more competition, where OFTEL set the rules for fairness.

KCOM, (formerly Kingston Telecommunications) was under the ownership of the City of Hull.

Being the only part of the UK Telecoms network not directly owned by the state and under

the jurisdiction of the Post-Office prior to 1982, it was part-privatised and became KCOM plc.

13

Summary of articles found here: http://www.btplc.com/thegroup/btshistory/1984onwards/1984.htm

11

APPENDIX 4: Reference for EBITDA breakdown charts

C & W £m

EBITDA 100.0% 442

Capex 54.1% 239

Dividends paid 19.5% 86

Working Capital 11.3% 50

Interest and taxation 10.4% 46

Exceptional items* 10.4% 46

Pension 3.4% 15

Cash Flow -9.0% -40

*Exceptional items, Movement in exceptional provisions, LTIP Payment

Source: Cable&Wireless Worldwide, ‘2010/11 Annual Report’ p.34

BT £m

EBITDA 100% 5,557

Capex 46.6% 2,590

Dividends paid 9.8% 543

Interest and taxation* 20.7% 1,153

Cash-Flow 22.9% 1,271

*Interest paid - Interest received + Income taxes paid

Source: BT Group plc, ‘Annual Report & Form 20-F 2011’ p.50, p.103

COLT €m

EBITDA 100.0% 330.2

Capex 70.2% 231.8

Exceptional items 9.1% 30.1

Working Capital 5.7% 18.7

Interest and taxation 0.5% 1.8

Cash Flow 14.5% 47.8

Source: Colt Group S.A., ‘2010 Annual Report’ p.19, p.61

TALK TALK €m

EBITDA 100.0% 276

Capex 33.3% 110

Exceptional items* 17.9% 59

Interest and taxation 5.8% 19

Dividends paid 4.5% 15

Working Capital 3.0% 10

Cash Flow 19.1% 63

*Exceptional items-One company, demerger

Source: TalkTalk Telecom Group PLC, ‘Annual Report’ p.17

NOTE: KCOM did not provide sufficient data in their annual report to show a useful

breakdown of EBITDA.

12

APPENDIX 5: C&WW Balance Sheet and Note 25

Cable & Wireless Balance Sheet (Annual Report 2010/11) p.62

Cable & Wireless Notes to Financial Statements (Annual Report 2010/11) p.84

13

APPENDIX 6: Cable & Wireless Depreciation on assets (p.80 Annual Report)

APPENDIX 7: Asset turnover i.e. Sales / Average Total Assets (Units: times)

14

APPENDIX 8: Extract from OFCOM report on decline of voice revenues14

14 Ofcom UK Communications Market Report 2011 p. 278

15

APPENDIX 9: % revenues by product/service set

See Appendix 10 (below) for workings of the percentages in these pie charts.

16

APPENDIX 10: % change of revenues per product/service

BT 2011 2010 DELTA % DELTA/REV

%PROD/REV Products and services £m £m £m

ICT and managed networks 6,632 6,574 58 0.3% 33.0%

Broadband and convergence 2,767 2,677 90 0.4% 13.8%

Calls and lines 5,595 6,225 -630 -3.1% 27.9%

Transit 1,518 1,758 -240 -1.2% 7.6%

Conveyance, interconnect circuits, WLR, global carrier and other wholesale 1,471 1,451 20 0.1% 7.3%

Other products and services 2,093 2,226 -133 -0.7% 10.4%

Revenue 20,076 20,911 -835 -4.2% 100.0%

Source: BT Group plc, ‘Annual Report & Form 20-F 2011’ p.108

TALK TALK 2011 2010 DELTA % DELTA/REV

%PROD/REV Products and services £m £m £m

Broadband 1,247 1,086 161 9.1% 70.7%

Non-broadband 189 273 -84 -4.8% 10.7%

Corporate 329 327 2 0.1% 18.6%

Revenue 1,765 1,686 79 4.5% 100.0%

Source: TalkTalk Telecom Group PLC, ‘Annual Report’ p.56

C&WW 2011 2010 DELTA % DELTA/REV

%PROD/REV Products and services £m £m £m

IP and data 999 978 21 0.9% 44.3%

Hosting and applications 263 240 23 1.0% 11.7%

Traditional voice and legacy 995 1,047 -52 -2.3% 44.1%

Revenue 2,257 2,265 -8 -0.4% 100.0%

Source: Cable&Wireless Worlwide, ‘2010/11 Annual Report’ p.30

COLT 2010 2009 DELTA % DELTA/REV

%PROD/REV Products and services £m £m £m

Carrier Voice 194.2 212.4 -18 -1.1% 12.3%

Corporate and Reseller Voice 415.7 459.1 -43 -2.7% 26.3%

Managed Services 172.6 156.1 17 1.0% 10.9%

Data 801.1 794.9 6 0.4% 50.6%

Revenue 1583.6 1622.5 -39 -2.5% 100.0%

Source: Colt Group S.A., ‘2010 Annual Report’ p.67

KCOM 2011 2010 DELTA % DELTA/REV

%PROD/REV Products and services £'000 £'000 £m

KC & Eclipse 118,162 122,070 -3,908 -1.0% 29.9%

Kcom & Smart421 276,472 289,858 -13,386 -3.4% 69.9%

PLC 778 872 -94 0.0% 0.2%

Revenue 395,412 412,800 -17,388 -4.4% 100.0%

Source: KCOM Group PLC, ‘Annual Report and Accounts 2010/11’ p.56

17

APPENDIX 11: References and Figures for CAPEX Breakdown

BT 2011 2010 %

Capital expenditure £m £m

Platforms & networks 1,145.0 1,135 44.2%

Customer related 599.0 560 23.1%

Access 591.0 566 22.8%

Regulatory & Compliance, Support functions 255.0 9.8%

Source: BT Group plc, ‘Annual Report & Form 20-F 2011’ p.55

TALK TALK 2011 2010 %

Capital expenditure £m £m

Acquisition of intangible assets 27 35 24.5%

Acquisition of property, plant and equipment 83 67 75.5%

Total capital expenditure 110 102 Source: TalkTalk Telecom Group PLC, ‘Annual Report’ p.48

COLT 2010 2009 %

Capital expenditure £m £m

Data 140.7 135.8 60.7%

Managed Services revenues 41.7 32.7 18.0%

Other 49.4 47.8 21.3%

Total capital expenditure 231.8 216.3

Source: Colt Group S.A., ‘2010 Annual Report’ p.21

C&WW 2010/11(£285m) 2009/10 (£268m)

Customer contracts 57% 52%

New capability assets 31% 31%

Maintenance of own properties and network assets

10% 10%

Cost reduction assets 2% 7%

Source: Cable&Wireless Worlwide, ‘2010/11 Annual Report’ p.34

KCOM 2011 2010 %

Purchase of property, plant and equipment 10,920 14,567 78.3%

Purchase of intangible assets 3,028 3,011 21.7%

Addition to investments 17

Total capital expenditure 13,948 17,595

Source: KCOM Group PLC, ‘Annual Report and Accounts 2010/11’ p.50

18

APPENDIX 12: Ratio Formulae and Workings

CABLE & WIRELESS

Ratios Formulae Values

2011 (,000)

Values

2010 (,000)

Results

2011

Results

2010

PROFITABILITY

RATIOS

ROSF Net Profit After

Tax / Equity

209 / 1,556 1 / 1,371 13.4% 0.07%

ROCE Operating Profit /

Capital

Employed

140 / (1,556 +

493)

-59 / (1,371 +

550)

6.8% -3%

Operating Profit

Margin

Operating Profit /

Sales

153 / 2,257 -59 / 2265 6.7% -2.6%

Gross Profit

Margin

Gross Profit /

Sales

1,065 / 2,257 (2,265 - 1,190)

/ 2,265

47% 47%

SOLVENCY RATIOS

Gearing

(Leverage)

LT liabilities /

(Equity + LT

Liabilities)

493 / (1,556 +

493)

550 / 1,371 +

550

24% 28%

Interest Cover Operating Profit /

Interest Payable

153 / 30 -59 / 36 5.1 1.8

LIQUIDITY

ANALYSIS

Acid Test Current Assets -

Inventories /

Current Liabilities

(596 + 266) /

1,008

(691 + 226) /

1,094

0.9 0.8

Current Ratio Current Assets /

Current Liabilities

909 / 1,008 934 / 1094 0.9 0.9

INDUSTRY

SPECIFIC (ASSET

EFFICIENCY

ANALYSIS)

Sales Revenue

per Employee

Sales /

Employees

6,361 /

2,257,000,000

6,575 /

2,265,000,000

354,818

(£)

344,487

(£)

Sales Revenue to

Capital Employed

(Asset Turnover)

Sales / Capital

Employed

2,257 / (1,556

+ 493)

2265 / (1,371 +

550)

1.1 1.2

COLT

Ratios Formulae Values

2010 (,000)

Values

2009 (,000)

Results

2010 Results

2009

PROFITABILITY

RATIOS

ROSF Net Profit After

Tax / Equity

71.2 / 1,371.2 121.6 /

1,273.2

5.2% 9.6%

ROCE Operating Profit /

Capital Employed

50.5 / 1,395.3 86.3 / 1,299.7 3.6% 6.6%

Operating Profit

Margin

Operating Profit /

Sales

50.5 / 1,583.8 86.3 / 1,622.5 3.2% 5.3%

Gross Profit

Margin

Gross Profit /

Sales

461.1 / 1,583.6 459.9 /

1,622.5

29.1% 28%

SOLVENCY RATIOS

Gearing

(Leverage)

LT liabilities /

(Equity + LT

Liabilities)

24.1 / (24.1 +

1371.2)

26.5 / (1,273.2

+ 26.5)

1.5% 2%

Interest Cover Operating Profit /

Interest Payable

50.5 / 4.9 86.3 / 9.0 10.3 9.6

LIQUIDITY

ANALYSIS

Acid Test

Current Assets -

Inventories /

Current Liabilities

566.6 / 610.4

568.3 / 584.2

0.9

0.9

Current Ratio Current Assets /

Current Liabilities

566.6 / 610.4 568.3 / 584.2 0.9 0.9

INDUSTRY

SPECIFIC

Sales Revenue

per Employee Sales / Employees

1,583,600,000 /

4,825

1,622,500,000

/ 4,777

328,207.

3 (£)

339,648.3

(£)

Sales Revenue

to Capital

Employed

(Asset Turnover)

Sales / Capital

Employed

1,583.6 /

(2,005.7 - 610.4)

1,622.5 /

(1,883.9 –

584.2)

1.1

1.3

19

BT GROUP

Ratios Formulae Values

2011 (,000)

Values

2010 (,000)

Results

2011

Results

2010

PROFITABILITY

RATIOS

ROSF Net Profit After Tax

/ Equity

1,504 / 1,951 1,029 / 2,626 77.09% -39.18%

ROCE Operating Profit /

Capital Employed

2,578 /

16,509

2,123 / ( -2626 +

20,886)

15.62% 11.63%

Operating Profit

Margin

Operating Profit /

Sales

2,578 /

20,076

2,123 / 20,859 12.84% 10.18%

Gross Profit

Margin

Gross Profit / Sales n/a n/a n/a n/a

SOLVENCY RATIOS Gearing

(Leverage)

LT liabilities /

(Equity + LT

Liabilities)

14,558 /

16,509

20,886 / 18,260

88.2%

114.4%

Interest Cover Operating Profit /

Interest Payable

2,578/3,203

2,123 / 3,113

0.8

0.7

LIQUIDITY

ANALYSIS

Acid Test Current Assets -

Inventories /

Current Liabilities

3,810 / 7,031

6,285 - 107 /

10,420

0.5

0.6

Current Ratio Current Assets /

Current Liabilities

3,931 / 7,031

6,285 / 10,420

0.6

0.6

INDUSTRY

SPECIFIC (ASSET

EFFICIENCY

ANALYSIS)

Sales Revenue

per Employee

Sales / Employees

20,076,000,0

00 / 94,600

20,859,000,000 /

101,700

212,219.9 (£)

205,103.2 (£)

Sales Revenue

to Capital

Employed

(Asset

Turnover)

Sales / Capital

Employed

20,076 /

(1,951 +

14,558)

20,859 / (2,626

+ 20,886)

1.2

0.9

TALK TALK GROUP

Ratios Formulae Values

2011 (,000)

Values

2010 (,000)

Results

2011

Results

2010

PROFITABILITY

RATIOS

ROSF Net Profit After

Tax / Equity

35 / 415 -3M / 392M 8.4% -0.76%

ROCE

Operating Profit /

Capital Employed

75 / 415 + 409 15 / (392 + 508)

9.1% 1.78%

Operating Profit

Margin

Operating Profit /

Sales

75 / 1765 16 / 1686 4.3% 0.95%

Gross Profit

Margin

Gross Profit /

Sales

888/1765 848 / 1686 50.31% 50.3%

SOLVENCY

RATIOS

Gearing

(Leverage)

LT liabilities /

(Equity + LT

Liabilities)

409 / 409+ 415

(508 + 392) 49.6% 56.4%

Interest Cover

Operating Profit /

Interest Payable

75 /18 16 / 11 4.2 1.5

LIQUIDITY

ANALYSIS

Acid Test

Current Assets -

Inventories /

Current Liabilities

(161 – 3) / 474 186 - 2 / 490 0.33 0.375

Current Ratio

Current Assets /

Current Liabilities

161 / 474 186M/ 490 0.34 0.38

INDUSTRY

SPECIFIC (ASSET

EFFICIENCY

ANALYSIS)

Sales Revenue

per Employee

Sales / Employees

1765 / 4077

1686 / 4572

432,916.36 (£)

368,766.4 (£)

Sales Revenue to

Capital Employed

(Asset Turnover)

Sales / Capital

Employed

1765 / (415 +409)

1686 / 392 + 508

2.14

1.9

20

KCOM GROUP

Ratios Formulae Values

2011 (,000)

Values

2010 (,000)

Results

2011

Results

2010

PROFITABILITY

RATIOS

ROSF Net Profit After

Tax / Equity

22,621 / 73,194 17,693 / 35,757 30.9% 49.5 %

ROCE Operating

Profit / Capital

Employed

40,294 /

170,204

26,550 / 35757

+ 191,035

23.7%

11.7%

Operating Profit

Margin

Operating

Profit / Sales

40,294 /

395,412

26,550 / 412,800 10.2% 6.4%

Gross Profit

Margin

Gross Profit /

Sales

n/a n/a n/a n/a

SOLVENCY RATIOS Gearing

(Leverage)

LT liabilities /

(Equity + LT

Liabilities)

97,010 /

170,204

191,035 / 35,757

57.0%

84.2%

Interest Cover Operating

Profit / Interest

Payable

40294/7393

26,550 / 7,368

5.4%

3.6%

LIQUIDITY

ANALYSIS

Acid Test Current Assets

- Inventories /

Current

Liabilities

7,328 / 151,546

(94,425 – 3,608)

/ 144,678

0.5% 0.6%

Current Ratio Current Assets

/ Current

Liabilities

794,78 /

151,546

94,425 / 144,678

0.5% 0.7%

INDUSTRY

SPECIFIC (ASSET

EFFICIENCY

ANALYSIS)

Sales Revenue

per Employee

Sales /

Employees

395,412 / 1,801

412,800 / 2,094

219,500 (£)

197,100 (£)

Sales Revenue

to Capital

Employed

(Asset Turnover)

Sales / Capital

Employed

395,412 /

(73,194 +

97,010)

412,800 /

(35,757 +

191,035)

2.3

1.8

21

Bibliography & Links

Mclaney & Atrill – ‘Accounting: An Introduction’ (Pearson 3rd

Edition, 2005)

Ofcom UK Communications Market Report 2011

http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr11/UK_Doc_Section_5.pdf

FT.com

http://www.ft.com/companies/telecoms

ANNUAL REPORTS

BT Group plc, Annual Report & Form 20-F 2011

http://www.btplc.com/Sharesandperformance/Annualreportandreview/pdf/BTGroupAnnualReport2011

.pdf

Cable&Wireless Worlwide, 2010/11 Annual Report

http://www.cw.com/assets/content/investors/reports/2011/ar-2011-full.pdf

Colt Group S.A., 2010 Annual Report

http://colt.online-ar2010.com/images/stories/PDFs/Colt_2010_AnnualReport.pdf

KCOM Group PLC, Annual Report and Accounts 2010/11

http://www.kcomplc.com/docs/news-pdf/annual-reports/annual-report-2010-2011.pdf

TalkTalk Telecom Group PLC, Annual Report

http://m2.ttxm.co.uk/sites/www.talktalkgroup.com/pdf/corporate/TalkTalk_AR11_Web-Ready.pdf