Analyse of ROE and ROIC for three years of Britishtelecom

In addition, before when we find ROE and ROIC of Britishtelecom we should create Managerial Balance Sheet where the indicators of each year of Invested Capital (IC) should be equal to the Capital Employed (CE). We should use the following formulas:

Table 1.Managerial Balance Sheet of Britishtelecom for 2011

The Working Capital requirement in 2011 is negative. It means that company uses it as a source of payment. It was transferred to the right sight of managerial Balance Sheet. It shows that this year Britishtelecom received a large amount of money right on the spot but obliged it to its suppliers in the future. Also it means that Accounts Receivable (AR) decrease, Accounts Payable (AP) increase. These indicators show a good situation, because Working Capital requirement (WCR) becomes a source of capital.

Table 2. Managerial Balance Sheet of British Telecom for 2012

The same situation is in 2012 the working Capital requirement is negative, therefore it becomes the source of payment.

Table 3. Managerial Balance Sheet of British Telecom For 2013

In 2013 Working Capital requirement is also negative. It means that company each year used it in the form of year Britishtelecom received a large amount of money right on the spot but obliged it to its suppliers in the future. Thus, the negative working capital position only works when the company is growing revenues. When the company’s revenues are declining the positive effect of a negative working capital position reverses and it immediately starts needing annual working capital investment during a time when the company can least afford it.

Table 4. The result of ROE and ROIC analyses of Britishtelecom for three years.

According to table 4, we can see extremely significant fluctuations of ROE indicators. We have found the core reason of such results. In 2013 Return on Equity sharply decreased because the company inserted new policy which is called ‘Retirement Benefit Plan’, however, it is closed to new entrants who have joined to the organization since 31^st of March in 2001.

A defined benefit plan is a pension arrangement under which participating members receive a pension benefit at retirement determined by the plan rules dependent on factors such as age, years of service and pensionable pay and is not dependent upon actual contributions made by the company or members. The income statement service cost in respect of defined benefit plans represents the increase in the defined benefit liability arising from pension benefits earned by active members in the current period. The company is exposed to investment and other experience risks and may need to make additional contributions where it is estimated that the benefits will not be met from regular contributions and expected investment income.

Furthermore, they have inputted a system which is called Career Average Revalued Earnings (CARE), according to which the employees during the whole process of work get some new bonuses and revalue their current performance meaning that at the period of retirement they will be able to receive more benefit than it was mentioned at the first time.

Thus, we have concluded that a lot of expenses were spent on this Retirement Benefit Plan showing that in 2013 defined benefit liabilities were extremely increased and became £47,422 million, while in 2012 liabilities were £40,989 million and in 2011 - £39,052 million. We can see that a lot of efforts and expenditures are provided for this Plan. And also if in 2011 there was an actuarial gain on defined benefit liabilities in 2011 which was £4,875 million, in 2012 it was turned into loss which comprised £1,674 million and in 2013 - £6,258 million of loss.

And of course because of such high fluctuations in liabilities, the equity also became even negative in 2013. It was -£262 million. Of course such deviations in equity influenced the ROE, therefore, it became less than zero and may be the proposal of such a plan will not have good results. We think that management system should be changed and the alternative to this Retirement Plan should be

offered.

Moreover, we have found some statistical information about ROE in this company and the current situation is becoming even much worse than it is now. So, we suppose that Retirement Benefit Plan should be altered by another one.