Media Finance the Financial Performance

Media Finance

The financial performance of BSkyB

British Sky Broadcasting Group Plc)

The aim of this report is to evaluate the financial performances of the B. Sky B, a media giant operator. In order to achieve this desiderate, we shall look into the company's general presentation, make a brief history of the entity and also analyze different financial ratios and make a final interpretation and further recommendations for improving the company's financial performances and overall activity.

General presentation of the company

British Sky Broadcasting Group Plc, or simply put - BSkyB, is one of the most important television operators in UK and Ireland, having as much as 8 million subscribers, representing one third of the total households from the above mentioned area. At the level of year 2006, the company's revenues were about 4.11 billion pounds, having a net profit, after paying taxes, of 551 million pounds.

BSkyB offers to consumers paid television services in United Kingdom and Ireland by two means: on one side, the company owns several programs which reach end-consumers by intermediate cable operators, or on the other side BSkyB retransmits the programs of other televisions. Sports, Films, News and General Entertainment are the main topics that the operator proposes under the 18 independent channels which are transmitted by different methods: DTH (Direct to Home) - the program reception is enabled by a satellite dish, DSL (Digital Subscriber Line) - high speed communication through copper telephone lines and also free to air shows and events, for which the viewer does not have to pay in order to be able watch the programs.

2. Brief history

BSkyB is the top pay-television provider in UK, its shares being currently traded at the International Stock Exchange. The company has its roots in the merger between Sky TV and BSB in 1990, merger that was aimed at concentrating on the British and Irish market, as this movement had been considered in that time to bring true benefits for the company.

Rupert Murdoch, media guru, had the most number of shares in the newly set-up company (36%), capital that was made in the form of investment in technology - in the first stage, the company wanted to design and use its own broadcasting satellites, which ultimately proved to be a wrong decision due to technical issues.

Through the company's history, the most important aspect would be the introduction in 1997 of the digital transmission programs that enabled viewers to access more than 130 different channels with a distinct quality that would make their transmissions superior than the traditional ones. The digital transmissions required the customer to acquire a simple-to-use satellite dish, a decoder package and a software program. In 2001, BSkyB became the first world television service provider, which offers fully digital transmissions. The huge investments, roughly 1.3 billion dollars, were covered by 1993, where the breakeven point was met. The company's profits started to grow, from 100.000 pounds a week, up to 511 million pounds in 2006, being one of the most profitable companies in the field.

3. Financial performances

In this paragraph we shall discuss the financial performances of the company for the year 2006, being able to distinguish from 5 financial ratios: profitability, liquidity, solvency, efficiency and asset management, as well as investment ratios.

First of all, we should be mentioned that the data was found on the company's official website, providing investors and interested third parties information about the development and performances of the enterprise. We will introduce the value of each ratio at a time, discussing its significance to the overall activity of the company, and also simultaneously make a comparison with the figures from previous year (2005) and see the evolution or involution on the short-term.

A. Liquidity ratios: present the company's ability to pay up its short-term obligations (namely suppliers, interest payable). Two indicators are to be used under this category: Quick Ratio and Cash Ratio.

A1. Quick ratio - is computed by dividing Current Assets (subtracting inventories) to Current Liabilities. This ratio presents the capacity of the company to maintain its operational activity by using current assets (cash and other liquid assets) during periods when it does not have a necessary level of revenues. For the reference year 2006, the Quick Ratio was 1.27 as compared to the base year, when the same ratio had the value of 0.89. This increase in the quick ratio would underline the company's strategy to become more liquid, or solvent, so that if it's put in the situation of engaging in other projects which require huge investments, it would have the necessary funds. As compared to the optimal value of this ratio (as indicated by analysts 0.8) we could say that BSkyB has a proper liquidity in order to cover its current liabilities

A.2 Cash ratio - is computed by dividing the sum between Cash and Marketable Securities to the Current Liabilities. This ratio explains the company's capacity to pay on the spot its current liabilities, if it were the situation. In this case, BSkyB would have to use its current assets which are more liquid, namely the cash and marketable securities. The results for the year 2006 is 0.53 while for 2005, the level of the cash ratio is 0.37. We may conclude that the company improved its short-term liquidity, so as to better face a possible crisis where it could be forced to pay, on very short basis, the current liabilities.

B. Solvency ratio: represents the ratio that determines the company's ability to cover its long-term liabilities. This ratio takes into consideration the net income (after paying taxes) subtracting non-monetary depreciation expenses, as compared to company's long-term obligations. The figures taken from the Official Financial Statements of the company indicate that for 2006 the value of the Solvency ratio was 0.26 as compared to 0.51 in 2005. This important difference could be explained by the important investments incurred by the company in the period 2005-2006, and consequently by decreasing profit. However, even for 2006, the solvency ratio is above the accepted level of 0.2, which indicates that overall the company is able to meet its long-term liabilities (for example, loans).

C. Profitability ratios: According to the denomination of this ratio, it tries to identify the profitability of the company, by using different methods. I have selected two ratios: Gross profit margin and Return of Equity.

C1. Gross profit margin - This indicator measures the gross profit earned according to the sales made by the company and is computed by dividing the Sales minus the Cost of Goods sold by Total Sales. The gross profit margin takes into consideration the cost of goods/services sold, but does not include other specific costs. As it could have been expected, the rates for the two years are very similar, around the 0.21 figure. This means that the gross profit rate registered by the company is 21%, and number being influenced by the continuous investments performed by the company so that it remains competitive on the market.

C2. Return on Equity - represents the final analysis for each shareholder, amounting the profits earned by each invested dollar. This ratio is closely monitored by possible and existent shareholders due to the fact that it indicates the profitability of their investment. It is calculated as Net Profit divided by Shareholder Equity. With a level of return on equity of 4.55 for the year 2006 as compared to 3.09 in 2005, we may conclude that the shareholders will be more than happy with their investment in BSkyB, as their nominal dollar invested brought them another 4.55 dollars, keeping up a linear up warding trend. Also, this ratio is beneficial to the company as it may raise funds more easily and cheaply, due to the fact that investors will see the shares of the company as valuable ones, bringing them important profits for every invested dollar. If the situation was to reverse, and the ratio would decrease, the investors would sell their BSkyB shares, and invest in other companies. This thing would not be beneficial for the company, as it may loose an important financing alternative.

D. Efficiency ratios: These financial indicators measure the quality of a business's receivables and how efficiently it uses and controls its assets, how effectively the firm is paying its suppliers, and whether the business is over-trading or under-trading on its equity (using loaned funds). The analysts use many key financial business ratios to measure a company's efficiency, and the most important methods are: Sales to Inventory and Assets to sales.

D1. Sales to inventory - This indicator is computed by dividing the Annual Net Sales over the inventory, in order to see the efficiency of current inventory level used by the company. Comparing the data for the two analyzed years, we end up with the following conclusions - for 2006 the Assets to Inventory ratio is 12.8 while for 2005 the figure is 11.96. When analyzing this indicators we should bare in mind that a high level figure could be explained by a lost in sales due to the under stock (level of stock lower than the optimal inventory) or by the fact that customers are buying from other competitor; a low level figure indicates that inventories are obsolete or stagnant. In our case, the increase in value could mean that efficiency of sales, in relation with the inventory, has increased (company's inventories are maintained at a lower level than in 2005).

D2. The Assets to sales ratio stands for the total investment used to generate a certain level of sales. Extreme values can be explained in different methods: an abnormally high percentage may indicate that a company is not being aggressive enough in its sales efforts, or that its assets are not being used at the maximum level of efficiency. A low ratio may indicate that an enterprise is selling more than can be safely covered by its assets, risking to maintain an inferior level of inventory, which may also negatively affect the company's activity. The Assets to Sales ratio is computed by dividing the total assets to the total sales. In 2006 the value of the assets represented 90% of the sales, while in 2005 this percentage was only 63%. This situation can be interpreted by the fact that BSkyB continued its investment policy, so acquiring new fixed and current assets, at a higher pace than the increase in sales. Probably the company realized that the competitive environment of this field urges the players to make important investments in order to maintain, or improve market share.

E. Financial Leverage ratio: offer an indication of the long-term solvency of the company. This ratios, as contrary to the liquidity ones, measure the company's ability to observe its long time obligations - for example a bank may want to know what is BSkyB capacity to pay up a loan, for which the company may need to design and launch a new satellite for its program broadcasting. In my opinion this is a very important indicator for the long-term development of the enterprise, because investments are an essential step in improvement of services, reducing costs, acquiring new clients and improving company's profits. Two of the most important types of these financial ratios are Debt Ratios and Debt-to-Equity ratio. Let us take them one at a time.

E1. Debt Ratio. Computed by the division of total liabilities over total assets, this indicator shows the percentage coverage of debts by assets. For example if the company were in a situation that it could not pay its loans, for different reasons, the banks and financial institution would need to evaluate the enterprise's assets. If the level of the ratio is higher than 1, then this should be an incentive for the bank to offer the loan to BSkyB Company, which may need the funds to continue its development and investment policy. The leverage level of the company in 2006 was 97%, while in 2005 it total liabilities represented 92%. This situation could be translated by the fact that more long-term liabilities of BSkyB are covered by total assets- fixed and current, so the company may obtain credits and loans with more favourable conditions - existence of a grace period, lower interest rate and a lower level of documents required.

E2. Debt-to-Equity. The Social capital can be another source for covering the company's debts. It the value of the assets is inferior to the value of the liabilities, this means that the creditors must settle the obligations with company's shareholders. This indicator may come in handy in here, due to the fact that it exactly indicates the percentage of total liabilities which can be paid with shareholder's contributions. The formula for this financial ratio is the following: Total debt divided by Total Equity. In the BSkyB case, the following figures appear for the observation years: 3.4% in 2006 as compared to 8.8% in 2005. This important increase in the ratio can be explained as the Social capital of the enterprise had decreased in only one year from 187 to 121, due to possible company's buy back policies (BSkyB may require to develop an investment, and needed funds for this thing. The cheapest way to do that is by increasing the social capital, with buy-back shares, on which the company engages to offer these shares to interested investors, with the buying-back promise after a certain period of time - usually one year). However, this decrease does not negatively influences the company's financial leverage, as the total liabilities of this commercial entities are covered, in a proportion of 97% by assets. So it is unlikely that the company end up in a situation of not being able to cover its debts by total assets, and must address its shareholders to do just that.