Income Statement Ratios
The net profit margin for BCE for the fiscal year 2016, as shown in Appendix 1, was 14.21% implying that BCE earned a net income of 14 cents per dollar of operating revenue. The positive and high net profit margin indicates that the company was profitable in the fiscal year 2016 (Gibson, 2013). The ratio was 12.69% in 2015 and 12.92% in 2014. The increase in the net profit margin in 2016 indicates that the profitability of BCE improved in 2016.
The operating margin or EBITDA margin for BCE was 40.46% and 39.75% in 2016 and 2015 respectively. This implies that the company's operating activities were profitable (Porter & Norton, 2017). The increase in the ratio from 39.75% in 2015 to 40.46% in 2016 shows growth in the profitability of BCE in 2016.
BCE's return on equity for the year 2016 was 21.8%, an increase from 21.1% in 2015 and. The ratio shows that BCE generated net earnings of 21 cents per dollar of equity invested in the company. The high return on equity implies that BCE was profitable during each of the two fiscal years. It further means that the profitability of BCE improved in 2015 and 2016.
BCE's Times Interest Earned ratio was 9.896 times for the year 2016. It shows that the company's adjusted EBITDA was 9.89 times the firm's interest expense for the year (Porter & Norton, 2017). This implies that BCE's earnings were adequate to pay its interest expenses hence there is no significant possibility that it can default interest payments due to insufficient earnings (Porter & Norton, 2017). The ratio increased from 9.407 and 8.9368 in 2015 and 2014 respectively indicating an improvement in interest coverage.
Balance Sheet Ratios: Solvency or Leverage Ratios
These are balance sheet ratios that assess the long-term financial stability of the company. They evaluate whether the company can meet its debt obligations (Gibson, 2013). BCE's debt ratio was 0.643 as on December 31, 2016. This implies that BCE financed 64% of its total assets through borrowing. It shows that the solvency of BCE is weaker since most of its assets were financed by liabilities (Porter & Norton, 2017). The total debt to total assets ratio increased 0.6389 on December 31, 2015, to 0.6437 showing that the solvency of BCE declined in the fiscal year 2016.
Its debt-to-equity ratio was 1.807 as on December 31, 2016, and 1.77 on December 31, 2015. This implies that the company's total liabilities exceeded its total shareholders' equity hence its solvency is weak. The rise in the debt-equity ratio in 2016 indicates that the solvency of BCE deteriorated in 2016 (Gibson, 2013).
Common Size Income Statement
As shown in Appendix 2, BCE's operating costs were 59.54%, 60.25% and 60.54% of the total operating revenues in 2016, 2015 and 2014 respectively. This shows that the company's operating costs decreased in 2016 due to workforce reductions at the Bell Wireline Segment. Adjusted EBITDA was 40.46%, 39.75% and 39.46% of the total revenues in 2016, 2015 and 2014 respectively. The increase shows that the profitability of BCE increased in both 2015 and 2016. The vertical analysis further indicates that BCE's net earnings were 14.21% of the total operating revenues in 2016. This was an increase from 12.69% and 12.92% of operating revenues in 2015 and 2014 respectively. The trend indicates that the profitability of BCE improved in 2015 and 2016 (Gibson, 2013).
Common Size Balance Sheet
The common size balance sheet (Appendix 3) indicates that BCE's cash and cash equivalents were 1.7%, 1.28% and 1.22% of the total assets as on December 31, 2016, 2015 and 2014 respectively. The firm's debt due within one year was 9.75% as at the end of 2016, a decline from 10.20% and 8.08% at the end of 2015 and 2014 respectively. This implies that total assets grew at a faster rate than the growth rate of cash and cash equivalents. Long-term debt was 33.07% of the total assets as at the end of 2016, an increase from 32.07% as on December 31, 2015. Total non-current liabilities were 44.2%, 43.07% and 47.45% of the total assets as at the end of 2016, 2015 and 2014 respectively. Total equity declined from 36.11% of the total assets as at the end of 2015 to 35.63% as at 31 December 2016 indicating a decline in BCE's solvency.
Three Most Significant Ratios
The three most significant income statement ratios are the net profit margin, return on equity and times interest earned ratio. The net profit margin and return on equity assess the profitability of the company, which is an essential aspect of its financial stability. The return on equity is a critical ratio especially to shareholders as it indicates the earnings the firm generates from the use of shareholders' funds. Times interest earned ratio is a critical solvency ratio. Solvency is not just about the amount the company has borrowed but also its ability to pay interest. The ratio shows how much the firm's earnings covers the interest expense hence it determines the likelihood of defaulting interest payments.
The most significant balance sheet ratios include debt-to-equity, long-term debt to equity and capital intensity or total assets turnover. Debt-to-equity ratios are critical since they assess the company's solvency (Gibson, 2013). Capital intensity is an essential asset management ratio. It shows the amount of assets BCE requires to generate a dollar of revenue (Gibson, 2013). Efficient management of assets as an important driver of profitability, liquidity, and solvency.
Analysis of Cash Flow Statements
BCE's cash flows from operating activities for the year 2016 were $6,643 million. This shows that the company had positive net operating cash flows. Generating positive operating cash flows is critical since it ensures the firm avoids cash flow problems (Gibson, 2013). Operating cash flows increased by 0.5% in 2015 and 5.9% in 2016. In the fiscal year 2016, BCE's cash flow margin ratio was 30.59% implying that it converted about 31% of its operating revenues into operating cash flows. The ratio increased from 29.16% and 29.66% in 2015 and 2014 respectively to 30.59% in 2016. The increase in the ratio shows that the efficiency of BCE in converting revenues into operating cash flows improved in 2016.
Cash flows used in investing activities increased by 11.4% from $4,114 million in 2015 to $4,584 million in 2016. In 2015, it increased by 15.2% from $3,570 million in 2014. The negative net cash flow implies that the company is increasing its investments rather and not divesting. Capital expenditures also increased by 4% from $3,626 million in 2015 to $3,771 million in 2016. An increase in capital expenditures is a sign of the company's growth and future profitability. Cash dividends paid to shareholders also increased from $1,893 million in 2014 to $2,169 million and $2,305 million in 2015 and 2016 respectively. Free cash flows also grew from $2,744 million in 2014 to $2,999 million and $3,226 million in 2015 and 2016 respectively. These changes imply that the cash flow condition of BCE improved in fiscal years 2015 and 2016.
Gibson, C. (2013). Financial statement analysis. Mason, Ohio: South-Western.
Porter, G., & Norton, C. (2017). Financial accounting. Boston, MA: Cengage Learning.
Ratio Formula 2016 2015 2014
Profitability Ratios Net Profit Margin Net Earnings/Total Operating Revenue 14.21% 12.69% 12.92%
Operating Margin Adjusted EBITDA/Total Operating Revenue 40.46% 39.75% 39.46%
Return on Equity Net Income/Average Shareholders' equity 21.80% 21.10% 21.00%
Cash Flow Margin Operating Cash Flows/Total Operating Revenues 30.59% 29.16% 29.66%
Solvency Ratios Debt-to-Total Equity Total debt/Total equity 1.80654 1.76952 2.03806
Debt to Total Assets Total liabilities/Total Assets 0.64369 0.63893 0.67084
Times Interest Earned Ratio EBITDA/Interest Expense 9.8964 9.40704 8.93757
Liquidity Ratios Operating Cash Flow Ratio Operating Cash Flows/Current Liabilities 0.6572 0.6279 0.68665
Efficiency Ratios Total Asset Turnover Total Revenue/Total Assets 0.43344 0.44827 0.45450
Capital Intensity Ratio Total Assets/Total Revenues 17.40% 16.90% 17.70%
Market Value Ratios Earnings Per Share (Basic) Net Earnings/Total number of common shares outstanding 3.33 2.98 2.98
Price to Earnings Ratio Market Price per share/Earnings per share 17.43 17.94 17.88
COMMON SIZE STATEMENTS
2016 2015 2014
CONSOLIDATED INCOME STATEMENTS % of Total Operating Revenues
Operating Revenues 100.00% 100.00% 100.00%
Operating costs 59.54% 60.25% 60.54%
Adjusted EBITDA 40.46% 39.75% 39.46%
Severance, acquisition and other costs 0.62% 2.07% 1.03%
Depreciation 13.25% 13.43% 13.69%
Amortization 2.91% 2.46% 2.72%
Finance costs 0.00% 0.00% 0.00%
Interest expense 4.09% 4.23% 4.41%
Interest on post-employment benefit obligations 0.37% 0.51% 0.48%
Other income (expense 0.10% 0.06% 0.20%
Income taxes 5.11% 4.29% 4.41%
Net earnings 14.21% 12.69% 12.92%
Net earnings attributable to: Common shareholders 13.32% 11.74% 11.23%
Preferred shareholders 0.63% 0.71% 0.65%
Non-controlling interest 0.26% 0.24% 1.04%
Net earnings 14.21% 12.69% 12.92%
Appendix 3: Common Size Balance Sheet
% of Total Assets
2016 2015 2014
Total assets 100.00% 100.00% 100.00%
Cash and cash equivalents 1.70% 1.28% 1.22%
Debt due within one year 9.75% 10.20% 8.08%
Long-term debt 33.07% 32.07% 35.33%
Total non-current liabilities 44.20% 43.07% 47.45%
Equity attributable to BCE shareholders 35.00% 35.47% 32.28%
Total Equity 35.63% 36.11% 32.92%
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