Is BT Group plc Dependent On Debt?

Are debt levels at BT Group plc (LON: BT.A) becoming unaffordable and detrimental to the company’s future prospects?

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BTThe stock market loves BT (LSE: BT-A) (NYSE: BT.US).

Indeed, shares have had a fantastic year, making capital gains of 53% while the FTSE 100 has only been able to deliver 7%. Furthermore, shares have made a great start to 2014, being up 7% while the FTSE 100 is up just 1%.

Of course, much of the gain has been due to warming sentiment surrounding BT’s decision to break into the lucrative sports television market, with BT Sport attempting to compete with Sky on Premier League football as well as Champions League football. This fight, though, is costly, with the Champions League rights alone costing close to £900 million over three seasons.

Therefore, does BT have the financial firepower to compete with Sky over the long run? Or, is it simply dependent on debt?

Excessive debt?

With BT having total debt of £4.6 billion, it may appear at first glance that the company’s balance sheet is stuffed full of borrowings and that this puts the business on shaky financial ground. However, in 2013 it cost BT £880 million to service this debt and, when compared to an operating profit of £2.9 billion, it’s clear that BT is not overly leveraged.

In other words, BT was able to make the interest payments on its debt 3.3 times in 2013, leaving it enough headroom to increase debt (should it wish to). Of course, with interest rates set to rise BT may wish to keep debt levels where they are, but in any case, it appears to be on a relatively sound financial footing and able to withstand a ‘war of attrition’ with Sky concerning football and other sports rights.

Looking ahead

Indeed, BT seems to have a bright future. For instance, it is forecast to grow earnings per share (EPS) by 10% in the financial year to March 2015 and by 9% in the financial year following that. Both of these figures are significantly ahead of the FTSE 100 average of 4% – 7%. Allied to this is a price to earnings (P/E) ratio of 14, which although slightly ahead of the FTSE 100 (which has a P/E of 13.5), seems reasonable when the above-average growth prospects are taken into account.

As a result of its sound financial standing and impressive growth prospects, BT seems to have a bright future ahead of it and could continue to outperform the wider index.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter does not own shares in BT.

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