Mutual Fund Recommendation
The most critical aspect of determining whether to include Rogers or Bell Canada Enterprise as part of the mutual fund is to determine which company has the most promising return that investors expect to receive from their investment. In order to evaluate these companies’ ability to return investors, their financial health, management’s expectation, and potential concerns will be compared to make a final recommendation.
Financial health
As part of our ratio analysis in part two of the group project, we did a detailed analysis of Rogers’ recent financial statement and performed a trend analysis with reference to BCE’s ratios. While we concluded that Rogers overall financial health is stable and shows consistent growth, BCE does appear to be in a safer position with less risk.
From 2016 to 2017, Rogers current ratio decreased from 0.50 to 0.44, compared to Bell’s 0.48 to 0.43. With a similar trend in quick ratio, Rogers showing decreasing from 0.50 to 0.39, corresponding to BCE’s 0.40 to 0.36. Rogers shows a slightly better ability to satisfy the short-term obligation with a higher ratio in both years. Reading into the notes, both Rogers and BCE credit the outflow of current assets due to an increase in investment activity and higher income tax in 2017.
Comparing the solvency ratios, Rogers shows a debt to equity ratio of 3.0 to 2.8 from 2016 to 2017, while BCE shows a significantly lower number of 1.27 across both years that stays relatively unchanged. For coverage ratio, Rogers shows a cash flow to total liabilities of 17% and BCE at 20% across both years. BCE is at a less risky position with lower debt to equity ratio and higher cash flow to total liabilities. This means that BCE can better satisfy long-term obligations. However, Rogers’ debt to equity ratio shows considerable improvement as they paid off 17% of their long-term debt in 2017.
Therefore, investing in BCE would be less risky with significantly lower debt to equity ratio, but Rogers’ still shows strong management with its debt. Instead, to determine whether Rogers or BCE is a better fit for our mutual funds means focusing on the potential return on the investment.
In terms of the ability to generate revenue, both companies have shown consistent growth over the past few years. Especially from 2016 to 2017 with the recent price adjustment came after the agreement with the government as detailed in part 1 and 2.
BCE’s revenue shows a growth of 1% from 2015 to 2016 and 4.6% from 2016 to 2017, while Rogers shows a 2% and 3% respectively. Bell’s higher growth can be explained by slightly higher wireless growth at 10.1% compared to Rogers’ 7% and Bell Wireline’s key increase in customer base with the IPTV technology that Rogers’ still had yet to be implemented.
As investors, we are most concern with the return our investment can make. By comparing the net profit margin, BCE performed significantly better in 2016 at 14% compared to Rogers 6% and slightly better at 13% and Rogers at 12% in 2017.
As detailed in the ratio analysis in part two, Rogers’ significant drop in net income in 2016 was caused by a 484 million expense as a result of changing its strategy with IPTV. Return on assets shows a different story with Rogers showing a significantly higher 5.9% in 2017 while BCE shows a declining at 1.6% in 2016 and 1.4% in 2017.
Overall, both Rogers’ and BCE’s ability to fulfill obligations and its management of debt and assets are not to be concerned with. It is reasonable to expect growth in both companies given the trends, especially with Rogers’ significantly better return on assets means that we can expect higher growth from Rogers’ investment than Bell’s. It would come down to what their management plan and expect in future years to determine which would yield better returns.
Future direction
As stated in part one, Rogers became the company it is today due to their strategic use of acquisitions, expansion and consolidation. Throughout almost six decades, they have succeeded and grown immensely by partnering with several companies, such as the Blue Jays and the NHL. As for the company’s strategic direction in the future Rogers has many priorities that consists of accelerating growth by investing in their products and services, their communities and economy. First, they wish to become a strong Canadian growth company by accelerating growth in a sustainable way and translating their revenue into profits and free cash flow which will then increase returns on assets and returns to shareholders. An additional strategy would be to drive growth in the business market by implementing business service innovation, improving their services and bringing market to new products or latest network technology, which will attract and serve more business customers in the future. Moreover, in order to improve and create consumer experience and have a better outlook in the future, Rogers aspires to make it easier for customers to interact with the company, whenever and wherever they want and listen to their voices by improving customer service.
Concerns
Although Rogers is at a stable and credible financial stage, there are some points of concerns that should be included in the portfolio. One of the concerns is that Rogers, in face of BCE, the largest competitor to Rogers, offers slower mobile internet experience than BCE in this world where trends of mobile devices are thriving and continuously growing. As mobile trends continues to grow, society wants to establish contracts with the company that offers the best mobile experience and internet speed. Consumers will be choosing faster services, resulting in increased services from Bell due to their quicker mobile internet speed and similar pricing to Rogers. In this high-tech world with rapidly growing trends of mobile devices, it is a concern that Rogers offers lower quality of mobile internet speed compared to its greatest competitor, BCE, as the insufficiency to meet consumers’ expectations may lead to loss in financial competition.
An additional concern is the quality of customer service offered to the customers. Rogers has history with unsatisfactory and low quality customer service. As the majority of customers prefer higher quality customer services consisted of shorter wait times, more comfortable and comprehensive technical support, etc, Rogers’ widely spread negative reputation of low quality customer service is a concern. This concern can negatively impact the image, customer loyalty, and financial stability of Rogers.
Conclusion
Based on the above analysis, the mutual fund should include Rogers instead of BCE. First, the strategies that Rogers implemented to improve the company’s future direction is able to solve most concerns seen in the portfolio which will then have a positive outlook on their financial stability. Additionally, while both Rogers’ debt to equity ratio might not be as well managed as BCE’s, Rogers’ has made effort to pay a significant portion of its debt in 2017 despite the failed investment in 2016. Furthermore, even if BCE has a larger growth in 2017, BCE has credited it to its success in IPTV, which Rogers is planning to implement it this year. In combinations of Rogers investment in the latest IPTV technology in 2017 and its excellent record of acquisitions, we can expect significant growth in the following years as Rogers continues to gain media market share from Bell Media.
Executive Bonus Compensation
We would expect a bonus based on the performance for the most recent fiscal year. First, the profitability ratios we calculated in part two are both increasing from 2016 to 2017 in Rogers’ financial statements. Rogers’ net profit margin has shown a significant growth from 6% in 2016 to 12% in 2017. Then, Rogers has also shown a significant increase for 2.9% in 2016 to 5.9% in 2017 in their return on asset ratio. The profitability ratio can reflect if the company earned profits. Hence, through the data, Rogers has an ability to give a bonus based on their performance. Although, the liquidity ratio which refers to the ability to return short-term liability has decreased from 2016 to 2017. It just shows that most assets for a telecommunication company are long-term infrastrate and the company does not have enough short-term liquid fund. So the situation in which the liquidity ratio has decreased is usual for a telecommunication company. Cash Flow to Total Liabilities ratio is unchanged and the debt to equity ratio decreased. The change for the debt to equity ratio shows that Rogers suffers less risk in 2017 and has ability to return the debt on shareholders. All financial data shows Rogers facing a positive future.