I’m cautious of the BT (LSE: BT.A) share price. Regardless of trying low cost at 140p, I reckon it may very well be a worth entice.

These are investments that appear like sensible shopping for alternatives on paper. Nonetheless, they develop into deceptive.

The inventory is up 11.9% this 12 months and 13.9% over the past 12 months. So, it’s gaining momentum. Even so, it has nonetheless misplaced 25.9% of its worth over the past 5 years.

Whereas I reckon it’s a inventory for traders to keep away from, might I be unsuitable? To reply that, I wish to take a look at three elements.

Valuation

Let’s begin by its valuation. To try this, I’ll use the price-to-earnings (P/E) ratio. Trying on the chart beneath, the inventory is presently buying and selling on a P/E of 16.8. That’s above the FTSE 100 common (11).

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Over the course of the 12 months, BT shares have turn out to be significantly dearer. That mentioned, trying forward paints a greater image. BT has a ahead P/E of simply 8.7. That’s fairly low cost.

Debt

So, BT appears prefer it has the potential to be good bang for traders’ buck. Let me now give attention to a problem I’ve with the enterprise, which is its debt pile.

On its stability sheet, it has a complete web debt of £19.5bn. That’s an enormous quantity and is round 1.25 occasions its market capitalisation. Whereas rate of interest cuts could also be close to, charges will keep elevated for the approaching years. That can make this pile dearer to service.

What’s extra, its debt has been steadily rising. Final 12 months, the enterprise pinned the rise, totalling £800m, down to pension scheme contributions.

Because the chart reveals beneath, meaning BT now has a debt-to-equity ratio of practically 1.9, the place 1-1.5 is taken into account wholesome. For my part, that’s concerningly excessive.

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Spectacular dividend

The ultimate issue I wish to spotlight is its dividend yield. As seen beneath, the inventory boasts a 5.5% payout, comfortably clearing the FTSE 100 common (3.6%).

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Its rising share price has meant its yield has fallen. Nonetheless, there’s the potential for it to rise. Final 12 months, its dividend jumped 3.9% to 8p per share.

A price entice?

There are points of BT to love. For instance, its full-year replace provided some positives. On 16 Could, the enterprise introduced it had “reached the inflection point” for its long-term plan, together with passing peak capex for its full fibre broadband rollout.

However then once more, I see additional drawbacks. Its high line has been falling in the previous few years. And it grew simply 1% for 2023. Its pre-tax income have additionally been sliding. Final 12 months they dropped by 33.5% to only shy of £1.2bn.

On my watchlist

Regardless of trying like respectable worth, I’m acutely aware BT’s debt might hurt its development potential within the years forward. I’ll be preserving an in depth eye on whether or not the determine comes down in its Q1 outcomes, due for launch on 25 July, and its half-year replace, on 7 November. The inventory will keep on my watchlist in the interim.