Abstract:
This literature sets out to give an overview of the current financial position of Vodafone Group plc and its prospects. The position is analyzed by looking at accounting ratios over the last few years, and by an examination Profitability, Liquidity, gearing, and growth. The key ratios analyzed in this are compare to T-Mobile's and O2's accounts. Note the fiscal year of T-Mobile's and O2's ends in December but Vodafone has its year end in March, this will clarify year differences between Vodafone and its competitors.
Company's Overview:
Vodafone Group plc considered one of the world's largest mobile operators in term of revenues and size, and the only one with a claim to be global. Its primary assets include controlled operations in Germany, Italy, Spain, UK, Japan, and high percentage holding in Verizon Wireless and a stake in SFR France. This gigantic expansion favored to Sir Christopher Gent which had been the CEO of Vodafone for over six years and Mr. Arun Sarin who has been chief executive since 2003, and finally the new latest CEO is the pervious Deputy Chief Executive Mr. Vittorio Colao. The company's valuation has expanded from UK £7 billion to total market capitalization of approximately £71.2 billion at 12 Nov 2009. Vodafone's cellular footprint has also grown to more than 30 directly-owned, associate and partnership cellular networks with approximately 85,000 employees during year ended 31 March 2010. Turnover last year was UK 35,478 billion and profit before exceptional items, etc. was UK 9 billion. Subscribers stand at a very substantial 347 million. That's more than 5% of the worldwide population. (Vodafone website, 2010)
The company stretched rapidly in the last half decade due to sudden increase in use of mobile phones and electronic data, and due to the globalization phenomena that causes the massive demand for connectivity all around the sphere. The company became a global giant thanks to mergers and acquisitions, On 20 April 2009 the Group acquired an additional 15% stake in Vodacom for cash consideration of ZAR 20.6 billion (£1.6 billion). This was a very controversial move at the time. The results of the acquired entity have been consolidated in the income statement. From 18 May 2009 the acquired entity contributed £90 million to the profit attributable to equity shareholders of the Group. There have also been other acquisitions of other telecommunication companies; such as Vodafone Australia which completed its merger with Hutchison 3G Australia to a 50:50 joint venture. Vodafone Hutchison Australia, which is in due course, will market its products and services solely under the Vodafone brand. The results of the combined business have been proportionately consolidated in the Groups results as a joint venture from the date of the merger. (Vodafone Website, 2010)
However the acquisitions and licenses had to be funded mainly through borrowing and the effect of these cash outlays on both acquisitions and licenses has been to increase the company's debt levels significantly and put pressure on its working capital and operating margins. Vodafone, which owns 45% of Verizon Wireless in USA, has been seeking a dividend from the unit that has been using funds for other purposes primarily to cut debt. Ivan Seidenberg, chief executive officer of Verizon Communications, which owns the rest of the venture, has said he will only consider a dividend once the wireless units' debt is paid off. (J. Browning & A. Thomson, 2010)
Vodafone going Green:
Vodafone has a socio-economic impact on a wide range of stakeholders, both directly and indirectly through our products and services, Vodafone do focus on Mobile phones and the networks that connect them have environmental impacts at every stage of their lifecycle from extraction of raw materials and manufacture of products through to their use and disposal.
The company focuses on reducing these impacts at the stages where we have direct control - tackling the climate impact of our networks and recycling network equipment.
Vodafone have around 429 base stations powered by renewable energy in eight countries, such as small wind turbines and solar panels. In Portugal, for example, the company installed wind turbines to power 32 base stations in 2008/09; these new implementations helped the company to be powered by on-site renewable energy by 7.5%across the Group
At other stages in the lifecycle, the company uses their influence to encourage others to reduce environmental impacts. They do this by working with suppliers to build up more energy efficient mobile phones and network equipment, and minimize environmental impacts during manufacture (and extraction of raw materials further down the supply chain). They encourage customers to return their mobile phones for refurbishment and reuse where possible and dispose of them responsibly at end of life.
Vodafone Company took a business strategy all over the world makes a direct contribution to the global economy through the wealth that they generate, the taxes they pay and the jobs they sustain directly and among our suppliers.
(Vodafone website, 2010)
Financial Performance
In the latest financial review for the first quarter of prelim 2010 the chief executives stated the following:
"We have made significant progress in implementing our strategy. We now generate 33% of service revenue from products other than mobile voice reflecting the shift of Vodafone to a total communications provider. In particular, mobile data and fixed broadband services continue to grow while we increased the contribution being made by our operations in emerging economies, primarily by gaining market share. We have reduced costs and working capital to manage better in the recessionary environment while maintaining investment in our networks."
"The Group generated free cash flow of approximately £1 billion ahead of our medium-term target established in November 2008 even after adjusting for beneficial foreign exchange." (Vodafone website, 2010)
To analysis statement above we will examine four historic financial performance figures:
Profitability
Liquidity
Financial gearing
Growth
Profitability
With Profitability ratios anaylsist measure the operating success of Vodafone group PLC for the last four years. the profit figures are expressed as a percentage of sales or capital employed, these ratios will compared with those of previous years, or those from companies in the same industry.
Ratios used in assessing profitability of a company are:
I. Gross profit Margin (FAME, Aug-2010)
Year 2010 2009 2008 2007
Vodafone group Gross Margin (%)
19.50
10.21
25.37
-7.66
Year
2009
2008
2007
T-Mobile Gross Margin (%)
-3.87
-21.75
-4.19
Group revenue increased to 19.5% on 2010, with favorable exchange rates contributing and to merger and acquisition activity outside the European continent, Gross profit have been reasonably variable over the last four years, due to many factors ranges from global economic crisis and from the fact that telecommunication market is becoming tougher. It's been indicated that the market has some way to go yet before it matures and margins come under pressure, but overall Vodafone is doing much better that other competitors such as T-mobile although Vodafone went into critical investment decisions in such harsh times .
Overseas Turnover
Year 2010 2009 2008 2007
Overseas Turnover
39,504
35,681
30,110
26,043
(Fame, Aug-2010)
Overseas Turnover increased by 1.1% to £39.504 million, with favorable exchange rates and the impact of merger and acquisition activity, primarily from the full consolidation of Vodacom in south Africa.
Return on capital employed
Liquidity
A comparison of current assets to current liabilities is commonly used to measure the ability of a business to pay its debts as they fall due. Working capital is particularly important for a company, especially if the company is planning on borrowing money or getting credit from their suppliers. A high current ratio indicates that the firm has a level of safety in the ability to cover unforeseen cash needs from current assets A ratio that is less than 1:1 might concern the management and investors because it would indicate that liquid recourses are insufficient to cover the short term payments.
1. Current Ratio (Current Assets: Current Liabilities)
Year 2010 2009 2008 2007
Vodafone Current Ratio
0.50
0.47
0.40
0.68
Year 2009 2008 2007
T-Mobile Current Ratio
0.77
0.64
0.56
(Fame, Aug-2010)
These figures indicate that liabilities now exceed assets and that the imbalance is declining, on 2009 while comparing these figures with T-Mobile we see that last company is scoring higher rate by .013 when comparing to Vodafone score ( .07).
2. Acid Test Ratio (Current Assets minus Stock: Current Liabilities)
Year 2010 2009 2008 2007
Vodafone Acid Test Ratio
0.48
0.45
0.38
0.66
Year 2009 2008 2007
T-Mobile Acid Test Ratio
0.73
0.59
0.48
(Fame, Aug-2010)
Ideally this figure should be above 1 for the company to be comfortable. That would mean that they could meet all their liabilities without having to sell any of their stock. This would make potential investors feel more comfortable about their liquidity. If the figure is far below 1 they may begin to get worried about the firm's ability to meet its debts. As the figures show Vodafone has fluctuated over and below 1 in the last three years and at present the value of its assets amount only to 60 % of its liabilities. If the ratio remains under 1 for more than a year or two there may be cause for concern as with such a low ratio the company is technically (basically) insolvent. However shareholder and supplier confidence in the potential of future cash flows plus Vodafone's apparent ability to service its debt allows the company to continue to trade.
Solvency ratios
Solvency ratios measure the company's ability to survive over a long period of time. Current and potential investors will be interested in a company's financing arrangements and also its risk. A company that has borrowed money obviously has a commitment to pay future interest charges and
Make capital repayments. Gearing ratios commonly wide used to measure company solvency state:
Gearing
Gearing is the term used to assess the percentage of the company's capital that is financed by debt and long-term finance. Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increased exposure to creditors.
Vodafone's gearing ratio in recent years has been as follows: (Creditors' amounts falling due after more than one year: Equity shareholders' funds)
Year 2010 2009 2008 2007
Vodafone Gearing (%)
50.04
55.97
40.76
42.41
Year 2009 2008 2007
T-Mobile Gearing (%)
53.10
52.11
52.31
(FAME, Aug-2010)
On 2009 Vodafone and our benchmark T-mobile have a very close rates but while checking the increase in the gearing ratios it's very clear that there was a sudden increase by almost 16% for Vodafone and only .2% for T-mobile. This reflects the mergers and acquisitions moves by Vodafone to which they have borrowed money to finance their expansions. Even so, however, the figures indicate that Vodafone still has a relatively low gearing ratio after these activities for 2009 and 2010. This means they have potential to borrow even more to finance future acquisition strategic decisions.
Growth
To determine growth in any company, we indicate the return an investor might earn by purchasing that share at a particular time, and then selling it with known profit margin. Price over earnings or Return on Shareholders' Funds provides a comprehensible indication of the value placed by the capital market on a company's earnings and what it is prepared to pay for investors. Subject to overall market reaction and economic circumstances, these ratios reflect the capital market appraisal of both the amount and the risk of these earnings.
Year 2010 2009 2008 2007
Vodafone Return on Shareholders' Funds (%)
9.60
4.86
11.53
-3.55
Year 2009 2008 2007
T-Mobile Return on Shareholders' Funds (%)
-3.86
-21.45
-3.55
Year 2008 2007 2006
O2 Return on Shareholders' Funds (%)
9.32
8.30
5.11
(Fame, Aug-2010)
Vodafone scored a 9.6% on 2009 with relatively positive figures in 2008 and 2009 fund that indicate a good acceptable return on shareholders' funds while comparing it to its close competitors O2 and T-Mobile.
Financial performance of Vodafone with the framework of financial statements and associated accounting ratios:
Information gathered from financial reports such as income statement and balance sheets can describe firm's condition. These reports are driven by two aspects, company activities and accounting system adopted by the firms (Palepu, Healy & Bernard, 2004), accordingly information's gathered from both annual and interim reports becoming so valuable in extracting valuable data such as earning, growth and share price, likewise since the global increases in bankruptcies, accurate predictions of companies' distress and bankruptcies are becoming so important to investors nerveless governments, Vodafone CEO Vittorio Colao stated the following "The Group has performed in line with our expectations and we have made strong progress with our strategic priorities, in particular in mobile data and cash generation. We have confirmed our guidance for the full year, despite the uncertainties of current economic trends. The £1 billion cost reduction program is expected to be delivered a year ahead of plan and we have extended this to a further £1 billion of cost savings by 2012. At the same time, we have maintained our capital investment at £2.6 billion in the first half, delivering further improvements in network quality and performance for our customers" as its very clear here the CEO of the company is trying to explain a cost reduction plan to avoid a forecasted drop in company's profitability and growth, furthermore to take such strategic decision Accounting ratios is being used to help investors and decision makers in formulate investment decision and predict firms future performance. It can also give timely warning about the hold back of company's financial condition (Ohlson, 1980)
Accounting Ratios used for many years by accountants and financial analysts as a practical means of summarizing and analyzing financial data (Horrigan, 1968) by using ratios, it is possible to make comparisons between several firms or with an average for a group of companies engaged in similar business. Hence it can be determined whether the firm being studied is above or below the average performance of similar firms. (Barns, 1987) The positive use of financial ratios has been used by accountants and investors to forecast future financial variables, estimating future profit by multiplying predicted sales by the profit margin, When it comes to the various markets in which Vodafone operates, in Europe went down by 5.1 percent in the time frame, while EBITDA went down 8 percent. In Asia, Pacific, Middle East, however the revenues went up by 11.3 percent for the constant currencies, go together by a 48.2 percent increase in customer base. In addition, the company added that Verizon Wireless, its United States joint venture, contributed with about 34 percent of adjusted operating profit to the total figures. An analyst from Evolution Securities rated Vodafone shares as buy commented "We doubt Vodafone has significantly outperformed its competitors in any major market, but data trends and emerging market trends were, on the whole, positive,"(Businessweek, 2010) said Steve Malcolm, that makes variables which are significant on returns are profitability ratios. It shows from investors point of view financial ratios are useful in making decision on investment. Explains how investors might take critical investment decisions according to ratios extracted from companies' financial statements. link
