Module Code: 216MANSC/216MANEL 2/18/2020

Financial Ratio Analysis 4 (i) Return on capital employed: 4 (ii) Net Profit Margin: 5 (iii) Current Ratio: 7 (iv) Debtors Collection Period: 8 C. Financial Ratio Analysis 4 (i) Return on capital employed: 4 (ii) Net Profit Margin: 5 (iii) Current Ratio: 7 (iv) Debtors Collection Period: 8 C. Analysis of the Economic Factors and the discussion of the impacts on the business There are various macro and micro

ECONOMIC AND FINANCIAL MANAGEMENT
Module code: 216MANSC/216MANEL
2/18/2020
Student’s name:

Executive Summary
The module and the assignment are aimed at guiding the decision making processes to the
various group of stakeholders. The significance of such a guide lies in the fact that the
business operations are affected by the external and internal environment factors. The result
of the same is that the financial performance fluctuates and so the demand for the shares of an
organisation in the market. The analysis of the shifts in the financial performance has been
conducted with the aid of the financial ratios which are one of the most basic tools for
financial analysis. The importance of the accounting ratios is that the ease of computation,
comparison and evaluation of the changes.

Contents
Introduction...........................................................................................................................................3
A. Analysis of the Economic Factors and the discussion of the impacts on the business...................3
B. Financial Ratio Analysis................................................................................................................4
(i) Return on capital employed:......................................................................................................4
(ii) Net Profit Margin:..................................................................................................................5
(iii) Current Ratio:........................................................................................................................7
(iv) Debtors Collection Period:.....................................................................................................8
C. Accounting Ratios and their significance......................................................................................9
D. Recommendations.......................................................................................................................10
E. Conclusion...................................................................................................................................10
References...........................................................................................................................................12

Introduction
A business organisation engages in the production of goods and services that drive the
economic output of a nation or a region. The relationship of a business and the economy can
be stated in the fact that the collective performances of business affect the economy at large.
In conjunction to this, the economic factors such as the inflation rates, interest rates,
consumer behaviour, employment rates, banking policies affect the performances of the
businesses (Robinson et. al. 2015). This means the increment or the decrement in the cost of
production which includes the material costs, labour costs, taxation charges, and others lead
to the movements and the shifts in the supply and demand curves.
The aim of the following report is to highlight the economic factors that influence the
conducts of a business, as examined in the case of the organisation Vodafone Plc., which is a
renowned organisation of UK and globally as well.
A. Analysis of the Economic Factors and the discussion of the
impacts on the business
There are various macro and micro economic factors that influence the conduct of the
business, which are elaborated as follows.
Macro Factors: The key macro-economic factors that affect the conduct of a business are
political, economic, social, legal and the technological factors. All the above factors lead to
the increment or the decrease in the cost of production of goods or the provision of the
services. For instance, the current external environment of Vodafone is influenced by the
events like Brexit, the legal changes leading to disposal of the certain business units. As the
cost of the production has risen, as evident from the declining profits, the shifts in the demand
curve can be depicted with the help of the graph as follows.

As depicted in the figure above, as the cost of production and the prices of a commodity rises,
the demand of the said product falls.
Micro Factors: While the macro factors deal with the external business environment, the
micro factors are the ones focussed on the internal business environment or the stakeholders
of the entity. The micro factors include the distribution channels, competitors, customers,
suppliers, and others. Thus, the change in the above factors influences the demands of the
products, the financial performances and eventually the share prices of the stock of the
company. The shifts are caused due to the changes in the population structure, the changes in
the consumer preferences, shifts in the prices of the substitute or the complementary goods
and others.
Glimpse of the financial performance for three year period
The financial performance of the company Vodafone was analysed over a period of three
years. The performance from the point of view of profitability was lowest in the year 2019
due to the disposal activities, though the assets improved in the said year. Overall it can be
stated that the external factors of the legal regulations and the resulting impact influenced the
financial performance considerably.
B. Financial Ratio Analysis
(i) Return on capital employed:
The return on capital employed ratio is used to measure the profitability of the company in
relation to the capital used. Thus, it is assessed that how well an organisation generates
profits against the capital employed in the business (Delen, Kuzey and Uyar, 2013). The ratio
is of prime interest to the potential and the existing investors, to assess the return that would
be earned on their investments. The earnings before interest and tax or the operating profit is
used for the said evaluation to analyse the efficiency of the company in relation to the
operations that is without the consideration of the interests and the taxes. The formula for the
computation of the above ratio is stated as follows.
Return on capital employed: Operating Profit/ Capital Employed
The following table highlights the return on the capital employed of Vodafone for the years
2019, 2018 and 2017.

Description Formula 2017 2018 2019
Return on Capital
employed
Operating
Profit/ Capital
employed
3725/(154684-
33527)
4299/(145611-
39024)
(951)/(142862-
25523)
=0.030745231 =0.036560475 =-0.008104722
3.07% 3.66% -0.81%
It has been assessed from the computation above, that the return on the capital employed has
declined significantly in the year 2019, as compared to the year 2018 and 2017. The reason
for the said decline is the impairment losses charged to the income statement, to the tune of €
3525 million (Vodafone, 2019, pp. 130). The said impairment losses belongs to the loss on
the disposal of the Vodafone India, which was charged to the Income Statement of the entity,
and further dragged down the overall margin of the operating profit. Apart from the
impairment loss, there is a slight increment in the administrative expenses of the entity. The
decline in the return on capital employed may affect the demand of the share in the market
and eventually the share prices of the company. Thus, it can impact the overall financial
position of the company.
(ii) Net Profit Margin:
Net income margin or the net profit margin is expressed in the form of percentage and
denotes the ratio of the generation of the net income or profit against the revenue of the entity
(Edmonds, 2013). Thus, the efficiency of the management is assessed in terms of the
2017 2018 2019
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
Return on Capital employed
Return on Capital
employed

generation of profits for the business segment, the entity is operating in. The said ratio is of
prime interest not only for the shareholders of the entity, but the other stakeholders as well.
The analysis of the said ratio is conducted generally in relation to the performance of the
industry competitors and the yearly performance of the entity itself. The formula is expressed
as follows.
Net Profit Margin = Net profit / Sales or revenue
The following table indicates the net profit margins of the company Vodafone for the
financial years 2019, 2018, 2017.
Description Formula 2017 2018 2019
Net Profit Margin
Net profit /
Sales or
revenue (6079)/47631 2788/46571 (7644)/43666
-0.127626966 0.059865582 -0.175056108
-13% 6% -18%
As evident from the table above, the entity has sustained losses in the year 2019 in
comparison to the profits in the preceding financial year. It must be noted that the net profit
margin was negative in the year 2017 as well. This highlights serious concerns in the business
operations of the company. It is vital to study the factors that led to the net losses in the year
2017 2018 2019
-20%
-15%
-10%
-5%
0%
5%
10%
Net Profit Margin
Net Profit Margin

2019, as described as follows. Not only the entity suffered operating losses due to the
charging of the impairment losses in the income statement but also the financing costs for the
year 2019 were much higher than the preceding financial years. The finance cost for the year
2019 amounted to € 2088 million (Vodafone, 2019, pp. 111). The increment in the financing
costs is attributed to the bonds and other liabilities (Vodafone, 2019, pp. 136). Thus, it can be
concluded that the inclusion of the bonds and other liabilities have not only led to the
increment in the risk in the capital structure, but also led to the greater charge in the income
statement, affecting the overall profitability. Hence, this is a negative sign for the entity from
the point of view of stakeholders.
(iii) Current Ratio:
The current ratio belongs to the group of liquidity ratios. The said group of ratio sheds light
on the efficiency of the liquidity position of an entity or the adequacy of the working capital
for the conduct of the day to day business operations (Fridson and Alvarez, 2011). Current
ratio is one key liquidity ratio that depicts the ratio of the current assets to the current
liabilities. Thus, the useful insights can be gained about the approach of the working capital
from the calculation of the current ratio. The idle benchmark for the current ratio is stated to
be twice the current assets to the liabilities, or 2:1. Thus, a current ratio on the above lines
indicates a sound liquidity position or the sufficiency of short term assets including cash to
pay off the current liabilities like that of the trade payables and other obligations. Though a
very high current ratio may indicate idle current assets, and may not be a healthy sign. The
computation of the current ratio of the company Vodafone for the preceding three financial
years is presented below.
Description Formula 2017 2018 2019
Current Ratio
Total current assets /
Total current liabilities 40114/33527 37951/39024 39586/25523
=1.196468518 =0.9725041 =1.550993222
1.20 0.97 1.55
The current ratios as computed above indicate that the short term financial health of the
Vodafone Group as a whole has certainly improved in the year 2019, as compared to the

earlier years. The ratio of 1.55 in the year 2019 is close to the benchmark, and the same is a
positive sign. The major component that is responsible for the said increase in the current
assets is in the form of the cash and cash equivalents. The cash and cash equivalents were €
4674 million in the year 2018, the same tripled around to € 13637 million in the year 2019.
The said improvement is also attributed to the decrease in the short term borrowings of the
company from € 8513 million in the year 2018, to € 4270 million in the year 2019. However,
such an increase in the cash and cash equivalents may also be indicative of the idle funds in
the company, as the other short term assets have also increased such as that of the trade and
other receivables and other investments. Also to note, the decrease in the working capital for
the year 2018 was also due to the decrease in the cash and cash equivalents, as were needed
for the disposal of the certain units of the group, such as the one in India. Hence, it can be
seen that the company has made a conscious effort to replenish its short term assets after the
disposal business strategy. The graphical representation of the movement of the above ratio is
depicted below.
2017 2018 2019
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Current Ratio
Current Ratio
(iv) Debtors Collection Period:
The next key ratio for the assessment of the management of the business operations of an
entity is the debtors’ collection period, also referred to as the average collection period. The
ratio denotes the period or the time taken by a business in receiving the payments that the
debtors of the company owe to it. The relevancy of the calculation of the average collection
period is to ensure that there is sufficient amount of cash in hand for the meeting of the
financial obligations of an entity. The computation of the average collection periods is

significant for the companies that rely on the debtors for the short term liquidity and the cash
flows. The formula is expressed as follows.
Debtors Collection Period = (Trade Receivables / Credit Sales)*365
The following table highlights the debtors collection period, assuming that all the sales of the
entity are made on the credit basis. The said assumption is made because of the absence of
data in the financial statements relating to the credit sales.
Description Formula 2017 2018 2019
Debtors
Collection Period
(Trade
Receivables /
Credit
Sales)*365
(9861/47631)*36
5
(9975/46571)*36
5
(12190/43666)*3
65
=75.56559803 =78.17901698 =101.8950671
75.57 78.18 101.90
2017 2018 2019
0.00
20.00
40.00
60.00
80.00
100.00
120.00
Debtors Collection Period
Debtors Collection Period
As depicted in the calculation and the graphical representation above, it is evident that the
debtors’ collection period is on an increasing trend over the period of three years. A higher
average collection period is not favourable and is indicative of the inefficient debtors’
management practices. This is a sign of the problem of the cash flows in the entity due to
which the company has to issue bonds to raise the cash. However, not much cannot be

commented on the evaluation as conducted above, because of the absence of the exact data on
the credit sales.
C. Accounting Ratios and their significance
Thus, various accounting ratios are calculated in the previous parts to examine the various
aspects of the business. The rationale behind the calculation of the varied accounting ratios is
that the same aids in the financial analysis followed by the decision making of the different
stakeholder groups. Out of the various financial analysis tools, the ratio analysis is most
simplified and presents a trend of performance, along with the room for the comparison of the
data within industry and among different financial periods. The significance also lies in the
fact that it leads to the simplification of the large volume of financial data and aids in the
evaluation of the same (Williams and Dobelman, 2017). Various groups of ratios are
focussed on the various area of the business and highlight the financial performance of the
entity over a concerned period. The ratio analysis as conducted of the company Vodafone
highlighted the important aspects of the profitability, liquidity and the efficiency. The
comparison of the ratios over the three financial years led to the evaluation of the trends of
the performances.
D. Recommendations
The following segment is representative of the recommendations on the basis of the financial
analysis as conducted in the previous parts. The first recommendation that is extended to the
entity is to balance out the portion of the debts in the financing structure, as the servicing cost
of the same in the form of the interests is leading to the significant decline in the operating
and the overall profits of the entity. In addition, it has been suggested to balance the short
term assets of the company Vodafone. This is because there is fluctuating trends in the cash
flows of the company, and if the same would continue, the management would find it
difficult to address the short term obligations efficiently. Further, it has been suggested to the
organisations to manage the administrative expenses of the company, to reduce the pressure
on the earnings of the company, and maintain the levels of the profits.
E. Conclusion
The above report was an attempt to highlight the impact of the varied economic factors on the
financial performance of an entity. The financial analysis was conducted as aided by the
accounting ratios led to the observation that the financial performance of the entity Vodafone

fluctuates considerably over the period of the three financial years, as were chosen for the
report. The varied business areas like liquidity, efficiency and profitability were examined
with the help of key ratios. In addition, the recommendations are provided based on the above
mentioned performance indicators.
References
Delen, D., Kuzey, C., and Uyar, A. (2013) Measuring firm performance using financial
ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp. 3970-3983.
Edmonds, T. P. (2013) Fundamental financial accounting concepts. UK: McGraw-Hill.
Fridson, M. S., and Alvarez, F. (2011) Financial statement analysis: a practitioner's guide
Vol. 597. UK: John Wiley & Sons.
Robinson, T. R., Henry, E., Pirie, W. L., and Broihahn, M. A. (2015) International financial
statement analysis. UK: John Wiley & Sons.
Vodafone Group Plc. (2019) Vodafone Group Plc. Annual Report 2019 [online] Available
from: https://www.vodafone.com/investors/investor-information/annual-report/downloads/Vodafone-
full-annual-report-2019.pdf [Accessed on: 20 February 2020].
Williams, E. E., and Dobelman, J. A. (2017) Financial statement analysis. World Scientific
Book Chapters, pp. 109-169.