Analysis of Financial Performance of Vodafone

This report presents financial analysis of Vodafone over the latest five years, including liquidity, profitability, efficiency, and solvency ratios. The report concludes with company’s financial standings and recommendations for future improvements.

ANALYSIS OF FINANCIAL PERFORMANCE OF VODAFONE 1
ANALYSIS OF FINANCIAL PERFORMANCE OF VODAFONE
Author
Course Title
Professor
City
Date
1

Introduction
The report aims to present financial analysis of one of the organization listed on London
Stock Exchange. It will present financial performance analysis of Vodafone over the latest
five years. This would entails analysis of Vodafone financial outlook in the latest five years,
its financial ratio analysis which is aimed at estimating its weaknesses and financial strength
over this period. The report is concluded with company’s financial standings and
recommendations for future improvements.
Overview of Vodafone
Vodafone is one of the international mobile operators in Britain with its headquarters being in
Newbury (Vodafone Group Plc 2017). In essence, it is the world’s leading
telecommunication firms by revenue. In other words, Vodafone is the largest and most
popular multinational firm in UK and the leading form in the telecommunication industry all
across the globe. The company manoeuvres across the world where it provides a broad array
of the telecommunication services dealing directly with the clients and providing services for
the businesses. Some of its services and products include voice, messaging, devices to assist
client in meeting the total communications, fixed line as well as data solutions. The
organization or entity vision is to be the global leader in the telecommunication sector. It has
made significant growth all across the globe since its inception (Vodafone Group Plc 2016).
The company has been broadening its presence within enterprise communication marketplace
both locally and across different countries. It prioritises free cash flow creation and
concentrates on emerging marketplace instead of expansions which is fundamental.
Financial Ratio Analysis
2

This is a technique utilized in assessing account of a specific organization (Grzegorz 2011). It
is a significant aspect in analysis since it offers easy and quick outcome to an organization. In
essence, ratio analysis is the easiest means in evaluating an organization’s financial
performance compared to the income statement and balance sheet (Cox 2007). The analysis is
also of greater importance to an organization in determining whether it is accomplishing all
the desired objectives as well as assist in assessing how its rivals are doing. In essence, ratio
analysis offers valuable information regarding an organization’s financial standing and
position (Gibson 2011). Besides, ratio analysis is utilized for analysing financial statements
of a specific firm in comparing itself with its competitors and comparing its performance over
a specified period. It offers relationship between different items within the financial
statements (Schroeder, Clark & Cathey 2009).
Liquidity Ratios
Such ratios are usually obtained from the organization’s balance sheet and help in assessing
the capacity of an entity or company in settling its debts (Costae 2008). The ratios include;
Current ratios
The ratio is said to display whether the short-term assets of Vodafone could cover its short-
term or current liabilities (Gibson 2011). As from Table 1 below, it can be stated that
Vodafone has some challenges in settling its short or current debts in most part of its latest
five years. This is due to the notion that the company experienced relatively lower current
ratio below 1 between 2013 and 2016 except in 2017 where the company experienced
relatively higher current ratio mostly above one. Such trend is a clear sign that for most part
of its operations, the company was struggling with its current or short-term debts whenever
they came due.
3

Quick ratios
This ratio helps in measuring short-term liquidity of Vodafone over the last five years
(Gibson 2011). As such, it is evident from Table 1 below that for the past five years, the
company experienced low quick ratio over time. In essence, it is evident that for the past five
years, Vodafone experienced decreasing and increasing quick ratio over time. Such trend
means that the company might need extra finances or ought to opt to sanction part of its long-
term loans in order to improve its liquidity standings, which is helpful in future.
Table 1: Liquidity Ratios
2017 2016 2015 2014 2013
Current Ratio 1.01 0.84 0.69 0.99 0.75
Quick Ratio 0.54 0.65 0.54 0.78 0.58
Profitability Ratios
These ratios assist in analysing how profitable a given organization is operating (Costae
2008). They comprises of the followings;
Gross Profit margin
The ratio play a crucial role within an organization since it tells about the total amount of
profit earned via selling products (Foster 2009). From the analysis, Vodafone gross profit
margin experienced a decreasing trend in the latest five years. Such implies that Vodafone
profitability is decreasing over time. The reason for such decline is due to increased goodwill
costs as well as PPE that the firm might have purchased within this time frame.
4

Based on Table 2 below, it can be stated that Vodafone experienced unstable trend in its
gross margin. This is due to the fact that the company gross margin decreased from 30.2 in
2013 to 27.1 in 2014 and later increased to 27.5 in 2015. This was not all, gross margin
decreased to 26.3 in 2016 but in 2017, the gross margin increased to 27.4. Such unstable
trend in the gross margin is not a good sign for the company since it means that the company
has been experiencing some challenges in its profit generation over time. Besides, the
unstable trend in the company’s gross margin is a clear sign of how ineffective the company
has been in managing its cost of sales over the last five years.
Net profit margin
The ratio is a significant financial indicator of an organization’s financial performance since
it assists in comparing the net profit of an organization from previous periods (Costae 2008).
In this case, Vodafone net profit margin is said to have experienced a decreased trend over
the last five years. The decrease is driven by increased administrative expenses as well as
exceptional operating items. In addition, the decrease could be attributable to decreased sales
value as well as decrease in its operating income.
As from the profitability analysis in Table 2 below, it can be stated that Vodafone
experienced a decreasing trend in its net margin over the last five years. Such is evident from
the fact that the net margin decreased as from 154.52 in 2014 to 13.64 in 2015. This trend is
also said to worsen by 2016 with the company registering a net margin of -9.82 and 13.22 in
2017. The decrease was attributable to increase in the operating expenses as well as decrease
in sales level over time. This means that for the latest five years, the company has not been
profitable at all.
ROE
5

The ratio is useful in analysing organization efficiency in utilizing its shareholders’ equity to
generate income (Fraser, Ormiston & Fraser 2010). It assists the form in understanding
whether the firm is generating sufficient income in relation to its total equity. In other words,
ROE measures organization profitability by displaying how much income an organization
could generate with cash its shareholders have invested in it. Over the last five years,
Vodafone ROE is said to have decreased with a significant margin. The decrease is not an
attractive thin for this firm. This is based on the fact that it means that the company has been
inefficient in utilizing its shareholders’ equity to generate income. The decrease might have
been driven by increased amount of borrowing over the period.
Based on Table 2 below, it is evident that Vodafone experienced a decreasing trend in its
ROE over the past five years. The decrease is not a good sign for the company and could be
as a result of increased borrowing over the last five years. In addition, the decrease was
driven by decreased net income over the period. With these, it is clear that Vodafone has been
inefficient in utilizing its shareholders’ equity to generate or produce income.
ROA
The ratio is useful in analysing organization efficiency in utilizing its assets to generate
income (Helfert & Helfert 2001). It assists the form in understanding whether the firm is
generating sufficient income in relation to its assets (Vogel 2014).
As from Table 2 below, it is evident that Vodafone ROA decreased as from 45.28 in 2014 to
5 in 2015 and later to -3.03%. This was not all, the company’s ROA decreased further to -
3.88 in 2017. The decrease is not good for Vodafone and is a clear indicator that Vodafone is
in efficient in managing its assets to generate or produce income.
Table 2: Profitability Ratios
6

2017 2016 2015 2014 2013
Gross Margin 27.4 26.3 27.5 27.1 30.2
Net Margin % -13.22 -9.82 13.64 154.52 0.97
Return on Assets % -3.88 -3.03 5 45.28 0.3
Return on Equity % -8.09 -5.87 8.95 84.12 0.57
Efficiency ratios
These are financial ratios used in assessing organization’s management efficiency in utilizing
its assets to generate revenue or income (Alexander, Britton and Jorissen 2007). In this case,
receivable turnover, fixed asset turnover, inventory turnover as well as asset turnover would
be utilized in assessing efficiency of Vodafone.
Receivable Turnover
As from the Table 3 below, it can be stated that receivable turnover for the company
decreased in the past five years. In essence, receivable turnover decreased as from 11.8 in
2015 to 9.03 in 2017. The decrease means inefficiency of Vodafone management in
collecting money owed by debtors.
Inventory turnover
In the Table 3 below, it can be indicated that Vodafone inventory turnover decreased in the
last three years after the company had regained in 2015. This is due to the notion that the
company inventory turnover decreased as from 70.8 in 2015 to 53.51 in 2017. The trend in
inventory turnover is a clear picture that the company is inefficient or is experiencing some
challenges in selling its inventories over time.
7

Fixed asset turnover
As from Table 3 below, it can be stated that Vodafone fixed asset turnover decreased as from
1.8 in 2015 to 1.45 in 2017. The decrease implies that the firm has been inefficient in
managing or utilizing its fixed assets to generate sales.
Asset turnover
The asset turnover as from Table 3 below is said to have decreased as from 0.37 in 2015 to
0.29 in 2017. The low and decreased asset turnover is not a good thing for Vodafone since it
means that the company has been inefficient in managing its assets to generate sales. The
decreased and low asset turnover was mainly attributable to decreased sales level over time.
Table 3: Efficiency Ratios
2017 2016 2015 2014 2013
Receivables Turnover 9.03 9.46 11.8 10.17 11.22
Inventory Turnover 53.51 56.11 70.8 63.35 64.79
Fixed Assets Turnover 1.45 1.44 1.8 1.79 2.27
Asset Turnover 0.29 0.31 0.37 0.29 0.31
Solvency ratios
These ratios are useful in measuring or evaluating organization’s capacity in settling its long-
term debts over time (Brealey, Stewart and Allen 2008). In this case, debt/equity, leverage
and interest coverage ratios would be used in assessing Vodafone solvency level.
Debt/Equity
8

This is a solvency ratio used in assessing how
Based on Table 4 below, it is evident that Vodafone’s debt/equity for the latest five years was
relatively below 1. The decreasing and low debt/equity is a clear sign that the company has
been relying more on shareholders’ equity to fund its daily operations. The decrease was as a
result of decreased liabilities and increased equity over time. In essence, the low debt/equity
ratio implies less secure shareholders’ equity capital.
Interest coverage
The company interest coverage is found to have experienced decreasing and increasing trend
or asymmetric trend over the last five years. Such trend is a clear indicator that the company
has been experiencing some challenges in some years in settling interests charged for their
long-term debts.
Financial leverage
As from Table 4 below, it can be indicated that Vodafone experienced relatively high and
increasing trend in its financial leverage in the last five years. Such trend is evidenced by an
increase in its leverage from 1.72 in 2014 to 2.14 in 2017. The increasing trend in the
company leverage ratio is a clear sign that the company is at financial risk. Therefore,
necessary actions should be taken to minimize the risk.
Table 4: Solvency Ratios
2017 2016 2015 2014 2013
Debt/Equity 0.31 0.45 0.34 0.3 0.41
0.72 1.62 -8.46 2.93
9

Financial Leverage (Average) 2.14 2.03 1.85 1.72 2
Strengths
Vodafone has very strong international brand recognition. This is a chief strength for the firm
in such a period or era where branding is considered as the chief component of marketing.
Vodafone brand financing was ranked 1st as one of the most valuable brand across the globe.
It has developed some set of guidance in enabling its customers consistently utilize its brand
in retail, merchandising, advertising and online, which is a key strength in enabling it have
strong client focus. Besides, Vodafone has extensive or wide international reach as well as
expanded or widespread revenue base.
Weaknesses
The company has continued to experience some financial challenges. This is said to eat in its
profitability. In addition, the company is experiencing some financial weaknesses in
generating income as well as in utilizing its resources, and more specifically, in utilizing its
shareholder’s equity to generate income and revenue. Furthermore, the company is said to
experience some weaknesses in collecting money owed by debtors. It is also experiencing
some challenges in selling its inventories over time. Furthermore, it is also evident that
Vodafone is experiencing some issues in utilizing its assets to generate some revenues or
incomes.
Conclusion
Based on the above analysis, it can be concluded that Vodafone performed relatively better in
the latest five years. This is commendable as economic environment in which Vodafone
10

operates has not been that favourable. In fact, it is evident that Vodafone has been less
profitable or has made no improvement in its ROE and operating profit margin over the latest
five years Decrease or deterioration in the company ROE indicates that Vodafone have made
minimal or less improvement in utilization of its capital employed. Besides, the decreased
trend in the profitability ratios means that for the last five years, the company has been less
profitable. In addition, it is evident that Vodafone has been able to keep or maintain it
solvency level under high control. It is also evident that despite the decreasing or worsening
trend in the company’s efficiency and profitability levels, existing as well as potential
investors are confident on future prospect of Vodafone which is reflected in its increased
share price over time.
Recommendations for Improvements
Vodafone should be commended to build and maintain on its strengths, extending its global
reach, maintaining its leads as well as increasing on its brand value. Such is said to have
definite effect on its capacity to improve on its profitability as well as help it do well in spite
of performing in highly competitive and mature environment with dire climate (Revsine
2010). In fact it is unfortunate that none of Vodafone strengths could minimize or eradicate
its weaknesses. Therefore, the company should take care whenever computing and
recognizing its taxes by ensuring that it has put in place appropriate internal controls in
ensuring all regulations and rules are adhered to. As such it should be noted that for any
existing or potential investor willing to invest, they should hold. They should hold selling any
shares invested in the company and those planning to buy shares from profitable firms should
hold any plans to purchase the shares till the company recovers from its current financial
hitches.
11

References
Alexander, D, Britton, A and Jorissen, A (2007), International Financial Reporting and
Analysis, London Thomson Learning.
Brealey, RA, Stewart, CM and Allen, F (2008), Principles of Corporate Finance Singapore:
McGraw-Hill.
Costae, A (2006), 'The Analysis of the Telecommunication Sector by means of Data Mining
Technique', Journal of Applied Quantitative Methods, pp.144-150.
Cox, D (2007), Accounting: the basics of financial and management accounting. Worcester:
Osborne Books Ltd
Foster, G (2009), Financial Statement Analysis, 2/e. Pearson Education India.
Fraser, LM, Ormiston, A & Fraser, LM (2010), Understanding financial statements. Pearson.
Gibson, CH (2011), Financial reporting and analysis. South-Western Cengage Learning.
Grzegorz, M (2011), ‘Financial Analysis in the Enterprise: A Value-Based Liquidity Frame-
work,’ Available at SSRN 1839367.
Helfert, EA & Helfert, EA (2001), Financial analysis: tools and techniques: a guide for
managers (pp. 221-296). New York: McGraw-Hill.
Revsine, C (2010), Johnson. Financial Reporting and Analysis. New Jersey: Prentice Hall.
12

Schroeder, RG, Clark, M & Cathey, JM (2009), Financial accounting theory and analysis:
text and cases (p. 82). John Wiley & Sons
Vodafone Group Plc (2016) Vodafone Group Plc annual Report For the year ended 31st
March 2016; Available from:
http://www.vodafone.com/content/annualreport/annual_report16/downloads/vodafone-full-
annual-report-2016.pdf [Accessed 2nd June 2018].
Vodafone Group Plc (2017), Vodafone Group Plc annual Report For the year ended 31st
March 2017: Available from:
http://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_VOD_2017.pdf
[Accessed 2nd June 2018]
Vogel, HL (2014), Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
13