Financial Performance Analysis: Vodafone & Talk-Talk Telecom Plc

This report conducts a financial analysis of Vodafone Group Plc. and Talk-Talk Telecom Group Plc., two leading telecommunication companies in the UK, using ratio analysis based on their annual reports for the year ending March 31, 2016. It includes both intra-firm (comparing FY 2016 with FY 20...Read More

Running Head: Financial and Auditing Studies
Financial Accounting and Auditing and Taxation

Running Head: Financial and Auditing Studies
Introduction
Purpose and objective of the report:
This report presents the financial analysis of two leading corporations: Vodafone Group Plc.
and Talk-Talk Telecom Group Plc. Both the companies are operating in the
telecommunication industry of United Kingdom and also are listed on the London Stock
Exchange. The financial analysis is undertaken to assess the financial health of both the
companies using the key technique of financial analysis i.e. Ratio analysis. As a part of ratio
analysis various financial ratios are determined to evaluate the company’s financial
performance in terms of profitability, liquidity, efficiency, solvency and its investment worth.
The financial information in relation to the said aspects is derived from the annual reports for
the year ending on 31st March, 2016. Both, inter-firm and intra-firm comparison of the
financial performance is carried out under this report. The intra-firm analysis of performance
of both the companies is carried by comparing the financial results of FY 2016 with that of
FY 2015 in order to determine whether the overall financial performance has improved or
deteriorated and to identify the reasons of the variation in the performance over the last two
years. The inter-firm analysis is undertaken to identify and analyse as to which company is
performing better and what are the factors that have contributed to provide competitive
advantage to one company over other.
Background of the companies
Vodafone Group Plc. had started its business in 1984 and is headquartered in Newbury,
United Kingdom. The company operates its business in Europe, Africa, Middle East and Asia
Pacific Regions. It provides a wide range of products of mobile services to its customers such
as call, text, broadband, voicemails, mobile money services, television offerings and various
other communications solutions like Vodafone Meet Anywhere and Vodafone One Net

Running Head: Financial and Auditing Studies
Enterprise. Moreover, Vodafone provides internet of things connection to the users of its
network so as to allow them to communicate in the secured and reliable manner over the
internet using its cloud services. Further, various carrier services are also being provided by
the company like for example international voice, IP transit and message services. Along
with the said services, Vodafone is also engaged in the provision of mobile virtual network
services. Currently, the company is serving over 536 million customers for its mobile
services and around 20 million customers for its broadband services. The company has a
customer base which comprises of domestic businesses of varied sizes, commercial units, and
various public sector units at national and international level both. Its 4G network is
successfully running across 90 countries in the world. Vodafone Group is the holding
company of various companies such as Vodafone GmbH, Vodafone Limited, Vodafone
Marketing UK, Quickcomm Pty Limited, Vodafone Espana, S.A.U., CWGNL S.A. and
Vodafone Albania Sh.A.
Talk-Talk Telecom Group Plc. is also a provider of telecommunication services across
London. The company had commenced its operations in 2003 and is headquartered in
London only. It provides its customers a wide range of services such as broadband, voice
telephony, mobile communication and telephone services. Currently, Talk-Talk Group is
serving over 4 million customers from both residential as well as commercial units through
its Talk-Talk business brands. It offers 3 customer propositions: Simply Broadband, Essential
TV and Plus TV. The company is a business to business telecom service provider that is
serving around 180000 business units and public sector units of the nation. The products and
services of the company includes connectivity & networking, hosted solutions, internet
protocol telephone systems and voice as well as data services mainly offered to small and
middle sized units of UK (Financial Times, 2018).
Limitations of comparison under ratio analysis

Running Head: Financial and Auditing Studies
Although, ratio analysis is a useful technique of measuring and analysing the financial
performance of the company but it suffers from certain limitations which has influenced the
financial analysis. The problem with this type of financial comparison is that the accounting
policies that have been used by the companies while preparing the financial statements might
be different which does not provide a common ground to carry out the comparison. Also, the
financial statements of both the companies are presented into two different currencies as
Vodafone Group has published its financial reports in Euro Currency whereas Talk-Talk
Group has prepared and published its annual financial statements in Pound Sterling due to
which makes it difficult for the users of report to compare the performances (Foster, 2004).
Ratio Analysis
Refer Appendix for the ratio calculations:
PROFITABILITY
Gross profit Margin
RATIOS Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
Gross
profit
Margin 25.72% 26.87% 53.95% 54.60%
The gross profit margin ratio measures the percentage of company’s sales revenue which is
remained after meeting the production cost of goods sold by the company (Singh
&Schmidgall, 2002).
Intra-firm analysis:

Running Head: Financial and Auditing Studies
Vodafone: The gross profit margin of the company has declined in 2016 as compared to 2015
due to the reason that the revenue from sales was decreased in 2016 but the cost of goods sold
did not decline with the same rate of decline in sales.
Talk-Talk Group: Even though the sales in 2016 were higher than 2015 but the GP margin of
the company declined because the rate of cost of production in relation to sales was higher in
2016.
Inter firm Analysis:
The GP margin of Talk-Talk Group is almost double the GP margin of Vodafone. This
shows that Talk-Talk is more profitable than Vodafone as it is incurred lower production cost
in relation to the sales of the companies.
Net Profit Margin
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
Net
profit
Margin -9.82% 13.64% 0.11% 4.01%
The net profit margin ratio depicts the percentage of earnings left out of the total revenues
generated from the sales made during the course of business in the given period (Foster,
2004).
Intra-firm analysis:
Vodafone: There has been a significant decline in the net profit of the company in 2016 as
compared to 2015 due to incurrence of heavy financing costs and impairment losses and due
to this it had to incur losses in 2016.

Running Head: Financial and Auditing Studies
Talk-Talk Group: The net profits of Talk Group have also declined considerably in 2016
because of incurrence of operating expenses at a higher rate than that of 2015. The non-
operating expenses were also quite higher in 2016 in comparison to 2015 due to which the
company could earn a very low rates of profits that were not even sufficient to distribute
among the shareholders as a return on their investments.
Inter firm Analysis:
Though the profitability position of both the companies was not satisfactory as they could not
generate returns for their shareholders but still it can be said that Talk-Talk Group has
performed better than Vodafone as it did not have to incur losses. Talk Group managed to
earn a little profit for its shareholders so as to retain them in the company.
Return on Equity
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
ROE -5.87% 8.64% 0.76% 22.36%
The return on equity ratio measures the percentage of returns provided to the shareholders in
lieu of their investment made in the company. ROE is an important indicator of company’s
financial health and hence it is most commonly used by the existing as well as potential
shareholders of the company to determine whether the company is worth their investment or
not. The comparison of two company’s ROE helps the investors to rank the company on the
basis of their investment worthiness (Higgins, 2012).
Intra-firm analysis:

Running Head: Financial and Auditing Studies
Vodafone: As the company could not earn profits out of its normal business operations it did
not have anything remained at the year to distribute among the shareholders and therefore
they had to incur losses rather gains from the investment in the company. Vodafone had
generated sound returns for its shareholders in 2015 but in 2016 it seems that the company
could not utilise the invested funds of its shareholders efficiently.
Talk-Talk Group: Company had generated sufficient returns for its shareholders in 2015 by
making efficient utilisation of their investments in the business for the purpose of generation
of higher sales revenue. However, in 2016 the company could barely earn any profits for its
shareholders due to its weakened profitability state.
Inter firm Analysis:
From the ROE viewpoint also, Talk-Talk Group had performed better than Vodafone because
the former company has at-least earned fewer but some profits for its shareholders. The
shareholders of Vodafone, on the other hand, had to incur losses on their investment.
Return on Assets
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
ROA -3.14% 4.84% 0.13% 5.17%
Intra-firm Analysis
Vodafone: The investment in total assets was increased in 2016 despite of the declining sales
which might resulted in higher financing costs to acquire the new business assets. As a result
of this company had to incur heavy losses in place of profits from its business. However, in

Running Head: Financial and Auditing Studies
2015 the company had generated sufficient returns for its shareholders by managing its assets
investment and utilisation.
Talk-Talk Group: In case of Talk group also, the investment in total assets of the business
was increased which resulted in incurrence of higher financing costs which in turn had led to
reporting of negligible profits in 2016 as compared to 2015
Inter firm Analysis:
From the ROA viewpoint also, Talk-Talk Group had performed better than Vodafone
because the former company did not at-least cause the loss to its shareholders rather only
lower returns were generated to them. The shareholders of Vodafone, on the other hand, had
to incur losses on their investment.
LIQUIDITY
Current Ratio
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
Current
Ratio 0.84:1 0.69:1 0.60:1 0.65:1
Current ratio tells about the liquidity position of a company. It measures the ability of
company to meet its short term financial obligations through the use of its current assets and
not the fixed assets. The company must at-least have current assets equivalent to its current
liabilities so as to remain liquid in the market.
Intra-firm analysis:

Running Head: Financial and Auditing Studies
Vodafone: The liquidity position of the company in both the years under consideration is
quite lower than the ideal current ratio of 2:1. Current ratio of Vodafone is indicating that
company could not have met its current liabilities as and when they fell due in 2016 and 2015
and due to which it had to face the liquidity crunch. However, there has been a slight
improvement in the liquidity state of Vodafone in 2016 because of increased investment in
current assets and by reducing the current obligations of business.
Talk-Talk Group: The liquidity position of Talk Group in 2016 and 2015 was below average
due to high short term financial obligations as compared to current economic resources to
meet those obligations (Talk-Talk Group, 2015). Moreover, in 2016 there had been a further
decline in the current ratio which worsened more its liquidity state.
Inter firm Analysis:
From the liquidity point of view both the companies have performed below average but still
it could be said that Vodafone had performed better than Talk-Talk as Vodafone had higher
proportion of current assets.
SOLVENCY
Debt equity ratio
The solvency position of the business has been determined using the key solvency ratios such
as debt equity ratio, debt ratio and the time interest ratio(Lee, Lee & Lee, 2009). Debt equity
ratio shows the relative proportion of total debt to total equity used to finance the assets of the
company.
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.

Running Head: Financial and Auditing Studies
2016 2015 2016 2015
Debt
Equity 0.69 0.81 3.07 2.07
Intra-firm analysis:
Vodafone: The debt equity ratio of the company has reduced in 2016 as compared to that of
2015 which shows that the proportion of total debt (long term and short term borrowings) has
reduced in 2016 in relation to the portion of equity. It shows that firm had relied more on
equity financing in 2016 to make investments in assets. Debt is generally considered as a
burden on the company by the investors and hence high level of debt discourages them to
invest in the company. With the reduced debt equity ratio, the financial leverage of the
company had lowered down in 2016 as compared to 2015.
Talk-Talk Group: The ideal debt equity ratio is less than one but the ratio of 3.07 and 2.07
shows that the company was highly levered in both the years due to excessive reliance on
debt sources of financing (Talk-Talk Group, 2016).
Inter firm Analysis:
Talk-Talk had faced high risk of insolvency as it had overburdened itself with huge portions
of debt in its overall capital structure. However, Vodafone had the potential of attracting
more investors because of its lower debt obligations.
Debt Ratio
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
Debt
Ratio 0.50 0.45 0.85 0.80

Running Head: Financial and Auditing Studies
The debt ratio shows the quantum of total assets financed through the debt sources (Tracy,
2012).
Intra-firm analysis:
Vodafone: The debt ratio had slightly increased in 2016 as compared to 2015 which shows
that more assets were financed through debt sources of finance. The leverage of the company
is therefore increased in 2016.
Talk-Talk Group: It is highly levered as it has acquired most of the assets through the debt
financing modes and its leverage has increased further in 2016 as compared to 2015.
Inter firm Analysis:
Talk-Talk Group is facing higher financial risk as it had invested in assets by way of
generation of funds from the external borrowings which affects the financial health of its
business (Nissim& Penman, 2001). Vodafone had maintained its solvency position by
maintaining an adequate capital structure.
EFFICIENCY:
Inventory turnover ratio
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
ITR 58.14 66.92 19.20 29.64
Inventory turnover ratio shows the number of times the inventory has been turned down to
the sales in the given period of time. Higher inventory ratio is good for the smooth cash
operating cycle of the company (Tracy, 2012). Vodafone Group has higher ITR than that of
Talk Group in both the years. This indicates Vodafone is managing its inventory in the better
ways and hence it has better operating cycle than Talk Group.

Running Head: Financial and Auditing Studies
Intra-firm analysis:
Vodafone: The decline in ITR in 2016 as compared to 2015 shows that there has been a
reducing in the average number of times when inventory was sold in the course of business. It
reflects the weakened inventory management practices of Vodafone in 2016.
Talk-Talk Group: The ITR of Talk Group in 2016 was relatively lower than that of 2015,
indicating that company could not make efforts to fasten its inventory cycle by adoption of
better inventory management practices.
Inter firm Analysis:
Vodafone is more efficiently utilising its inventory stocks by turning them down more
quickly into sales which is necessary for the business. Talk Group is taking more time to
convert its inventory into sales as compared to Vodafone.
Receivable turnover ratio:
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
RTR 4.77 4.99 4.71 6.05
Receivable turnover ratio measures the frequency with which the accounts receivables of the
company are converted into cash (Tracy, 2012).
Intra-firm analysis:
Vodafone: Slight reduction in RTR in 2016 as compared to 2015 shows that company had
taken longer durations to collect cash from its accounts receivables.

Running Head: Financial and Auditing Studies
Talk-Talk Group: There has been a considerable reduction in the RTR in 2016, which is
indicating that the cash conversion cycle of the company must have slowed down in 2016 due
to its ineffective accounts receivable practices.
Inter firm Analysis:
Vodafone had managed its accounts receivables in the better way than that of Talk-Talk
Group and hence it can be said that Vodafone’s efficiency position is better than Talk-Group.
INVESTMENT WORTH
Earnings per Share
RATIO Vodafone Group Plc. Vodafone Group Plc. Talk-Talk Group Plc. Talk-Talk Group Plc.
2016 2015 2016 2015
EPS -0.20 0.27 0.002 0.08
Intra-firm analysis:
Vodafone: Due to losses in 2016, Vodafone could not generate positive returns for their
shareholders and hence they had to bear losses rather than having gains on their investments
in 2016. But in 2015, the company had paid sufficient returns to its shareholders for their
investment. The negative returns are not at all acceptable to the shareholders and hence they
must have withdrawn the shares of the company.
Talk-Talk Group: The EPS had reduced in 2016 as compared to 2015 due to generation of
fewer profits in 2016. This must have encouraged the shareholders to withdraw their invested
funds from the company (Vogel, 2014).
Inter firm Analysis: From shareholder’s earnings point of view Talk-Talk Group had
performed relatively better than Vodafone as it could earn some profits for the shareholders.

Running Head: Financial and Auditing Studies
Part c: Factors affecting performance of the companies:
For Vodafone, 2016 has been a year of solid progress both in terms of successful
implementation of its strategies and focus on customer service excellence. Over the last three
years, company had re-invested its profits of over d £47 billion in capital expenditure, new
acquisitions and spectrum & licences which had enabled it widen its network so as to achieve
competitive advantage. Moreover, it had returned £11bn to its shareholders in lieu of their
investment in the company over the last 3 years. The Project Spring Investment Programme
has enabled it to improve its customer base in the highly competitive market (Vodafone
Group Plc., 2016).
The cyber-attack faced by Talk-Talk Group in quarter three of FY 2016 had made the
company face material financial consequences as during this period it could not effectively
trade in the market and also the extended period of disturbance caused delayed
implementation of its various initiatives towards becoming the leading value for money
operator of telecommunication industry of UK. However, the focus on the existing customers
coupled with benefits of MTTS for the customers helped the company regain its broadband
base in quarter 4 of the year (Talk-Talk Telecom Group Plc., 2015).

Running Head: Financial and Auditing Studies
References:
Financial Times, 2018.Talk-talk Telecom Group PLC: About the company. Available
at:https://markets.ft.com/data/equities/tearsheet/profile?s=TALK:LSEAccessed on: 29.10.2018
Foster, G., 2004. Financial Statement Analysis, 2/e. Pearson Education India.
Higgins, R.C., 2012. Analysis for financial management.McGraw-Hill/Irwin.
Lee, A. C., Lee, J. C., and Lee, C. F. 2009. Financial analysis, planning and forecasting:
Theory and application. Singapore: World Scientific Publishing Co Inc.
Nissim, D. and Penman, S.H., 2001. Ratio analysis and equity valuation: From research to
practice. Review of accounting studies, 6(1), pp.109-154.
Penman, S.H. and Penman, S.H., 2001. Financial statement analysis and security valuation.
New York, NY: McGraw-Hill/Irwin.
Reuters, 2018.Vodafone Group PLC (VOD.O). : Full Description. Available
at:https://www.reuters.com/finance/stocks/company-profile/VOD.OAccessed on: 29.10.2018
Saleem, Q. andRehman, R.U. 2011.Impacts of liquidity ratios on
profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
Singh, A.J. and Schmidgall, R.S., 2002. Analysis of financial ratios commonly used by US
lodging financial executives. Journal of Retail & Leisure Property, 2(3), pp.201-213.
Talk-Talk Telecom Group Plc. 2015. Annual Report: 2015. Available
at:https://www.talktalkgroup.com/dam/jcr:04037e42-6a6d-4fcf-9bea-8f339240d0ba/Annual
%20Report%202015%20Final.pdfAccessed on: 29.10.2018

Running Head: Financial and Auditing Studies
Talk-Talk Telecom Group Plc. 2016. Annual Report: 2016. Available
at:https://www.talktalkgroup.com/dam/jcr:3ae87c83-4e84-4464-a9df-06dd76eb293d/TalkTalk
%20Telecom%20Group%20PLC%20Annual%20Report%202016.pdfAccessed on: 29.10.2018
Tracy, A., 2012. Ratio analysis fundamentals: how 17 financial ratios can allow you to
analyse any business on the planet. RatioAnalysis. Net.
Vodafone Group Plc. 2015. Annual Report: 2015. Available
at:https://www.vodafone.com/content/annualreport/annualreport15/assets/pdf/
full_annual_report_2015.pdfAccessed on: 29.10.2018
Vodafone Group Plc. 2016. Annual Report: 2016. Available
at:https://www.vodafone.com/content/annualreport/annual_report16/downloads/vodafone-full-
annual-report-2016.pdfAccessed on: 29.10.2018
Vogel, H.L. 2014. Entertainment industry economics: A guide for financial analysis. New
York: Cambridge University Press.

Running Head: Financial and Auditing Studies
Appendix
Using the data from the Annual Reports of the respective companies:
RATIOS FORMULAS Vodafone Group Plc. Talk-Talk Group Plc.
2016 (Figures
in GBP million)
2015 (Figures
in EUR million)
2016 (Figures
in GBP million)
2015 (Figures
in GBP million)
PROFITAB
ILITY
Gross Profit
Margin
Gross Profit /
Sales 25.72% 26.87% 53.95% 54.60%
10538/40973 11345/42227 990/1835 980/1795
Net profit
Margin
Net profit
available to
owners/ Sales -9.82% 13.64% 0.11% 4.01%
(4024)/40973 5761/42227 2/1835 72/1795
Return on
equity
Net profit
after tax
/Average
shareholder's
equity -5.78% 8.64% 0.76% 22.36%
(-3818)/
((65885+66145
)*0.5)
5917/
((66145+7080
2)*0.5)
2/
((231+297)*0.
5)
72/
((297+347)*0.
5)
Return on
assets
Net Profit
after
Tax/Average
Total Assets -3.14% 4.84% 0.13% 5.17%
(4024)/
((133713+1225
73)*0.5)
5917/
((122573+121
840)*0.5)
2/
((1533+1464)*
0.5)
72/
((1464+1323)*
0.5)
LIQUIDITY
Current ratio
or working
capital ratio
Current
Assets/Curren
t Liabilities 0.84 0.69 0.60 0.65
28144/33395 19847/28897 364/606 355/550
SOLVENC
Y
Debt to
Equity ratio Debt/Equity 0.69 0.81 3.07 2.07
(29327+16020)
/65885
(25943+28897
)/67722 (25+684)/231 615/297
Debt Ratio Total Debt/
Total Assets 0.50 0.45 0.85 0.80

Running Head: Financial and Auditing Studies
(33001+33395)
/133713
(25943+28897
)/122573 1302/1533 1167/1464
EFFICIENC
Y
Stock or
inventory
turnover ratio
COGS/
Average
Inventory 58.14 66.92 19.20 29.64
30435/
((565+482)*0.5
)
30882/
((482+441)*0.
5)
845/
((57+31)*0.5)
815/
((31+24)*0.5)
Debtor’s
turnover ratio
Sales/Average
Accounts
Receivables 4.77 4.99 4.71 6.05
40973/
((9141+8053)*
0.5)
42227/
((8053+8886)*
0.5)
1708/
((356+369)*0.
5)
1835/
((294+313)*0.
5)
INVESTME
NT
EPS
Annual
Report -0.20 0.27 0.002 0.08