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1. Identify, analyse and solve financial problems confronting business enterprises, particularly problems relating to corporate investment, asset management and financing decisions

2. Analyse the impact of economic, legal and tax changes on the strategic and financial position of companies.

About Vodafone

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.

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.

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).

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;

Importance of Ratio Analysis

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.

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;

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.

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.

Liquidity Ratios

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.

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.

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).

Profitability Ratios

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

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

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.

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.

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.

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.

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

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

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.

Efficiency Ratios

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.

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

Interest Coverage

2.63

0.72

1.62

-8.46

2.93

Financial Leverage (Average)

2.14

2.03

1.85

1.72

2

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.

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 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.

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.

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.

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: https://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: https://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.

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[Accessed 26 May 2024].

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