Table of Contents
Introduction
Vodafone was founded in 1984 under the name Racal Telecom Limited as a subsidiary to the brand Rascal electronics. In 1991, the company merged with Rascal electronics to become and independent company called Vodafone Group Plc. Before the year 2005, Vodafone had over 150 million customers around the globe. In 2007, the company was the first company to sign an agreement with yahoo and Microsoft in order to provide instant messenger to its customers and making the mobile more like a computer. Customers could also check out EBay, MySpace, and Google maps as part of the service. The company has a total market share of over 25% in the UK a lone and has been named the largest industry in size in the UK. The industry has many competitors with whom Vodafone with have to fight to get the biggest market share. Major competitors in the market include; T-Mobile, O2, Orange and 3UK. Vodafone used to be number one until a few years ago when the spot was taken by O2. Vodafone continues to thrive in the UK market and is well known for its good network coverage in the country.
This Report will be divided into three main parts. The first part will be talking about financial ratios of Vodafone. This part of the report will look at two periods of the company and compare those periods in order to evaluate the business performance. The report is going to look at the main ratios that can be used to get a close idea on the performance of the business. Charts will also be used in order to represent the results well. The second part of the report will be looking at the company’s sources of funding. This will be evaluated using a pie chart and ratio for both years. The final part of the report will give an idea on qualitative issues in the company. This will mainly be on corporate social responsibility and making the environment safe.
Ratio Analysis
Ratio analysis shows the ratios shared between two variables or values taken from the financial data that are used by stakeholders to evaluate the strengths and weaknesses of the company (Dyson, 2004). It can be used to compare performance between companies, industries and between one period in a company and another (Glynn et al, 2008).
The main financial ratios that will be used to evaluate the performance of Vodafone include net profit margin, quick ratio, total asset turn over, Return on capital employed (ROCE), gearing ratio and Price earning ratio (P/E). Each ratio represents a different aspect of the company’s performance compared to the other ratios.
Table 1; Ratio analysis for Vodafone for the year 2008 and 2009
| Ratio | 2009 | 2008 |
| Net profit margin | 3,080 = 0.08 41017 | 6,756 = 0.19 35,478 |
| Quick ratio | 13,029 – (412+2,868) = 0.35 27,947 | 8,724 – (417+2,426) = 0.27 21,973 |
| Total asset turnover | 41,017 = 0.27 152,699 | 35478 = 0.28 127270 |
| ROCE | 3,080 = 2% 124,752 | 6,756 = 5% 149,243 |
| Debt ratio | 39,975 + 27,947 = 44% 152,699 | 28,826 + 21,973 = 40% 127,270 |
| P/E ratio | 122.8 = 21.25p 5.78 | 150.9 = 26.20p 5.76 |
Analysis of Ratios
Despite an increase in revenue in Vodafone between 2008 and 2009, the company’s net profit margin fell from 0.19 to 0.08. This means from every £1 of revenue generated in 2008 the company made a profit of 0.19 pence in 2008 and 0.08 pence in 2009. This might have occurred because of increase expenses and an impairment of £5,900 that occurred in 2009 and not in 2008. This means the company is generating less profit from revenue than before and should therefore cut down on its expenses.
Figure 1; Net profit Margi
The company’s quick ration has increased from 0.3:1 to 0.4:1 from 2008 to 2009. Despite this increase, the company still can not meet its short term obligations. This means for every pound the company owes in short term loan, they can only pay 30p in 2008 and 40p in 2009. This is information is very important short term loan borrowers and also for suppliers because it shows if the company can pay its short term loan in case the rate of turnover is slow.
Figure 2; Quick Ratio
Total asset turnover for the company had a less significant fall from 0.27 to 0.28 in 2008 and 2009 respectively. This shows how much revenues can be generated from a £1 worth of total asset. This can be used to measure the performance of managers as it shows how efficient and effective managers manage their assets. ROCE fell between 2008 and 2009 from 5% to 2%. This means the company is barely making profits on its capital employed. This also shows how managers can manage operations and resources in the business.
Figure 3: Total asset Turnover
Figure 4: ROCE
Debt ratio increased from 40% in 2008 to 44% in 2009. This means the company is using more debt to finance its assets. In 2008, about 40% of the company’s assets where funded from debts and this increased to 44% in 2009. This shows managers are not doing enough to generate more current assets that could be used by the company.
Figure 4; Debt Ratio
Price earning ratios fell from 26.20p in 2008 to 21.25p in 2009. This means investors are paying less for stocks in 2009 than they did in 2008. This may be as a result of the fall in market price from 150.9 in 2008 to 122.8 in 2009.
Figure 6: P/E Ratio
Judging from the financial ratios, Vodafone in a general has not improved over the years. The company’s profits margins are very poor and they can not meet their immediate short term liability. This means the company may have to borrow in the short term in order to meet these obligations. Although this will increase the company’s debt, they have to think about meet short term obligations of the company. The ratios also indicate the company has been has almost half of its resources financed by debts. This is not a good sign for the company. The economic crises might have contributed to the poor results of the company as well. Therefore, managers should be alert and try to make good use of their resources so as to improve on the company’s result.
Company funding
Table 2; Sources of funding for the company
| Source | 2008 £m | 2009 £m |
| Called up share capital | 4,153.00 | 4,182.00 |
| Capital redemption reserve | 10,101. 00 | 10,054.00 |
| Long term borrowings | 31,749.00 | 22,662.00 |
| Deferred tax liabilities | 6,642.00 | 5,109.00 |
| Post employment benefits | 240.00 | 104.00 |
| Provisions | 533.00 | 306.00 |
| Trade and other payables | 811.00 | 645.00 |
| 54,229.00 | 43,062.00 |
The table above shows that most of the company’s funding came from long term borrowings. This is mostly from banks, overdraft, bonds, and others. Reserve is the second largest source of funding for the company from the financial report, it could be seen that the company still hold bonds that are hold mature from 2010 and some until 2032. The company has over three billion US dollar bonds and over 750 euro bonds. Within one year alone, the company borrowed £950 million brings the total money from bank loans as at 31 march 2009 to £6,052 million. The reason for an increase in the long term borrowing could be because of the exchange rate. The exchange rate for the starling dropped between 2008 and 2009. It became less valuable and at a certain point almost the same as the euro. Prices of goods and service also increased. This means the cost of goods and services might have increased during that period to cause the company to borrow more to finance activities.
Post employment benefits are still considered funds because they have not been paid out and therefore still used in the company. Vodafone operates a number of pension plans that employees can earn.
The most appropriate was to explain this is by using the debt ratio. In the first part of the report: the debt ratio for 2008 and 2009 where 40% and 44%. This indicates that 44% of assets are being fined by debt. This is not a very good way of measuring the company’s ability to use available resources to generate profits and revenues in the business. If 44% of a company’s debts are fund the company’s that means the company the company has 66% of their personal funds to finance other resources and operation.
Evaluating and analysing the debt ratio will help the company to know if they need more fund to fine a project and also how much they will need. This information is very useful to investors and share holders. This information tells shareholders if the company is a successful or not and is they can still buy shares from the company. A poor debt ratio might lead to the company liquidating its asses to pay their long term obligations.
Figure 7; 2008 debt funding
Figure 8; 2009 debt funding
This indicated why the company has a very high debt ratio. The company has borrowed from a lot of sources in order to finance its assets. The company needs to cut down on these debts in order to reduce the risk of liquidating its assets in order to pay for the debts. This can be done my making maximum use of assets to generate sales and profit in order to pay for these debts.
Qualitative issues
Corporate social responsibility refers to the way in which a company conducts itself with respect to its environment (Collier, 2003). Every company strives to operate its activities in a manner so as to benefit the environment in which it operates in; Vodafone is no exception. In an attempt to achieve this sustainable environment, Vodafone plc has adopted a number of strategies which will be discussed in this section. Firstly, as part of the company’s climate strategy, Vodafone has steered towards the production of goods and services which aims to help customers limit their own emissions (Vodafone.com, 2008) For instance, it aims to develop new products such as solar powered phone chargers as well as universal phone chargers to be used with Vodafone branded handsets (Vodafone.com, 2008). Secondly, Vodafone announced that by 2020, it aims to reduce its CO2 emissions by 50% by improving its energy efficiency and its use of renewable energy (Vodafone.com, 2008). The results of all this will bring about cost reduction. (Vodafone.com, 2008) The company aims to drive through these operational and technological changes and ultimately cut carbon emissions (Vodafone.com, 2008). They also intend to use renewable energy when and where necessary. For instance, in 2006/7 Vodafone reduced the amount of carbon dioxide by 29% and it improved the energy efficiency of new network equipment by 25% (Vodafone.com, 2008).
Vodafone has come together with other mobile operators to reduce the impact of carbon dioxide emission in to the atmosphere by working with suppliers to improve the efficiency of energy and participating as an active member of the climate change group (Vodafone.com, 2008). The company also encourages electronic communication with shareholders in order to create an environmentally friendly place (Vodafone.com, 2008). The company also uses environmentally friend materials to print reports. The group also sets standards for its suppliers to make the purchasing process more ethical and environmentally friendly. Customers buying phones from Vodafone will always get a bag for them to put and send their old mobile phones. This helps the company to recycle the phone and reduce the amount of waste.
Conclusion
This report has looked at Vodafone and its major achievements over the year. The first part of this report looked at the company’s financial analysis. The major financial analysis of the company was chosen in order to make comparison between two periods in the company. This was used to evaluate the company’s performance between 2008 and 2009. The second part of the report talks about the company’s funding what sources of finance the company has used in order to fund its major resourced. This part of the report also talked about debt ratio and how it can be used to know how much of company’s resources have been financed by debt. The final part of the report talked about the company’s corporate social responsibility and what steps they have taken on the past years to contribute in saving the environment.
These analyses that have been made in both part one and two of the report shows that a company can make profits but still be in serious trouble if they cannot manage resources well. By looking at the financial analysis of the company, it can be seen that they are not doing well internally to utilise their resources efficiently. In conclusion, financial analysis is just one of the ways to measure the performance of a company. Despite the many ways used to measure performance, financial analysis is the most important indicator and can be used to evaluate a company’s management, performance and the probability of survival in an intensely competitive age.
Appendices
| Ratio | Formula | definition |
| Net profit margin | Net profit Total revenue | This shows how much profit is made from £1 of revenue generated in a business |
| Quick ratio | Current assets – (inventory + Prepayments) Current liabilities | This shows the ability of a company to meet its immediate short term obligations. |
| Total asset turnover | Total revenue Total assets
| This shows how much revenue can be generated from £1 of assets employed in the business |
| ROCE | Net Profit Capital employed (Total asset-Current liabilities) | Shows how much profit the company is making from a portion of their investment. |
| Debt ratio | Total liability Total assets | This shows the proportion of the business that has been funded by loans that still have to be paid |
| P/E ratio | Current Market share Earnings per share (EPS) | This shows how well the company is performing compared to its market |
| Consolidated income statement | |||
| 2009 | 2008 | ||
| £m | £m | ||
| Non-current assets | |||
| Goodwill | 53,958 | 51,336 | |
| Other intangible assets | 20,980 | 18,995 | |
| Property, plant and equipment | 19,250 | 16,735 | |
| Investments in associated undertakings | 34,715 | 22,545 | |
| Other investments | 7,060 | 7,367 | |
| Deferred tax assets | 630 | 436 | |
| Post employment benefits | 8 | 65 | |
| Trade and other receivables | 3,069 | 1,067 | |
| Total Non-current asset | 139,670 | 118,546 | |
| Current assets | |||
| Inventory | 412 | 417 | |
| Taxation recoverable | 77 | 57 | |
| Trade and other receivables | 7,662 | 6,551 | |
| Cash and cash equivalents | 4,878 | 1,699 | |
| Total Current assets | 13,029 | 8,724 | |
| Total assets | 152,699 | 127,270 | |
| Equity | |||
| Called up share capital | 4,153 | 4,182 | |
| Share premium account | 43,008 | 42,934 | |
| Own shares held | -8,036 | -7,856 | |
| Additional paid-in capital | 100,239 | 100,151 | |
| Capital redemption reserve | 10,101 | 10,054 | |
| Accumulated other recognised income and expense | 20,517 | 10,558 | |
| Retained losses | -83,820 | -81,980 | |
| Total equity shareholders’ funds | 86,162 | 78,043 | |
| Minority interests | 1,787 | 1,168 | |
| Written put options over minority interests | -3,172 | -2,740 | |
| Total minority interests | -1,385 | -1,572 | |
| Total equity | 84,777 | 76,471 | |
| Non-current liabilities | |||
| Long term borrowings | 31,749 | 22,662 | |
| Deferred tax liabilities | 6,642 | 5,109 | |
| Post employment benefits | 240 | 104 | |
| Provisions | 533 | 306 | |
| Trade and other payables | 811 | 645 | |
| Total non-current liabilities | 39,975 | 28,826 | |
| Current liabilities | |||
| Short term borrowings | 9,624 | 4,532 | |
| Current taxation liabilities | 4,552 | 5,123 | |
| Provisions | 373 | 356 | |
| Trade and other payables | 13,398 | 11,962 | |
| Total current Liabilities | 27,947 | 21,973 | |
| Total equity and liabilities | 152,699 | 127,270 | |
| Income statement | ||
| 2009 | 2008 | |
| £m | £m | |
| Revenue | 41,017.00 | 35,478.00 |
| Cost of sales | -25,842.00 | -21,890.00 |
| Gross profit | 15,175.00 | 13,588.00 |
| Selling and distribution expenses | -2,738.00 | -2,511.00 |
| Administrative expenses | -4,771.00 | -3,878.00 |
| Share of result in associated undertakings | 4,091.00 | 2,876.00 |
| Impairment losses | -5,900.00 | – |
| Other income and expense | – | -28.00 |
| Operating profit/(loss) | 5,857.00 | 10,047.00 |
| Non-operating income and expense | -44.00 | 254.00 |
| Investment income | 795.00 | 714.00 |
| Financing costs | -2,419.00 | -2,014.00 |
| Profit/(loss) before taxation | 4,189.00 | 9,001.00 |
| Income tax expense | -1,109.00 | -2,245.00 |
| Profit/(loss) for the financial year from continuing operations | 3,080.00 | 6,756.00 |
| Loss for the financial year from discontinued operations | – | – |
| Profit/(loss) for the financial year | 3,080.00 | 6,756.00 |
| Attributable to: | ||
| – Equity shareholders | 3078 | 6660 |
| – Minority interests | 2 | 96 |
| 3080 | 6756 | |
| Basic earnings/(loss) per share | ||
| Profit/(loss) from continuing operations | 5.84p | 12.56p |
| Loss from discontinued operations | – | – |
| Profit/(loss) for the financial year | 5.84p | 12.56p |
| Diluted earnings/(loss) per share | ||
| Profit/(loss) from continuing operations | 5.81p | 12.50p |
| Loss from discontinued operations | – | – |
| Profit/(loss) for the financial year | 5.81p | 12.50p |
References
- Dyson, J. R. (2004). Accounting for Non-Accounting Students; Sixth Edition. Prentice Hall, Harlow
- Glynn, J. et al (2008). Accounting for Managers; Fourth Edition. Cengage Learning EMEA
- Collier, P. M. (2003). Accounting for Managers: Interpreting Accounting Information for Decision-making. Wiley
- Vodafone.com (2008). Vodafone Group Announces Commitment to Reduce CO2 Emissions by 50%. http://www.vodafone.com/start/media_relations/news/group_press_releases/2007/01.html date accessed 19/04/2010