ANALYSIS OF COMPANY’S FINANCIAL STATEMENTS

Introduction

Vodafone Group PLC and BT Group PLC are two multinational telecommunications services organizations that are in a single nation, and are confronted with the same issues. The two companies have numerous types of products all over the world and hence they are very popular in the world. Therefore, their reputations of being the leading firms in the telecommunications industry keep on growing too.

The two corporations have been impacted with the globalization and advancement in technology. Despite the problems that they face, the two corporations are preferred and well-known because of the higher admired feedback they got from the clients that have given them sustainable competitive advantage. This paper presents analysis and interpretation of the financial statements of Vodafone Group PLC and BT Group PLC with the aim of arriving at the best company that will offer higher financial rewards to their investors.

 

A brief background of each company, highlighting the main markets and sources of revenue

About the companies

Vodafone Group PLC

Vodafone Group PLC refers to a British multinational telecommunications company that is headquartered in London. As of 2014, Vodafone Group PLC was ranked fifth with revenue and second in the number of connections (435.9 million) behind China Mobile, among mobile operator globally.

Vodafone Group PLC operates and owns networks in 26 countries; in addition, it has partner networks in more than 50 additional countries. Besides, the company’s Vodafone Global Enterprise division offers telecommunications as well as IT services to the corporate clients in over 150 countries. Vodafone Group PLC has a primary listing on the London Stock Exchange and secondary listing on NASDAQ. It is a constituent of the FTSE 100 Index. Vodafone Group is a public limited company founded in 1991 with a registered office in Newbury, Berkshire, United Kingdom. Its products include fixed line and mobile telephony, internet services and Digital television. Its main markets include Africa and Middle East, the Americas, Asia-pacific, and Europe.

It has a strong financial performance, for instance, revenue of over £40.97 billion as of financial year 2016, Operating income of £1.37 billion. The main sources of revenue for the company are the sales of products and services that it offers such as mobile money transfer services and mHealth services.

 

BT Group PLC

BT Group PLC refers to a holding company owning British Telecommunication PLC which is a British multinational telecommunications services company having its head office in London, UK. BT Group PLC has operations in around 180 countries. It was founded in 1969 and offers products such as fixed line telephony, IT services, mobile telephony, fibre-optic communication, broadband internet and digital television. BT Group PLC has primary listing on the London Stock Exchange and a secondary listing on the New York Stock Exchange as well as a constituent of the FTSE 100 Index.

It controls several subsidiaries. BT Consumer division supplies broadband, telephony, and subscription television services to around 18 million customers in the Great Britain while its BT Global Services division supplies telecommunication services to government and corporate customers worldwide. Most of the profits of BT Group PLC are generated by its Openreach subsidiary that controls the ‘last mile’ copper infrastructure of the UK. It has a strong financial performance evidenced by total revenue of £17.851 billion as of 2015, operating income of £3.733 billion and a profit of £2.135 billion as of 2015. BT has substantial power in some markets that it supplies. The main source of revenue is the supply of the more profitable services and products that it has expended into.

 

An interpretation and assessment of financial performance and position

This assessment should cover the following five core areas: –

  1. Profitability;

Profitability ratios determine the bottom line and the returns a company offers to its investors (Kieso et al 2011, pg. 295). Such ratios show the firm’s overall performance and efficiency.

Vodafone

2015 2014
Profitability
Return on capital employed 2% -4%  
Return on equity 9% 83%  
Gross margin 27% 27%  
Operating profit margin 5% -10%  
Net profit margin 14% 29%  

 

The probability ratios of Vodafone fluctuated across the period. Vodafone’s return of capital employed increased from -4% to 2%indicating an increase in the efficiency it generated profits from investor’s funds. Gross margin remained constant at 27% implying stability in profitability of the company. Return on equity decreased from 83% in 2014 to 9% in 2015 implying a reduction in the effectiveness with which Vodafone uses owner’s funds to generate revenue. Operating profit margin increased from -10% to 5% while net profit margin decreased from 29% in 2014 to 14% in 2015. This huge decrease is due to the fact that majority of its profit in 2014 was attributed to the discounted operations. Although the profitability ratios fluctuated, the details revealed by the analysis is that Vodafone is relatively profitable and has a moderately good financial performance because it can meet its operating expenses and other expenses and still realize some earnings from their operations (Abraham, 2006, pg. 214).

BT Group PLC

2015 2014  
Profitability  
Return on capital employed 17.9% 18.3%
Return on equity 264.2% -340.9%
Gross margin N/A N/A
Operating profit margin 19.4% 17.2%
Net profit margin 11.9% 11.0%

 

On the other hand, the return on capital employed for BT decreased from 18.30% in 2014 to 17.90% in 2015. Therefore, BT experienced a decrease in the efficiency with which its capital is used in generating earnings. Return on equity increase from -340.9% to 264.2% implying an increase in the effectiveness with which Vodafone uses owner’s funds to generate revenue. However, operating profit margin increased from 17.20% to 19.40% while net profit margin increased from 11% to 11.90%. BT Group is relatively profitable and has a moderately good financial performance (Roxas, 2011, p. 58). When compared to each other, BT Group is more profitable than Vodafone Group PLC. Therefore, BT Group is able to give higher financial rewards to its investors than Vodafone. BT Group did not declare their gross profit due to the nature of their business. They do not have cost of sales but have operating expenses hence no gross profit.

 

  1. Liquidity position;

Liquidity ratios show the organization’s ability to meet its short-term obligations and therefore, it is a basic measure of the company’s financial health (Kieso et al 2011, pg. 290).

 

     
  Vodafone 2015 2014
  Liquidity    
  Current ratio 0.69 0.99
Quick/acid test ratio 0.67 0.97

 

The current ratio and quick ratio of Vodafone Group has decreased from 2014 to 2015. The current ratio decreased from 0.99 in 2014 to 0.69 in 2015 while quick ratio decreased from 0.97 in 2014 to 0.67 in 2015; this shows a reduction in its ability to meet short-term obligations. However, the liquidity ratios are less than one implying Vodafone group is not liquid and cannot effectively meet its short-term obligations using its current assets.

     
  2015 2014
Liquidity    
Current ratio 0.97 0.74
Quick/acid test ratio 0.96 0.73

 

BT Group PLC, on the other hand, has an increasing liquidity ratios; current ratio increased from 0.74 in 2014 to 0.97 in 2015 while quick ratio increased from 0.73 in 2014 to 0.96 in 2015; implying an increase in the ability to meet short-term obligations using current assets. Just like Vodafone, BT Group PLC is not liquid and cannot fully meet its short-term obligations because its liquidity ratios are less than one. However, when the two firms are compared, BT Group PLC is more liquid than Vodafone Group because it has higher liquidity ratios shown by its higher current and quick ratios.

 

  1. Efficiency

Asset management or efficiency ratios indicate how well an organization manages its liabilities or how effective it is using its assets to generate revenues (Kieso et al 2011, pg. 290).

Vodafone PLC

Efficiency in use of assets
Asset turnover 0.5 0.4
Inventory turnover 5.7 days 5.8 days
Receivables days 34 days 35 days
Payables days 60 days 62 days

Inventory days                                                          64                  63

Asset turnover ratio for Vodafone increased from 0.4 to 0.5 times implying an increase in how effectively Vodafone is using assets to generate revenues. On the other hand, inventory turnover decreased from 5.8 to 5.7. The company generated $5.8 per $1 in inventory in 2014 and $5.7 per $1 in inventory in 2015 implying that it is very efficient in managing its inventories. The inventory days increased from 63 days to 64 days implying a decrease in the efficiency of the company to convert inventory into cash. Its receivables days decreased from 35 days to 34 days which indicates that it takes fewer days to convert inventories into cash. On the other hand, its payables days decreased from 62 days in 2014 to 60 days in 2015. Therefore, it takes relatively more days to pay for its payables and hence has sufficient cash to meet its daily operations. Generally, the Vodafone Group PLC is efficient in their operations because the fluctuations are minimal.

 

BT PLC

2015 2014
Efficiency in use of assets
Asset turnover 0.9 1.1
Inventory turnover 2.4 days 2.0 days
Receivables days 30 days 27 days
Payables days 71 days 66 days

Inventory days                                        154 days       185 days

On the other hand, asset turnover ratio for BT Group decreased from 1.1 to 0.9 times implying a decrease in how effectively BT is using assets to generate revenues. However, the inventory turnover increased from 2.0 to 2.4 hence the company generated $2.00 per $1 in inventory in 2014 and $2.40 per $1 in inventory in 2015 implying that it is very efficient in managing its inventories. The inventory days decreased from 185 days to 154 days implying an increase in the efficiency of the company to convert inventory into cash BT Group’s receivables days increased from 27 days to 30 days. Despite the increase it takes fewer days to convert inventories into cash. On the other hand, its payables days increased from 66 days in 2014 to 71 days in 2015 which also indicate that it takes relatively more days to pay for its payables and hence has sufficient cash to meet its daily operations. Generally, the BT Group PLC is efficient in their operations.

When compared with each other, BT Group PLC is more efficient in its operations than Vodafone Group PLC because it has higher asset turnover and lower receivable days. BT Group PLC is using fewer inventories and total assets in generating more revenue hence higher efficiency (Beaver et al. 2010, p. 100).

 

 

  1. Gearing

Solvency or gearing ratios indicate the amount of debts a company uses in its operations (Dalabeeh, 2013, pg. 25).

Vodafone 2015 2014
Solvency/gearing
Gearing ratio 28% 26%
Interest cover 2 -2

The gearing ratio increased from 26% to 28% implying an increase in the use of debts by Vodafone. However, the company is lowly geared hence it is using few debts in its operations as equity is more than long-term debt. On the other hand, interest cover increased from -2 times to 2 times implying an increase in the ability to make interest payments on the debts in a timely manner.

 

BT Group PLC 2015 2014
Solvency/gearing
Gearing ratio 96% 103%
Interest cover 3.99 3.77

Interest cover (excluding finance income)              3.97               3.75

The gearing ratio decreased from 103% to 96% implying a decrease in the use of debts by Vodafone. However, the company is lowly geared hence it is using few debts in its operations as equity is more than long-term debt. On the other hand, interest cover increased from 3.77 to 3.99 implying an increase in the ability to make interest payments on the debts in a timely manner. This is also evidenced by interest cover (excluding finance income) which increased from 3.75 to 3.97.

Although BT PLC has more debts and has more business risks; it is more able to meet its interest payments than Vodafone Group PLC (Kieso et al 292).

 

  1. Investment potential

This category of financial ratios, indicates the investor’s perception of the market value of  a company. Dividend per share ratio and EPS show what the market is willing to pay for the stock of a company based on its current earnings (Kieso et al., 2011: 217).

 

Vodafone 2015 2014
Investor ratios
Dividend per share (£) 0.11 1.50
Dividend cover 2.0 1.5
Earnings per share (£) 0.22 2.24
Dividend yield 5% 68%
Price/earnings ratio 9.85 0.98

 

Dividend per share for Vodafone decreased from 1.52 to 0.11 implying a reduction in the value returned to the shareholders. This also implies reduction in company’s profits which lowers shareholder value. Also, EPS decreased from 223.84p to 21.75p which implies a reduction in the value of the stocks. This implies Vodafone’s investors are expecting a relatively lower earnings growth from the company (Kieso et al. 2011: p. 210). Dividend yield decreased from 68% to 5% implying a reduction in how much cash flow the company is getting for each dollar invested in the equity position. dividend cover increased from 1.5 to 2.10 which implies an increase in the capacity of BT to pay dividends out of the profit attributable to the shareholders. Finally, P/E ratio increased from 0.98 to 9.85 implying an increase in the dollar amount the company’s investor expect to invest in the company.

 

BT PLC 2015 2014
Investor ratios
Dividend per share (£)                     0.13                     0.11
Dividend cover                     2.08                     2.29
Earnings per share (£) 0.27 0.26
Dividend yield 2.9% 2.9%
Price/earnings ratio                   16.53                   14.80

 

The dividend per share ratio for BT Group PLC increased from 0.09p to 0.11p implying an increase in the value returned to the shareholders as well as an increase in company’s profits which drives up the shareholder value. On the other hand, the EPS ratio increased from 25.7p to 26.5p which implies an increase in the value of the stocks. This implies BT Group’s investors are expecting a relatively higher earnings growth from the company (Kieso et al. 2011: p. 210).

Dividend yield remained constant implying a stable cash flow the company is getting for each dollar invested in the equity position. Dividend cover decreased from 2.29 to 2.08 which imply a decrease in the capacity of BT to pay dividends out of the profit attributable to the shareholders. Finally, P/E ratio increased from 14.80 to 16.53 implying an increase in the dollar amount the company’s investor expect to invest in the company.

When compared with each other, BT Group PLC is a good investment because it has a higher earnings growth than Vodafone Group PLC.

An assessment of the long-term strategic development of both companies after Bexit

Brexit has posed several risks such as costing London thousands of jobs as well as dealing a substantial blow to the city’s reputation as Europe’s financial capital. This has necessitated firms to mull over the potential relocation of their headquarters since London is viewed as less advantageous to do business in after the UK split from the EU. However, BT Group and Vodafone have not considered relocating their headquarters. BT and Vodafone intend to diversify its businesses outside the UK because EU has aided them in maintaining beneficial employment laws (Khan & Jain, 2007, 6-3).

 

Recommendation of the best investment

Based on the analysis, BT Group PLC would make a more suitable investment option to the investors than Vodafone PLC because of the following reasons. Firstly, BT Group is more profitable than Vodafone Group PLC therefore; BT Group is able to give higher financial rewards to its investors than Vodafone. Secondly, BT Group PLC is more liquid than Vodafone Group because it has higher liquidity ratios shown by its higher current and quick ratios. Thirdly, BT Group PLC is more efficient in its operations than Vodafone Group PLC because it has higher asset turnover and lower receivable days (Overview, 2013, p. 79). BT Group PLC is using fewer inventories and total assets in generating more revenue hence higher efficiency (Kimmel et al. 2008, p. 290). Fourthly, although BT PLC has more debts and has more business risks; it is more able to meet its interest payments than Vodafone Group PLC (Dyson et al. 2007, p. 226). Finally, BT Group PLC is a good investment because it has a higher earnings growth than Vodafone Group PLC.

 

An explanation of the limitations of your analysis, including the ratio analysis technique

The analysis of the financial performance of the two companies may not be that accurate because ratios have several limitations. Firstly, comparing two companies using ratio analysis might be very misleading if the two companies operate in different industries because they experience different environmental conditions. Secondly, the analysis only explains the relationships between the historical or past information rather than future and current information. Therefore, the analysis does not provide complete information for forecasting and future planning (Carlberg & Carlberg, 2002, p. 190). Thirdly, the analysis might have given a false result if the ratios were calculated from incorrect or false accounting data. Also, it might be misleading in case of the window-dressing of accounting information (Halim et al. 2012, p. 74).  Finally, the analysis is due to the fact that ratio analysis uses only quantitative data but ignores qualitative point of view. Therefore, it did not address issues like employee morale, customer service, product quality, and management skills which are crucial in influencing the financial performance of the company (Kapil, 2011, p. 126).

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