2012

By

Asra Isar

By

Asra Isar

Financial Analysis

Introduction

Vodafone Group Plc. is one of the world's largest mobile companies providing a wide range of services

including voice, messaging, data and fixed broadband.

How it works:

Vodafone provides better coverage due to its increasing number of base station sites. (Strategy, (2012),

Available from: Vodafone Annual Report 2012 (Accessed 12 September 2012)).

It also has leading robust IT systems to create a “single view” of our customers across the Group which

links together all customer activity and information on various sales channels – online, retail and contact

centres. (Strategy, (2012), Available from: Vodafone Annual Report 2012 (Accessed 12 September

2012)).

Their 3G network has been reconfigured to run on 900 MHz frequency spectrum instead of 2100 MHz,

which enables the radio signal to travel longer distances and provides better indoor coverage. (Strategy,

(2012), Available from: Vodafone Annual Report 2012 (Accessed 12 September 2012)).

Investment in high capacity backhaul using ethernet, microwave and optical fibre transmission

equipment by Vodafone supports high speed data capability across its network. (Strategy, (2012),

Available from: Vodafone Annual Report 2012 (Accessed 12 September 2012)).

Vodafone has deployed more single radio access network (‘RAN’) base station sites, which comprise of

2G, 3G and 4G technology in one single unit, that deliver energy operating cost savings of up to 40% to

traditional RAN units as compared to three different, and more expensive units. (Strategy, (2012),

Available from: Vodafone Annual Report 2012 (Accessed 12 September 2012)).

The online self-care service has been extended from PC to smartphones and tablets in 17 of Vodafone’s

markets so that its customers can view their billing information, their usage and information about their

price plan, across any of their connected devices. (Strategy, (2012), Available from: Vodafone Annual

Report 2012 (Accessed 12 September 2012)).

Using more online capabilities, has allowed 57% of Vodafone’s customers in Europe to receive an

electronic bill which saves money and also helps the environment. (Strategy, (2012), Available from:

Vodafone Annual Report 2012 (Accessed 12 September 2012)).

Services:

Vodafone’s customers enjoy a range of services including simple voice calls, text and picture messaging, and

data services such as mobile internet browsing, social networking sites, downloading applications (‘apps’) and

sending emails via smartphones.

Vodafone has launched a range of services designed to support data usage on smart devices and build longer

term relationships with customers. These services include:

Vodafone Cloud: It automatically uploads or saves customers’ photos and videos to the cloud which can

then be retrieved from any device. (Strategy,( 2012), Available from: Vodafone Annual Report 2012

(Accessed 12 September 2012)).

Vodafone Contacts: It is another cloud based solution that backs up customers’ phone contacts, so all

their numbers are always safe. (Strategy, (2012), Available from: Vodafone Annual Report 2012

(Accessed 12 September 2012)).

Vodafone Protect: This service locates lost or stolen phones and laptops, and wipes the content to keep

them secure. (Strategy, (2012), Available from: Vodafone Annual Report 2012 (Accessed 12 September

2012)).

Vodafone Guardian: Vodafone Guardian helps protect children, with smartphones, against unwanted

communication, promote responsible use of mobile technology, and help parents control how their

children’s use smartphones. (Strategy, (2012), Available from: Vodafone Annual Report 2012

(Accessed 12 September 2012)).

Vodafone’s business scope:

Vodafone operates in over 30 countries with a significant presence in Europe, the Middle East, Africa,

Asia Pacific and the United States through the Company's subsidiary undertakings, joint ventures,

associated undertakings and investments.

(http://www.vodafone.com/content/index/about/about_us/where.html)

It first emerged in UK in 1985 and has expanded to cover 26% of UK’s market. (Where we are heading,

(2012), Available from: Vodafone Annual Report 2012 (Accessed 12 September 2012)).

Vodafone owns 35% market share in Germany due to customers who are loyal to its fixed broadband

services. (Where we are heading, (2012), Available from: Vodafone Annual Report 2012 (Accessed 12

September 2012).

Even with recession imminent across Europe, Vodafone’s flexible cost structure and low handset

subsidies have made it manageable for Vodafone to keep its overall profitability in Italy. The market for

Vodafone in Spain, however, has declined due to cutback in spending. (Where we are heading, (2012),

Available from: Vodafone Annual Report 2012 (Accessed 12 September 2012).

India and Africa are the emerging markets that are of interest to Vodafone due to the growing need of

mobile internet and data services respectively. (Where we are heading, (2012), Available from:

Vodafone Annual Report 2012 (Accessed 12 September 2012).

The largest market share is provided by Verizon Wireless in US, with 45% controlling interest, mainly

because of greater usage of mobile data services. (Where we are heading, (2012), Available from:

Vodafone Annual Report 2012 (Accessed 12 September 2012).

Overall performance

The major component for Vodafone’s profitability is an increased demand in mobile data and internet services

as well as improvements in 3G technologies and innovative solutions. However, higher investments in

smartphone by consumer, competition and macroeconomic variables have had a negative impact on the

revenue. This has increased the Group’s revenue only slightly by 1.2%. The AMAP region which consists of

Africa, Middle East and Asia Pacific showed an increase in revenue by 8% attributable to India’s growing

customer base as well as Qatar, Ghana and Vodacom in Africa. Whereas Europe exhibited decline in revenue

which was mostly offset by improved performance in Germany, UK, Netherlands and Turkey. (Operating

Results, (2012), Available from: Vodafone Annual Report 2012 (Accessed 12 September 2012).

Financial Analysis

Ratio Analysis:

Current Ratio: The figures from 2010 to 2012 show an increasing trend. This specifies that Vodafone’s liquidity

is improving as well as its ability to pay short term debt.

Name 2012 2011 2010

LIQUIDITY RATIOS

Current Ratio 0.833 0.627 0.496

Quick 0.799 0.597 0.475

Operating Cash Flow 0.5309 0.443 0.456

ACTIVITY RATIOS

Inventory Turnover 61.673 63.534 69.678

Receivables Turnover 4.641 5.086 5.408

Payables Turnover 2.104 2.148 2.144

Fixed Asset Turnover 2.390 2.247 2.229

Total Asset Turnover 0.319 0.297 0.287

LEVERAGE RATIOS

Debt to Equity 0.797 0.727 0.732

Debt Ratio 0.439 0.4209 0.421

PROFITABILITY RATIOS

Net Profit Margin 0.1508 0.171 0.193

Gross Profit Margin 0.320 0.328 0.338

ROA 0.0481 0.05106 0.0556

ROE 0.0851 0.0884 0.0976

EPS 0.138 0.1501 0.163

P/E 0.0813 0.0941 0.124

Quick Ratio: Since this ratio does not include inventory which is why the quick ratio is lower than the current

ratio. However, Vodafone’s highly liquid assets have increased from 2010 to 2012 which indicates the ability to

pay its current liability has improved.

Operating Cash Flow: This ratio shows that Vodafone’s current debt is not entirely covered by its cash from

operations and it needs to generate more cash from its operations as cash is how bills are paid off.

Inventory Turnover: Inventory turnover has decreased gradually which means that it either has excess inventory

with a rate of return of zero or if it is high compared to industry averages then it implies either strong sales or

ineffective buying.

Receivables Turnover: This ratio is also declining steadily which implies that most of its sales get tied up in

accounts receivable and this trend is increasing. Vodafone will have to improve its collection policy for its

customers to ensure the timely collection of imparted credit that is not earning interest for the firm. 

Payables Turnover: Since the turnover ratio is falling from one period to another, this is a sign that Vodafone is

taking longer to pay off its suppliers than it was before.

Fixed Asset Turnover: There is an upward trend in this ratio which specifies that Vodafone is gradually

increasing its investment in fixed assets to generate revenues. When companies make these large investments,

investors watch this ratio in following years to see how effective the investment in the fixed assets was.

Total Asset Turnover: Vodafone’s efficiency to use its assets to generate sales or revenue is increasing every

year. This also indicates that the company’s profit margin is decreasing. However this trend should not continue

for long.

Debt to Equity: Vodafone’s debt to equity ratio is increasing which means that it is financing its growth with

debt. This can result in volatile earnings as a result of the additional interest expense. 

Debt Ratio: Debt ratio is less than 1, but rising every year, indicates that Vodafone has more assets than debt.

Net Profit Margin: This ratio is declining which implies that Vodafone’s costs are increasing and hence it needs

to control these costs in order to improve its profit margin otherwise even if its sales increase its earnings will

decrease due to higher financing costs i.e. interest expense.

Gross Profit Margin: This margin is also decreasing which indicates that raw material costs must be rising due

resulting in higher Cost of Goods Sold.

Return on Assets: Vodafone’s ability to convert its investments into earnings is falling, which might be a

concern to its investors as investor’s money or investment is being used inefficiently to bring in earnings.

Return on Equity: Shareholders usually watch this ratio as this ratio indicates how the shareholder’s money is

being used to earn net income. This ratio is decreasing which means that Vodafone should be careful in

utilizing the shareholder’s money in the future.

Earnings per share: EPS of Vodafone is showing a downward trend which indicates that Vodafone’s earnings is

at a declining trend and need to be looked at because this ratio also indicates that profitability is decreasing.

Price to Earnings Ratio: Since this ratio is not considered as a good indicator of growth in earnings as earnings

can be manipulated. However by looking at the historical P/E ratios of Vodafone, earnings are declining

steadily.

Conclusion:

Vodafone needs to assess its decline in net income as well as its growing costs. It needs to control its costs

otherwise costs will continue to rise and it won’t be able to pay its debt because of less cash generated through

its operations. The recession may be a contributing factor towards declining net profit which is visible in Spain,

which is one of the markets Vodafone is currently operating in. However, since Vodafone is good at innovating

technology it might be acceptable to say that Vodafone may find solution to control its costs through

revolutionizing its businesses.

Annexure

Ratio Formula 2012 2011 2010

CurrentCurrent Assets /

Current Liabilities20,025/24,025 17,003/27,075 14,219/28,616

Quick (Acid

Test)

(Cash + Marketable

Securities + Net

Receivables) / Current

Liabilities

(10744+1323+71

38)/24025

(6252+674+9259)/

27075

(4423+388+8784)/

28616

Operating Cash

Flow

Cash Flows from

Operations / Current

Liabilities

12755/24025 11995/27075 13064/28616

Bibliography:

Vodafone Group Plc. (2012). Vodafone Annual Report. Available from:

http://www.vodafone.com/content/index/investors/investor_information/annual_report.html (Accessed 12

September 2012).

Vodafone Group Plc. (2012). Where we are. Available from:

http://www.vodafone.com/content/index/about/about_us/where.html (Accessed 12

September 2012).

Ratio Formula 2012 2011 2010

Inventory

Turnover

COGS / Average

Inventory

31546/

(486+537)/2

30814/

(537+433)/229439/(433+412)/2

Receivables

Turnover

Sales / Average

Accounts Receivables

46417/

(10744+9259)/2

45884/

(9259+8784)/2

44472/

(8784+7662)/2

Payables Turnover

COGS-Beg

inventory+ending

inventory/ Average

Accounts Payables

(31546-537+486)/

(15236+14698)/2

(30814-433+537)/

(14082+14698)/2

(29439-412+433)/

(14082+13398)/2

Fixed Asset

Turnover

Sales / Average Fixed

Assets

46417/

(18655+20181)/2

45884/

(20181+20642)/2

44472/

(20642+19250)/2

Total Asset

Turnover

Sales / Average Total

Assets

46417/

(139576+151220)

/2

45884/

(151220+156985)/

2

44472/

(156985+152699)/2