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Vodafone and Deutsche
Vodafone and Deutsche
1 Introduction
Telecommunication industry is the one of the most dynamic industry. Because of its vulnerability and its
dynamism, the rate of permanence is too high. Worldwide the market grew by 4% i.e. around 3.2 trillion euro.
The demand comes especially from Asian emerging economies and developing economies like India and China
and Europe has been increasing. As these emerging developing Asian economies are the major contributors on
world GDP. According to the Report of Statista, it has analyzed that the telecom sector will grow at stable
rate. The revenues from 2005 onwards are shown in Chart
With the advent of digitalization, smart phones, data intelligence, data analytics, cloud computing and all the
demand of mobile phones, tablets are increasing their demand. Specially in developing economies, India and
china are the growing markets and showing high developments and demands in the world global consumers.
Thus, the global telecommunication market is showing tremendous innovations and developments. The 3 G, 4
G and Recent 5 g trails are making the sector vulnerable. Now the recent news is the tablets and mobile
phones will be going as a substitute of television industry. Catering of these developments the industry is
showing growth potential in the same way the industry is also reflecting some of the challenges like: intense
market competition, and high investments in new telecommunication technologies such as wireless
communication and satellite. Some of the other factors behind the growth of the market worldwide include
affordability of services, innovative services such as e-agriculture and e-education, and demand for high-speed
internet. On the other hand, high cost of providing various services is again a challenge in front of the industry.
Services provided by key players in the telecommunication market include providing storage area networks,
storage products, and storage networking services, entry-level servers, and enterprise networking services, 3G
services, calling cards, broadband networks, and application networking services. The growing number of
internet users worldwide has been increasing exponentially by the day and thus, within the
telecommunications market, the market for internet-based services is currently thriving and is at its peak.
The world top 10 companies according to the Bloomberg report 2018 are as under:
Table 1.1: The world top 10 companies according to the Bloomberg report 2018
Financial performance is subjective term and company specific i.e. how company’s able to employ their short
and long term capital into productive and efficient use. By the employment of its assets is company is able to
generate effective operating profits. There are different indicators of financial performance. However these
indicators cannot be judged standalone rather it can be infer in aggregation. Thus this thesis not only
considers the change in select indicators but also gives inference of financial performance as on aggregate
basis. The financial performance of the company can be analysed into different ways: first, with the companies
own history and secondly, the company’s financial performance with its peer group companies and lastly, with
its industry averages.
Financial performance of any company can be classified as profitability, liquidity, solvency and turnover. The
brief overviews of these variables are as follows:
Long term debt equity has been calculated by dividing long term debt by the book value of equity.
Long term debt equity= total long term liabilities/ shareholders equity
Interpretations: High debt equity ratio i.e. greater than 1 indicates that the company is employing more debt
in the capital employed rather than equity. If the operating margins are low this may leads to financial risk and
turned to insolvency. Besides if the company having stable and growing operating margins on YOY basis then
in this case company are gaining the benefits of debt capital and finally improves its return on equity. But on
the other lower debt equity ratio is viable for the companies having low and stable margins. Thus, reduction in
debt capital will reduce financial risk.
2. Current ratio :
Current ratio is a variable to judge the liquidity of the company. It has been calculated as:
Interpretations: many studies has considered the idle current ratio is 2:1. But we can’t say out rightly that this
is the benchmark ratio. This indicator is more company or industry specific. Rather than using high and low, it
is better to use positive change or negative change respectively from its previous ratio. Positive change in
current ration definitely infers increase in liquidity position of the company. But again a rational approach
considers this ratio with profitability. If the profitability is increasing then we can infer that the company is
effectively running its operating cycle. Besides if company’s profitability reducing over the years it can infer
that the companies are making their funds idle and are losing their opportunity cost. On the other hand if
there is a negative change, again it can’t be interpret that the company becomes short term insolvent. It
depends largely on industry average and particularly on the trends of profitability. If the operating profits
increase on YOY basis then definitely it can be infer that the companies are going for making their resources
into productive use rather than keeping them idle. Besides that if the profitability is low than the previous
year, it can be interpreted that the company becomes illiquid which hampers its operating cycle.
It is a very interesting and inferential ratio to judge the solvency of any company. It can be calculated as:
This ratio gives an inference and conclusion to debt equity ratio. Always higher coverage ratio is desirable
otherwise companies are going to bankrupt. Thus, this thesis considers this ratio as a proxy of solvency ratio
while preparing index of financial performance in chapter 6.
Asset turnover ratio reflects the efficiency and productivity of the company that how efficiently companies are
going to employed their assets in order to generate profitability. It has been calculated as:
ROCE is again reflecting company’s efficiency that how company is utilizing their capital. This ratio has been
calculated as:
Higher ratio over the years shows true efficiency of the company. And this ratio considers operating profits
which again reflects true profits of the company that is free from non recurring income. Higher ratio is
desirable.
6. Return on equity:
ROE is an indicator of profitability and it reflects profits per unit of equity. Investors are basically interested in
higher return on equity. This ratio also called as return on net worth. It has been calculated as:
Higher the ratio is desirable which spread positive sentiments among investors towards company. The
increase and decrease in return on equity can be analysed by Du pont analysis. Du pont analysis can be divided
into profitability, turnover and leverage.
For the analysis of return on equity, thesis considers three more variables i.e.
7. PBIDT/Sales (%):
It is the very good indicator of profitability as it is not included non cash items i.e. depreciation and non
recurring income. Thus it’s a true reflection of operating margin. Higher ratio means high profitability.
8. Sales/Net Assets:
Sales to net asset ratio are the turnover ratio. As we had already discussed, higher the ratio infers the
company’s effectiveness
It is the market value of company’s outstanding share. It has been calculated as:
The market capitalization serves and dilutes the misconception that higher the stock prices , larger is the
company. Stock prices are not the true indicator of company’s actual worth or potential. This misprice and
differential price comparison can be resolved by comparing with market capitalization. For the purpose of
comparison of financial performance it is superior to price per share. This thesis considers this indicator as a
base for the calculation of weights while constructing the index of financial performance.
Thesis considers some other variables like net sale, value of output and operating profit (PBIT) in order to
judge the financial performance of the companies in telecom sector.
Various Ratios as Financial Performance indicator has been applied on two companies. The data considered as
2016 and 2017. The data taken from the Yahoo finance and Annual reports of the companies.
Various Ratios that are used are Return on Capital Employed, Return on Sales , Asset Utilization Ratio, Gross
profit margin, Current Ratio and Quick Ratio, Gearing Ratio, Interest Coverage Ratio, Stock days, Current trade
receivables days, Current trade payables days.
Formulae
ROCE EBIT/(Total Assets- Current Liabilities)
Return on sales PAT/Sales
Asset Liability Ratio Assets/ Debt
Gross profit Margin GP/ Sales
Current Ratio CA/CL
Quick Ratio (CA-Inventories- trade rec)/CL
Gearing Ratio Long Term Liabilities/ Capital Employed
Interest Coverage Ratio EBIT/Interest
Trade Receivables Ratio Sales Credit/ Accounts Rec
Trade Payables Ratio COGS/ Accounts Payables
Source: Authors compilation
1.5 Analysis of Financial Performance of Vodafone Group Plc and Deutsche Telekom AG:
The companies ROCE has increased BY 14.33% from 2016. The return on capital employed is the one of
the crucial indicator. It reflects the company’s efficiency in generating revenue on its overall capital
investments. Thus, the company is showing efficiency in generating revenue on its investments. But
this will further analysed better if this growth has been compare with either industry or with its
competitor.
Return on sales is also showing positive trend and it has increases by 25.98%. It means the company is
able to generate enough revenue from its sales. But again it will give a better understanding if it
compares with its world market return.
Asset liability ratio is again showing positive growth i.e. 5.56% it means the companies having more
equity than debt and the company is relying more on equity than on debt in its capital structure and
financing assets.
GPM is also showing positive mark up by 1.133%. On standalone basis it can be analyzed that company
is booking better gross profit from the previous years.
Current ratio is showing negative growth i.e. 7.33%. In 2016, the current ratio was 0.804. Which
becomes very less than the benchmark i.e. 2:1. Again this benchmark varies from industry to industry,
thus this could give better understanding if it compares with its peer set companies or with industry
averages. Now, as of now on standalone basis, it can be inferred that the ratio was quite low i.e. 0.804
and again in next year this has reduce to 0.74. This could be bad signal and the warning sign for the
company. Again the quick ratio is also showing negative growth over the years i.e. 36% decline from
2016. Thus, it can be inferred that the company may face short-term liquidity problem.
Days sales outstanding has been reduced and purchase days outstanding has been increases from 2016
which is the positive signal of inventory management and its demand of the product in the industry
and moreover the companies hold on its vendors.
Interest coverage ratio is the one of the most vital ratio indicates the companies efficiency to repay its
fixed financial cost i.e. Interest rates. Here, it can be analyzed that the company is showing positive
potential to cover its interest cost as the 2.87 in 2016, which infers that the companies is having almost
2.9 times EBIT margins to cover its fixed financial cost. Further, this ratio is increased by 24.96%. This
finding is being a support of ROCE and Asset liability ratio. This indicator shows positive financial
solvency of the company.
Days sales outstanding is showing negative trend which is a bad signal that the credit sales are not
easily converting into cash and thus the Trade receivables ratios showing positive growth it infers that
the accounts receivables are high.
Purchase outstanding days are positive thus the company is not able to utilize or get competitive credit
policy from the market. In order to make early payments to its creditors as debtors are paying late, the
company should have to maintain effective buffer. But the company is not managing its working capital
effectively.
1.5.2 Standalone comparison of Vodafone PLC:
Vodafone Plc
Financial Ratios 2017 2016 Inc/ Dec
0.
ROCE 04 0.02253 78.146149
Return on sales 0.052371648 -0.1322 139.61432
Asset Liability Ratio 1.890953717 1.910505 -1.0233329
Gross profit Margin 0.296321745 0.274086 8.1126086
Current Ratio 0.9725041 1.00821 -3.5414833
Quick Ratio 0.733420459 0.80108 -8.446094
Gearing Ratio 0.356328633 0.343524 3.7275089
Days Sales Out 67.63092912 62.00668 9.0703988
Days Purchase Out 68.24082268 64.82416 5.2706698
Interest Coverage Ratio 4.423991727 2.277228 94.270941
Trade Receivables Ratio 5.323008344 5.805826 -8.3160957
Trade Payables Ratio 5.275434643 5.553485 -5.006779
Source: Authors own Calculation
ROCE has increases by 78% from 2016. This is a very high growth in the ratio. This can be infers the
company is able to achieve higher growth in returns on capital invested. And the growth in returns on
investments is showing a very high growth
Return on sales is also showing a tremendous growth i.e. 139%
Asset liability is again showing a negative growth i.e. by 1.02. It means the company is able to deploy
more of debt in its capital structure. Thus for financing of assets, the company is relying on debt
financing. Further, the potential of debt financing could check by the company’s potential of consistent
operating margin or consistent growth in EBIT and the growth in coverage ratio. If the company is
having, low operating cost that the company is able to take more financial cost. This inference I further
supported by Growth in EBIT and Growth in coverage ratio, which has been increases, by 94%. This
indicates the sound financial solvency of the company.
GP margin is also showing appositive growth i.e. 8%
As predicted because of low asset liability ratio it could be easily infer that the companies gearing ratio
would be low.
Current ratio and quick ratio is showing negative growth i.e. 3.5% and 8% respectively. It reflects the
short-term insolvency of the company.
Here the sales and purchasing outstanding both are positive it is good in the context of sales but not in
the context of purchases. The company has to maintain effective working capital to meet out the
creditor’s management effectively.
60%
50%
40%
30%
20%
2016
10%
2015
0% 2014
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120%
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80%
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40% 2016
20% 2015
2014
0%
-20%
The company’s sales are not showing any growth rather they are declining
However, the company is having a very strong control on costs it shows negative growth, and thus they
are able to increase their operating cost. This is a very positive sign for the company.
Gross profit Margin 0.296321745 0.2740862 8.1126086 Gross profit Margin 0.311238 0.30775 1.133605
Current Ratio 0.9725041 1.0082097 -3.5414833 Current Ratio 0.745158 0.804142 -7.33497
Quick Ratio 0.733420459 0.8010805 -8.446094 Quick Ratio 0.198531 0.311689 -36.3047
Gearing Ratio 0.356328633 0.3435238 3.7275089 Gearing Ratio 0.627343 0.663269 -5.41648
Days Sales Out 67.63092912 62.006676 9.0703988 Days Sales Out 60.44415 70.25557 -13.9653
Days Purchase Out 68.24082268 64.824155 5.2706698 Days Purchase Out 73.95213 71.7968 3.001977
Interest Coverage Ratio 4.423991727 2.2772277 94.270941 Interest Coverage Ratio 3.58773 2.87107 24.9614
Trade Receivables Ratio 5.323008344 5.8058264 -8.3160957 Trade Receivables Ratio 5.955912 5.124149 16.23222
Trade Payables Ratio 5.275434643 5.5534854 -5.006779 Trade Payables Ratio 4.868014 5.014151 -2.91448
Source: Authors calculation
Deutsche Telecom because of having larger market share, having higher sales in absolute terms than
Vodafone Plc but the return on sales is lower than Vodafone Plc. Now these inferences about the
growth in margins could be better understood by analyzing the growth in EBIT. Again the EBIT of
Vodafone is growing at robust rate than Deutsche. This inference actually gives a positive sign of the
performance of Vodafone that their operating efficiency has been increasing over the year than its
competitors.
The cost i.e. Cost of revenue growth and operating expenses of Vodafone are showing negative trend
than Deutsche Telecom, this is another gives an clue that the company is efficient enough to utilize its
economies of scale and able to reduce its cost and increasing its bottom-line in comparison to its peer
company
By the analysis of Asset liability ratio and gearing ratio it has been analysed that the Vodafone is more
on relying debt capital as a source of financing rather Deutsche. How we can infer that it is good or
bad. It can be inferred well if this can be analysed by connecting with the company’s coverage ratio
and EBIT. If we analyse the Vodafone has increased its Operating Profits tremendously, on the other
hand the coverage ratio is high than the company can have a potential of taking more loaned capital.
Because the company may get benefit of financial leverage.
Vodafone is having low operating leverage, means the company is able to use its operating fixed cost
effectively.
Moreover the liquidity position of Vodafone is better than of Deutsche and they are also effective
enough to manage its working capital cycle than its peer company.
Thus, company is performing well but the only factor that the company has to look forward is how to
increase its sales, its market share and its product ranges.
1.6 Conclusion
From the above analysis it has been concluded that the overall financial performance in terms of beta, EBIT, Working
Capital Management, Liquidity, Operating and financial leverage ; is better than its peer set company. However, the
company should focus to increase its reach. In this regard, company is taking several initiatives like capturing the
European market and Asian economies. Vodafone is coming up with several strategic alliances like merger with idea etc.
1.7 Recommendation
Vodafone Plc should focus on how to increase its market share in the world telecom market.
References:
Websites
1. www.Yahoofinance.com
2. www.reuters.com
Reports
Links:
https://www.myaccountingcourse.com/financial-ratios/return-on-capital-employed
https://www.gurufocus.com/term/current_ratio/DTEGY/Current-Ratio/Deutsche%20Telekom%20AG
Annexure-1
Vodafone Plc:
Income Statement
Currency in EUR. All numbers in thousands
Operating Expenses
Research Development - - - -
Non Recurring - - - -
Others (133,000) 96,000 286,000 146,000
Non-recurring Events
Extraordinary Items - - - -
Other Items - - - -
Net Income
Current Assets
Accumulated Amortization - - - -
169,107,000.0 169,579,000.0
Total Assets 145,611,000.00 154,684,000.00 0 0
Current Liabilities
Negative Goodwill - - - -
Stockholders' Equity
Preferred Stock - - - -
151,694,000.0 161,801,000.0
Capital Surplus 150,197,000.00 151,808,000.00 0 0
Total cash flow from operating activities 13600000 14223000 14336000 12668000
Investment activities, cash flow provided by or used in
Capital expenditure -4917000 -6285000 -8265000 -7324000
Investments -2569000 1881000 1779000 771000
Other cash flow from investment activities
620000 -1460000 -1874000 -153000
Total cash flow from investment activities -9841000 -8423000 -13871000 -13234000
Financing activities, cash flow provided by or used in
Dividends paid -3920000 -3714000 -4188000 -3758000
Sale purchase of stock - - - -
Net borrowings -758000 -648000 5362000 3562000
Other cash flow from financing activities
-810000 -4759000 -597000 -2997000
Total cash flow from financing activities -7234000 -9096000 4082000 -3162000
Effect of exchange rate changes -433000 -313000 -1128000 975000
Income Statement
Currency in EUR. All numbers in thousands
Revenue 12/31/2017 12/31/2016 12/31/2015 12/31/2014
Total Revenue 77,272,000 75,243,000 71,318,000 64,602,000
Cost of Revenue 53,222,000 52,087,000 50,520,000 45,823,000
Gross Profit 24,050,000 23,156,000 20,798,000 18,779,000
Operating Expenses
Research Development - - - -
Selling General and Administrative - - - 225,000
Non Recurring - - - -
Others 2,447,000 2,365,000 2,125,000 2,299,000
Total Operating Expenses 68,091,000 67,115,000 63,761,000 58,769,000
Operating Income or Loss 9,181,000 8,128,000 7,557,000 5,833,000
Income from Continuing Operations
Total Other Income/Expenses Net -4,188,000 -3,581,000 -2,779,000 -1,483,000
Earnings Before Interest and Taxes 9,181,000 8,128,000 7,557,000 5,833,000
Interest Expense -2,559,000 -2,831,000 -2,724,000 -2,786,000
Income Before Tax 4,993,000 4,547,000 4,778,000 4,350,000
Income Tax Expense -558,000 1,443,000 1,276,000 1,106,000
Minority Interest 11,737,000 9,540,000 8,750,000 8,629,000
Net Income From Continuing Ops 5,551,000 3,104,000 3,502,000 3,244,000
Non-recurring Events
Discontinued Operations - - - -
Extraordinary Items - - - -
Effect Of Accounting Changes - - - -
Other Items - - - -
Net Income
Net Income 3,461,000 2,675,000 3,254,000 2,924,000
Preferred Stock And Other Adjustments - - - -
Net Income Applicable To Common
Shares 3,461,000 2,675,000 3,254,000 2,924,000