PERFORMANCE EVALUATION OF VODAFONE

PERFORMANCE EVALUATION OF VODAFONEVodafone Group Plc (Vodafone) was founded as a subsidiary of Racal Electronics Plc in 1984. It became independent of the gild in 1991 then varyd its name to Vodafone Group Plc. Today, as a British multinational mobile network operator with headquarters in Newbury, England, it is known as one of the worlds leading telecommunication companies by revenue.It ope straddles crosswise the globe where it offers a identify of communication services dealing horrendousctly with consumers and offering services for businesses. Its consumer customers are classified into prepaid and contract and its business customers range from small office-home-office (SoHo) and small-medium enterprises (SMEs) to corporate and multinational corpoproportionns (MNCs). Its products and services includes messaging, voice, data, devices to help customers in meeting total communication needs and fixed line solutions. In all, its customer baseborn total 341.1 million proportionate customers all everyplace the globe (www.vodafone.com).The companys vision is to become the world leader in communications (www.vodafone.com).In this paper, we look to pronounce the performance of Vodafone for the periods ending thirty-first March 2009 and 2010. Evaluation testament be based on financial and non financial factors including appoint ratios and SWOT analysis for a more coherent outlook. Recommendations will then be made based on the performance analysis.CALCULATION OF KEY RATIOS (all figures are in m)Profitability ratios make profit molding this is calculated by expressing the gross profit made in the year over sales multiplied by atomic number 6.20102009(15,033/ 44,472)* hundred = 33.80%(15,175/ 41,017)*100 = 37.00%Operating profit moulding calculated by expressing profit before interest and tax over sales multiplied by 100.20102009(9,480/44,472)*100 = 21.32%(5,857/41,017)*100 = 14.28%Return on Capital Employed (ROCE) calculated by dividing profit before inter est and tax over total asset less sure liabilities all multiplied by 10020102009(10,186/156,985-28,616)*100 = 7.93%(6,608/152,699-27,947)*100 = 5.30%Gearing calculated by dividing long term debt over equity20102009(28632/90381)*100 = 31.7%(31749/86162) = 36.8% liquidity calculated as current asst over current liabilities and the dit test ratio calculated as current asset less stock over current liabilities20102009(14,219/28,616) = 0.5(14,219-433/28,616) = 0.48(13,029/27,947) = 0.47(13,029-412/27,947) = 0.45Price earning (P/E) calculated as average share expense for the period over earnings per share (EPS) EPS is calculated as profit for the year over number of issued share20102009P/E (132/16.11) = 8.19(136/17.17) = 7.92http//www.vodafone.comEVALUATION OF THE RESULTSFINANCIALProfitability ratioGross profit margin relates to the trading profit of a firm to its sales. Generally, it should be steady year and year and any wide variation investigated (Cox and Fardon, 2007). In the case of Vodafone, there was a fall in this ratio from 2009 to 2010 from 37% to 33.8%. This fall dope be attributed to the increase in cost of sales of 13.92%, nearly twice as high as the increase in sales of 8.42%. Further investigation is need to ascertain the increase in cost of sales.On the contrary operating profit margin nearly treble from 14.28% in 2009 to 21.32% in 2010. This margin highlights how effectively a firm has managed its cost of operations. It would look like Vodafone has managed cost effectively however the increase is due to a fall in impairment loss of approximately 64% on goodwill. In 2009 there were a lot of adverse events e.g. economical down turn. differently all cost remained fairly the same only slightly higher in 2010.ROCE increased from 5.3% to 7.93% in 2010. It is good as it reflects that Vodafone has the ability to earn a return on all smashing employed increasingly. Investors should be happy in this respect as it means their investment is been put to good use. What will be more helpful is a five year trend and knowing that the 7.93% is at least equal to the return on a depose account (Cox and Fardon, 2007).Gearing ratioThis ratio decreased by 13.9% to 31.75% in 2010. Long term borrowing fell 9.8% over the period, mainly due to a sharp fall in other liabilities, while equity increased by 4.9%. Higher gearing means less secure equity capital partly because repayment and interest make debt costly and partly because strictly speaking it can be recalled at any time. Although there is no authorize standard to judge acceptable gearing level, when gearing exceeds 100% it tends to worry investors (Cox and Fardon, 2007). Thus, in this case Vodafone has done well although five years figures will divulge us a clearer trend.Liquidity/ acidic test ratioLiquidity is the ability of a firm to pay off current obligation. Both the acid test and current ratio increased from 2009 to 2010. However, both ratios fall short of the rule-of-thumb that current ratio should be 21 (0.5 in 2010 and 0.47 in 2009) and acid test 11 (0.48 in 2010 and 0.45 in 2009). It shows Vodafone is not liquid. This is not a problem as such because in the telecommunications patience there are relatively few current assets and this contributes to low current ratios (Costea, 2006). For a meaningful conclusion a five year tread and industry average is necessitate.P/E ratioThis ratio represents the markets view of the growth potential of the company, its dividend policy and the degree of risk involved in the investment (Alexander, Britton and Jorissen, 2007). High P/E ratio means investors have good feelings about the factors mentioned, i.e. good growth opportunities, relatively safe earnings etc (Brealey, Myers and Allen, 2008). In the case of Vodafone there has been an increase in the ratio by 3.4% to 8.19 which highlights that investors are confident in the company. Again five years trend and comparison to the industry average will give a more meani ngful conclusion.NON FINANCIALSWOT analysis forms the basis of this section. summary of the financial statement and research by datamonitor show that there has been little change in the SWOT of Vodafone between 2009 and 2010 (see appendix 1).StrengthsVodafone has strong international brand recognition. in an age where branding is key element of marketing this is a key strength. In 2009, in Brand finance global ranking, the Vodafone brand came 8th as most valuable brand. In 2010 it moved up to 7th position. It has genuine a set of guidelines, to enable the consistent use of the Vodafone brand, in areas such as advertising, retail, online and merchandising and ensured it has a strong customer focus. The company also has all-embracing global reach and diversified revenue base. It has equity interests in over 30 countries and over 40 partner markets worldwide. It operates in three geographic regions Europe, Africa and substitution Europe, Asia Pacific and Middle East and also has a n investment in the United States. This reduces business risk and provides synergy. Furthermore, it is a leader in its markets meaning it understands its market.WeaknessesThe company continues to be a part of legal proceedings which eats into the companys profits. In 2004, Vodafone 2, one of the subsidiaries initiated a legal action to an enquiry by HMRC with regard to the UK tax intercession of its Luxembourg holding company, Vodafone Investments Luxembourg SARL (VIL), under the CFC Regime. The enquiry is ongoing and a provision of 2.2bn has been and was made in 2010 and 2009 accounts. This event shows Vodafone as an irresponsible company trying to evade taxation.OpportunitiesStrong growth has been visualize for the mobile advertising market with mobile phones becoming the centre of digital convergence. Indeed, compounded growth forecast for the USA alone is 70% for 2008-2013. This is good news for Vodafone as it has been focusing here in recent times and then, offers the potent ial to increase revenue in the future.The penetration of third generation technology (3G) has been increasing in recent times. It allows service providers to provide many services including mobile TV and VoD. The penetration rate of 3G in advanced economies is forecast to increase from nearly 30% to 60% between 2008 and 2013. At present Vodafone is an active leader in this market and thus is taking advantage of this.ThreatsThe telecommunication industry is highly competitive. In addition technology is constantly changing and if one is not careful one can be out of competition. Competition is also very high because markets are becoming saturated and thus marketing is shifting towards customer retention sort of than acquisition. This is particularly so in the European market where Vodafone generates considerable revenue.RECOMMENDATIONComparing the companys performance over a 2year period with the ratios can result in a highly inaccurate conclusion. For instance, is the fall in gross profit a one off occurrence within five years or has it been falling only rising in 2009 and falling again in 2010. If this is the case then there is a big problem. This being the case, it is recommended that the company disclose the analysis over 5 years for more informative conclusion. This is not to say that the one off occurrence in gross profit margin does not need attention. Also although the company may be doing well it may be below industry standards and thus industry average is necessitate to ensure this is not so and if it is then the company will know where to work on. This is particularly the case for Vodafones liquidity. The company is not liquid. Is this in line with industry average? Perhaps further liquidity test is needed.It is also recommended that the sharp rise in cost of sales is investigated. A breakdown of the cost is needed to know which element(s) is the culprit to determine what can be done about it.CONCLUSIONOverall Vodafone performed better in 2010 than it did in 2009. This should be commended as the economic environment has not been all that favourable. The company was profitable improving in both its operating profit margin and ROCE with the exception of gross profit margin falling. This has been commented on above. Improvement in the ROCE showed Vodafone to have made extensive use of capital employed. It has kept its gearing level under control and according to the price earnings ratio, investors are confident about the future prospect of the company and this is reflected in the increase in current share price of the company as is in appendix one.Once again Vodafone can be commended for maintaining and building on its strength extending global reach, maintaining its lead and increasing its brand value. This has definite shock on its ability to improve its profitability and do well despite performing in a mature, highly competitive environment with a dire climate. It is rather unfortunate that none of its strength or opportuniti es can eradicate or minimise its weakness. Vodafone needs to take care when calculating and recognising tax ensuring that it has prudish internal controls to ensure all rules and regulations are adhered to as fully as possible.ReferencesAlexander, D., Britton, A. and Jorissen, A. (2007) International Financial Reporting and Analysis, capital of the United Kingdom Thomson Learning.Brealey, R. A., Stewart, C. M. and Allen, F. (2008), Principles of Corporate Finance Singapore McGraw-Hill.Costae, Adrian The Analysis of the Telecommunication Sector by means of Data Mining Technique, 2006, Journal of Applied Quantitative Methods, pp.144-150Cox, D. (2007) Accounting the basics of financial and management accounting. Worcester Osborne Books LtdDATAMONITOR (2009) SWOT analysis, April 2009. London DATAMONITORhttp//www.lse.co.uk/SharePrice.asp?shareprice=VODshare=vodafone_grphttp//www.vodafone.com/etc/medialib/agm_09.Par.22820.File.dat/VF_Annual%20Report_2009.pdfhttp//www.vodafone.com/etc/med ialib/agm_10.Par.86506.File.dat/vf_ar2010.pdfLondon Stock Exchange (2010), 3 months Vodafone Share Graph. London Stock Exchange, Accessed 11 August 2010.Vodafone Group Plc. (2009) Annual Report For the year ended 31st March 2009, Vodafone Accessed 10 August 2010.Vodafone Group Plc. (2010) Annual Report For the year ended 31st March 2010, Vodafone Accessed 10 August 2010.