Vodafone 2017 Annual Report Ratio Analysis

Part 1

1) Three critical points are highlighted below.

• The company has made good progress with regards to converged communications in its major market i.e. Europe. The critical developments include merger with Ziggo in Netherlands, passive infrastructure remedies in Spain & Portugal coupled with European Commission’s (‘EC’) revised European Framework Review for Telecoms.
• In order to weather the growing competition in the Indian market, the company has merged with Idea to exploit synergies and remain focused towards Indian digital future. The company has strengthened operations in Africa where South Africa and Kenya are the major markets.
• Going forward, the company aims to improve on adjusted EBITDA growth which would rest on three pronged strategy involving tight cost control, continued profitable growth in revenue and management of scale for earning attractive long term returns.

2) Three critical points are highlighted below.

• The company intends to create network leadership by creating a “Gigabit Society”. In this endeavour the company tends to enter into partnerships for delivering better services through superior networks.
• The company intends to deliver a superior customer experience by providing excellent connectivity, providing value, rewarding loyalty and ensuring customer support access while ensuring efficient resource use.
• The company is also committed to building a diverse working environment which is inclusive which would initiate a positive culture and superior customer service.

3) Three critical points are highlighted below.

• The company offers a wide range of products and services which are directed to both consumers and enterprises. These products include mobile services, broadband, TV & fixed line service, VAS along with financial services besides IOT, cloud hosting.
• There is an increase in the converged offers as the demand for bundled services is on the rise. This is leading to higher operational efficiency and customer loyalty.
• The services of the company have worldwide reach and have presence in 26 countries with major markets located in Europe, India and Africa.

4) Three critical points are highlighted below.

• Owing to higher penetration of smartphones, there is a trend of increasing data usage. As a result, the company is focused towards providing the best data experience to the consumer so as to able to cash on this trend.
• The company intends to also cater to the increased demand for converged services and thereby provide more bundled services which would enhance revenue as well as profitability besides customer loyalty.
• For businesses, the company aims to provide a comprehensive communication portfolio with the intention of enhancing fixed enterprise services. Also, the company continuously aims to invest in relevant growth areas such as IOT, cloud hosting.

5) Three critical points are highlighted below.

• The KPI regarding diversity in senior management is quite surprising as most organisations do not have the same. However, considering the range of business, this is significant for Vodafone and adds value to the decision making.
• Another surprising KPI is that adjusted EBITDA growth should be higher than service revenue so as to have margins expansion. This is relevant for Vodafone considering that in various markets (especially India) the margins of the company are under pressure.
• Also, another surprising KPI is the number of 4G consumers. This is relevant for the company owing to continued focus of the company on enhancing the data consumption and these users tend to be highest consumers of data.

6) Three critical points are highlighted below.

• One of the key targets is women empowerment as the company is committed towards inclusion and diversity. It also aims to become the best employer for women by the year 2025.
• Another key target is with regards to energy efficiency through energy innovation so that the greenhouses gas emissions can be lowered from the various operating activities and also enables reduction of these emissions for the customers.
• The company intends to leverage digital technologies for the creation of jobs and allow the youth to enhance their skills through experiences that foster learning.

7) Three critical points are highlighted below.

• The company has a robust risk management framework into existence which is focused at identifying the various risks coupled with managing, monitoring and reporting the same so that appropriate measures can be undertaken on an ongoing basis.
• The company has exposure to various risks related to technology, competition, regulation and these are classified in accordance with their underlying likelihood and also the impact.
• Further, in relation to all major risks the company highlights the nature of risk, impact and also the tolerable level which the company is willing to bear. This is imperative since it is not possible to eliminate all risks completely and hence the acceptable limits are vital.

8) The main points from the above discussion are below.

• The key markets of the company are Europe, India and Africa. The company offers a host of services most of which can be bundled together. The company intends to enhance the profit margins of operating activities.
• The company intends to focus on technology convergence, bundled offers to consumers, growing investment in network and technology, better consumer experience, and focusing on IOT, cloud hosting etc. for consumers.
• Three surprising KPI of the company include focus on diversity and women empowering, focus on enhancing margins in wake of competition and also the amount of 4G customers.
• Going forward, the company has intention to focus on women empowerment, enhancing energy efficiency and also using technology for job creation and skill building.
• The risk management framework of the company is quite robust which seeks to identify, manage and monitor the various risks. Besides, these risks are updated are short intervals so as to ensure that the company taking strategic decisions in the right direction.

The various ratios are computed below.

• Gross Profit Margin

Formula Used = (Gross Profit/Sales Revenue)*100

Gross Profit Margin (2017) = (13055/47631)*100 = 27.41%

Gross Profit Margin (2016) = (13097/49810)*100 = 26.29%

Gross Profit Margin (2015) = (13312/48385)*100 = 27.51%

The gross margins are the highest in 2015 while they are the lowest in 2016. In 2017, the company has improved on the gross margins as compared to the previous year.

• Operating Profit Margin

Formula Used = (Operating Profit/Sales Revenue)*100

Operating Profit Margin (2017) = (3725/47631)*100 = 7.82%

Operating Profit Margin (2016) = (1320/49810)*100 = 2.65%

Operating Profit Margin (2015) = (2073/48385)*100 = 4.28%

The operating margins are the highest in 2017 while they are the lowest in 2016. In 2017, the company has improved on the operating profit margins as compared to the previous year.

• Net Profit Margin

Formula Used = (Net Profit/Sales Revenue)*100

Net Profit Margin (2017) = (-1972/47631)*100 = -4.14%

Net Profit Margin (2016) = (-5127/49810)*100 = -10.29%

Net Profit Margin (2015) =(7805/48385)*100 = 16.31%

The net profit margins are the highest in 2015 while they are the lowest in 2016. In 2017, the company has improved on the net profit margins as compared to the previous year.

• Inventory Turnover

Formula Used = (COGS/ Inventory)

Inventory Turnover (2017) = (34576/576) = 60.03

Inventory Turnover (2016) = (36513/716) = 51.00

Inventory Turnover (2015) = (35073/667) = 52.58

It is apparent that the inventory turnover for the company has reduced in 2016 but has increased in 2017 which augers well for the company as it reduces the days required to convert inventory into sales.

• Total Asset Turnover

Formula Used = (Sales Revenue/Total Assets)

Total Asset Turnover (2017) = (47631/154684) = 0.308

Total Asset Turnover (2016) = (49810/169107) = 0.294

Total Asset Turnover (2015) = (48385/169579) = 0.285

The asset turnover ratio has improved during the given period from 2015-2017 which is apparent from the above computations and augers well for the asset utilisation.

• Current Ratio

Formula used = Current Assets/Current Liabilities

Current Ratio (2017) = (25542+ 17195)/(30595+11794) = 1.01

Current Ratio (2016) = (31938+ 3657)/(41797+438) = 0.84

Current Ratio (2015) = 27457/39979 = 0.69

From the above, it is apparent that over the period 2015-2017, there has been an improvement in the current ratio of the company which augers well for the short term liquidity.

• Debt to Equity Ratio

Part 2

Formula Used = Total Liabilities/Total Equity

Debt to Equity Ratio (2017) = (154684-73719)/73719 = 1.10

Debt to Equity Ratio (2016) = (169107-85136)/85136 = 0.99

Debt to Equity Ratio (2015) = (169579-93708)/93708 = 0.81

From the above, it is apparent that over the period 2015-2017, there has been an deterioration in the debt to equity ratio as the balance sheet has become more leveraged amidst reducing contribution from equity to assets.

• Acid Test Ratio

Formula Used = (Current Assets-inventories)/Current Liabilities

Acid Test Ratio (2017) = (25542+ 17195 – 576)/(30595+11794)= 0.99

Acid Test Ratio (2016) = (31938+ 3657-716)/(41797+438) = 0.83

Acid Test Ratio (2015) = (27457-667)/39979 = 0.67

From the above, it is apparent that over the period 2015-2017, there has been an improvement in the acid test ratio of the company which augers well for the short term liquidity.

• Earnings per share (EPS)

Formula Used = (Net profit/Total outstanding shares)

EPS (2017) = -€ 0.2251

EPS (2016) = -€ 0.2025

EPS (2015) = € 0.2733

From the above, it is apparent that EPS for the company has deteriorated for the company during 2015-2017 which may be attributed to falling topline owing to which there has been loss for the company in FY2016 and FY2017.

• Dividends per share (DPS)

Formula Used = (Total Dividends Paid/Total outstanding shares)

DPS (2017) = € 0.1477

DPS (2016) = € 0.1448

DPS (2015) = € 0.1419

On the basis of the above, it is apparent that there has been increase in the DPS during the period 2015-2017 which augers well for the shareholders. This is despite the fact that company made losses in 2016 and 2017.

• Interest Coverage Ratio (Times Interest Earned Ratio)

Formula Used = (EBIT/Interest Expense)

Interest Coverage Ratio (2017) = (3725/1406) = 2.65

Interest Coverage Ratio (2016) = (1320/2046) = 0.65

Interest Coverage Ratio (2015) = (2073/1399) = 1.48

On the basis of the above, it is apparent that there is no particular trend as the interest coverage ratio has slumped in 2016 but has shown significant improvement in 2017. However, going forward the company should ensure to stabilise this at the FY2017 level.

• Debt to Total Assets Ratio

Formula Used = Total Liabilities/Total assets

Debt to Total Assets Ratio (2017) = (154684-73719)/154684 =0.52

Debt to Total Assets Ratio (2016) = (169107-85136)/169107 =0.50

Debt to Total Assets Ratio (2015) = (169579-93708)/169579 =0.45

From the above, it is apparent that over the period 2015-2017, there has been an deterioration in the debt to assets ratio as the balance sheet has become more leveraged amidst increasing contribution from debt towards assets.

• Dividend pay-out ratio

Profitability ratio

Formula used = (Dividends/Net Income)*100

Dividend pay-out ratio (2017) = (3714/-6079)*100 = -61.1%

Dividend pay-out ratio (2016) = (4188/-5122)*100 = -81.76%

Dividend pay-out ratio (2015) = (3758/7477)*100 = 50.26%

It is evident that there the dividend pay-out ratio is positive in 2015 and cannot be compared with the subsequent years i.e. 2016 and 2017 as in these years the company has made losses.

• Free Cash-Flow Ratio

Formula used = Cash flow from operating activities + Current Liabilities

Free Cash-Flow Ratio (2017) (€) = 14,223 + 30595 = 44,818 million

Free Cash-Flow Ratio (2016) (€) = 14,336 + 41797 = 56,133 million

Free Cash-Flow Ratio (2015) (€) = 12,668 + 39979 = 52,647 million

It is evident that there is no particular pattern with regards to free cash flow ratio but it is worse in 2017 as compared to 2016.

• Return on Capital Employed (ROCE)

Formula Used = Net Profit from continuing operations/(Total Assets – Current Liabilities)

ROCE (2017) = (-1972/(154684-30595)) = -1.59%

ROCE (2016) = (-5127/(169107- 41797)) =-4.03%

ROCE (2015) = (7805/(169579 – 39979)) = 6.02%

From the above computations, it is evident that there has been deterioration of ROCE in 2016 and 2017 in comparison to 2015 owing to company incurring a loss from continuing operations in both 2016 and 2017.

Summary & Conclusion

The performance of the company seems to have deteriorated in the period from 2015 to 2017 with majority of the ratios peaking out in 2015 and the worst year being 2016. While 2017 has been a better year but still the company is facing issues with regards to profitability and also the balance sheet seems to be highly leveraged.

The stock does not seem a good investment considering the fact that in the last two years the company has posted losses. Also, the amount of leverage on the balance sheet has increased. Additionally, going forward there would be significant amount of capital investments that would be required. Besides, the revenue of the company has remained stagnant for the last 3 years.  Also, the sector in general seems to be highly competitive owing to which the margins are quite thin.

With regards to giving loan, the liquidity and solvency ratios need to be taken into consideration. These ratios clearly are not very impressive for the company and also the profitability of the company is facing issues owing to which servicing of incremental debt and principal repayment may be a stiff task for the company and hence a company would not be happy by offering substantial loan to Vodafone.