Vodafone

1.0 Introduction

The boom years in mobile phone market are over but nobody can tell with certainty if days of glory will ever come back in this volatile market which is desperately looking for its identity. A new beginning is what everyone expects to see in this highly competitive market that is surrounded by uncertainty, risky investments and a not so optimistic future. This report will concentrate on one of the big players in the mobile phone market, “Vodafone Group Plc”, and its financial position. It will also provide a closer look and evaluate the financial performance of вЂ?Vodafone Group Plc’, through the detailed analysis of the firms’ annual reports and financial statements.

Financial analysis gives users an overall understanding of why the company is performing the way it does, and helps the management to identify deficiencies and then take actions to improve performance. Financial reports often carry a huge amount of information and it is difficult for even experienced and trained users of annual reports to make much sense of them. It is probably almost impossible, for the average shareholder to do so, as well. In this report Vodafone’s financial performance will be critically evaluated, through the use of ratios, a method which enables you to screen the information rapidly and simplifies the assimilation of the crucial aspects of a firm’s performance (Bill Rees, 1990). Ratio analysis has been conducted for the last two years (2002-2003) and it is based on five different aspects of financial performance of Merchant Retail Group Plc, which are: (a) Profitability, (b) Liquidity, (c) Efficiency, (d) Investment and (f) Financing. Each performance aspect is going to be discussed, explained and the impacts that major events have in the figures, will be identified. Then comments in the chairman’s statement and directors’ report will take place as well as comments on the auditor’s report and identification of significance changes on the accounting policies used in the groups’ financial statements.

Lastly, conclusions are going to be extracted regarding the Group’s financial performance position and future.

2.0 Company’s General Performance

During the year, Vodafone Group Plc, exceeded expectations and enjoyed strong growth in customer base and turnover and succeeded in launching many new projects such as Vodafone live and mobile office. Profit before taxation, goodwill and exceptional items was up 34% at Ð'Ј8.4 billion. Free cash flow was more than double from last year at Ð'Ј5.2 billion. Capital additions were Ð'Ј4.8 billion, with the ratio as a percentage of turnover for their mobile businesses down to 16.3%. Group net debt was Ð'Ј13.8 billion. In addition, Vodafone managed to further expand their operations in Europe, America and Asia through new partnerships and acquisitions. Furthermore, according to their accounts, Vodafone is further developing its partner network strategy to extend brand presence more cheaply whilst improving roaming products to customers. Despite concerns over political stability and troubled equity markets Vodafone's share price (See Appendix H) outperformed other large FTSE companies and the telecommunications sector as a whole. Nonetheless, the board don’t feel the share price fully reflects the company's performance and believe the price can go even higher. Because of Vodafone’s strategy which is growth through geographical expansion and the development of new services, they managed to reach the top position in the UK mobile market according to Oftel’s official research ( See Appendix F).

Lastly, the group’s strengths, weaknesses, opportunities and threats were identified and presented in Appendices (See Appendix I).

3.0 Ratio Analysis

Ratios are basic formulas that are being designed for anticipating future conditions and as a starting point for planning actions that will affect the future course of events. The ratio analysis can be compared with past record of the company or with the industries.

3.1 Profitability Ratios

Profitability ratios are used to indicate to the users of accounts how much profit the company has made and then to compare it with previous periods or with other entities. The absolute level of accounting profit will not be of much help, because it needs to be related to the size of the entity and how much capital has got invested in it (J.R. Dyson, 2001). There are four main profitability ratios:

 Return on Capital Employed Ratio (ROCE)

(Net profit before Interest and taxation / Capital Employed)*100

The most commonly employed Return on Investment ratio is ROCE ( Philip O’Regan, 2001, p.253). The ROCE Ratio is the best way of assessing profitability (J.R. Dyson, 2001), which it states the net profit as a percentage of the amount of Capital Employed. However, it is easier to spot a low ROCE than a high one, because there is always the chance that the company’s Fixed Assets, especially property, to be undervalued in the company’s balance sheet, and so the capital employed figure might be unrealistically low.

 Net Profit Ratio

(Net profit before interest and tax/Total sales revenue)*100

The Net Profit Ratio shows the percentage of net profit to total sales. It’s difficult to compare the net profit ratio for different entities, because they have different levels of expenditure, so it is best and more realistic if we use it in making internal comparisons.

 Cash Return on Capital Employed

(Net Cash flow from Operating Activities/Net Operating Profit)*100

The Cash Return on Capital Employed shows the amount of cash that have been generated from the asset base. Investors may not accept the profit as cash and for that reason they ask for a ratio that calculates the return on capital employed in relation to Net cash received in the company.

Table 1: Profitability Ratios for Vodafone Plc

For workings see Appendix A

2003 2002

ROCE -3,83% -8,83%

NET PROFIT RATIO -17,96% -55,56%

CASH