Analysis of Financial Statement – Part 3

Part 3

In comparing Vodafone with BT Group Plc, we were mainly interested in the performance of these companies in terms of four key areas: profitability, efficiency, liquidity, and gearing. These are important rations from this information, we can get important information about a company’s financial viability, performance, profitability, liquidity, and solvency. Such information is important to creditors, investors, and other stakeholders.

In terms of profitability, the GPR (Gross Profit Ration), ROCE (return on capital employed), and net profit margins for both companies were calculated. Vodafone saw its return on the capital increase from -4% to 2% while that of BT Group Plc reduced from 18.3 to 17.9%. Return of Capital is an indicator of the efficiency with which a company is able to utilise capital employed and realise profitability (Tracy 2012). From the figures provided, Vodafone has the ability to generate profitability form capital employed while BT Group Plc is less capable given its reduction in this ratio compared with the previous year. As such, BT Group Plc is more efficient in terms of realising profitability form capital employed. While Vodafone had a consistent gross profit, that of BT Group decreased. This could be an indication of BT Group has incurred a higher cost of production relative to its revenue. Since Vodafone had a consistent gross profit margin, it means therefore that the company has a sounder financial viability that BT Group.

BT Group Plc is also less efficient in revenue creation compared to Vodafone because the company’s asset turnover has reduced while that of Vodafone has increased. Moreover, at BT Group, it takes longer to sell and replace inventory in comparison with Vodafone, which is an indication that BT Group is has reduced efficiency. It could be that Vodafone has tied up too much of its capital in raw materials or goods that in turn takes longer to convert into products, sell and realise a profit.

In terms of liquidity, both the current and quick ratios of Vodafone and BT Group were reviewed. While the current ratio of Vodafone reduced, that of BT Group increased. Current ratio analysis is a measure of a company’s ability to meet utilise its current assets in meeting its current liabilities. (Peterson & Fabozzi). An increase in current ratio such as that of BT Group is a sign that the company is highly liquid. On the other hand, the drop in Vodafone’s current ratio could be a sign that the company has short  higher short term liabilities relative to its current assets. Since a rise in short term liabilities has a damaging effect on a company’s liquidity, there is need for Vodafone to take the necessary steps in improving its current ratio. A review of BT Group’s current ratio in 2013 indicates that at the time, the company had a high trade liabilities leading to a lower current ratio. Nonetheless, BT Group took the necessary steps to reducing this ratio in the following As such, BT is in a better liquidity position compared to Vodafone.

In contrast, quick ratio signifies a company’s ability to offset its short-term debts using current assets (Vallabhaneni 2014). An analysis of Vodafone reveals a fall in current ratio while that of BT also improved. However, since BT has seen improvements in both its current and quick ratios, it is thus  has better liquidity in comparison with Vodafone.

Sahu and Charan (2013) opine that debt-equity ratio signifies the financial risk that a company has assumed in the form of total liabilities to finance its assets proportionate to its equity. A lower debt-equity ratio indicates that an organisation is secure (Papadopoulos 2011). the LTDER of Vodafone has increased while that of BT Group has decreased, compared to the previous financial years. This is a sign that BT Group has taken the necessary steps to realise a stable financial position by reducing its debt-equity ratio.

Based on the computed ratio analysis of both Vodafone and BT Group, it is evident that the profitability, efficiency, liquidity of Vodafone is better than that of BT Group. In terms of gearing ratio however, BT group is in a better position to offset its current interest payments than Vodafone. Also, BT Group has enjoyed a positive increase in investor ratio. Considering that the company also has demonstrated a better ability to turn its revenue into profit, the company’s stock would thus be of much interest to potential investors compared to Vodafone.

References

Papadopoulos, P., 2011. Investment report – fundamental analysis/ ratio analysis. GRIN Verlag.

Peterson, PP & Fabozzi FJ 2012. Analysis of financial statements. New Jersey: John Wiley and Sons.

Sahu PA & Charan P (2013),’ Ratio analysis is an instrument –for decision making –a study’, Asia Pacific Journal of Research, vol. 1, no. 8, pp.36-41.

Tracy, A (2013). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. London: Ratio analysis.

Vallabhaneni, SR (2014). Wiley CIA excel exam review 2014: part 1, internal audit basics. New Jersey: John Wiley and Sons.