MS70104E Financial Management for Decision Makers Assignment Sample
Part A
The financial ratio is also called as accounting ratio which is related magnitude in between the two numerical values (Supriyanto & Darmawan, 2018). This essay, this part has included an in-depth analysis and understanding of a business’s financial performance over a time period.
Financial ratios have been used in the essay to provide an explanation and analysis of the financial performance over the time period. The selected time period for providing analysis of the financial performance is 5 years.
This essay has selected Vodafone UK, one of the major telecom service providers in the UK, for the analysis of financial performance. Vodafone is a telecom service provider based in the UK and the company also provides telecom service in other countries across the world. Mobile telecom service along with the internet, Wi-Fi are the major services provided by the company.
In the UK, Vodafone is the largest telecom service, provider. Not only in the UK, but in other countries, the company also maintained a good approach as a telecom service provider.
Part B
Liquidity or solvency ratios
Table 1: Liquidity or solvency ratios Source: (Morningstar, 2021)
| Particulars | 2016 | 2017 | 2018 | 2019 | 2020 | 2016 | 2017 | 2018 | 2019 | 2020 |
| (%) | (%) | (%) | (%) | (%) | ||||||
| Current ratio (current assets / current liabilities) | 0.84 | 1.01 | 0.97 | 1.55 | 1.02 | 100 | 120.23 | 97 | 155 | 65.81 |
| Acid Test ratio ((current assets- inventories)/current liabilities) | 0.59 | 0.52 | 0.57 | 1.41 | 0.86 | 100 | 88.136 | 109.615 | 247.368 | 60.99 |
The study of Malik, et al. (2016), has claimed that the liquidity ratio involves a set of ratios that shows the ability of an organisation to pay its bills on time. The ratio also helps an organisation to avoid inventory that can create difficulty to convert the price into cash. In regard to solvency or liquidity ratio, this assignment has included four ratios of Vodafone namely current ratio, acid test ratio or quick ratio, receivable collection period, and payable collection period. In terms of the current ratio, the organisation has observed a fluctuation.
The fluctuation has occurred in terms of one year of increase and one year of decrease (Morningstar, 2021). On the other hand, the acid test ratio or the quick ratio shows that the company has increased the rate. In regard to both the ratios, it can be said that the company is quite able to pay its debts on time.
However, if the trend analysis is considered then it shows a consistent decrease for the firm. Further, it can be said that the company has maintained a well managed scenario with the decreased value of receivable collection period and increased payables period for aligning with the ratios. This is because the overall strategy of the company has been effective for Vodafone to maintain their daily operations as well as existing liabilities.
Asset efficiency or activity ratios
Table 2: Asset efficiency or activity ratios Source: (Morningstar, 2021)
| Particulars | 2016 | 2017 | 2018 | 2019 | 2020 | 2016 | 2017 | 2018 | 2019 | 2020 |
| (%) | (%) | (%) | (%) | (%) | ||||||
| Total Assets Turnover ratio (COGS/ total assets) | 0.166 | 0.199 | 0.211 | 0.199 | 0.171 | 100 | 119.88 | 106.03 | 94.31 | 85.93 |
| Current Assets Turnover ratio (COGS/ current assets) | 0.88 | 1.21 | 1.27 | 0.714 | 0.88 | 100 | 137.5 | 104.96 | 56.22 | 123.25 |
In order to understand how well Vodafone is using its assets for the generation of income, the asset efficiency or activity ratio has been analysed (Supriyanto & Darmawan, 2018).
The total assets and current assets turnover ratio have been selected, used, and assessed in the work for the analysis of asset efficiency ratio. Through the trend analysis, it is identified that the company’s current assets turnover ratio has been fluctuated to observed an increase of 23% in five years (Morningstar, 2021). On the other hand, the total assets turnover ratio was increased in the first year but since then it decreased by 15%.
Debt ratios or financial leverage ratios
Table 3: Debt ratios or financial leverage ratios Source: (Morningstar, 2021)
| Particulars | 2016 | 2017 | 2018 | 2019 | 2020 | 2016 | 2017 | 2018 | 2019 | 2020 |
| (%) | (%) | (%) | (%) | (%) | ||||||
| Gearing (long term debts/ total equities) | 68.83 | 64.51 | 61.24 | 85.11 | 121.67 | 100 | 93.72 | 94.93 | 138.98 | 142.96 |
| Interest cover ratio (Operating profit/ interest expenses) | 0.85 | 2.63 | 4.26 | -0.37 | 1.28 | 100 | 309.41 | 161.98 | -8.68 | 545.95 |
For analysing, a company’s operations’ leveragability of the investment made by shareholders or funding, the evaluation of debt ratio is performed (Fullwiler, 2016). Here, the gearing and interest cover ratio of Vodafone has been performed to assess the status of leveraging.
It is also seen from the gearing trend analysis that the company has increased the value by 42% in five years (Morningstar, 2021). Although, Vodafone had observed a reduction in the first two years. With the increase of 42% in five years, Vodafone represents itself as an attraction of shareholders. On other hand, the interest cover ratio of the company has also been fluctuated to increase at a high level.
Profitability ratios
Table 4: Profitability ratios Source: (Morningstar, 2021)
| Particulars | 2016 | 2017 | 2018 | 2019 | 2020 | 2016 | 2017 | 2018 | 2019 | 2020 |
| (%) | (%) | (%) | (%) | (%) | ||||||
| Net profit margin (Net profit / Sales)* 100 | -5127 | -1972 | 4757 | -4109 | -455 | 100 | 161.54 | 441.23 | 113.62 | 188.93 |
| Operating profit margin (Operating profit / Sales)* 100 | 0.04 | 0.09 | 0.11 | 0.09 | 0.20 | 100 | 180 | 122.22 | 81.82 | 222.22 |
| Return on capital employed
(Operating profit/ net assets or capital employed) |
0.0108 | 0.0275 | 0.3367 | 0.0283 | 0.0532 | 100 | 254.63 | 122.44 | 84.05 | 187.99 |
The performance of a company is measured using the profitability ratios along with the ability of managing operations. Based on the profitability ratio, it can be said that the company has gained a significant increase in both operating profit margin and return on capital employed.
These aspects are just the representation of good profit generation for Vodafone.
Investor ratios
Table 5: Investor ratios Source: (Yahoo Finance, 2021)
| Particulars | 2016 | 2017 | 2018 | 2019 | 2020 | 2016 | 2017 | 2018 | 2019 | 2020 |
| (%) | (%) | (%) | (%) | (%) | ||||||
| EPS (Basic) | -0.20 | -0.08 | 0.16 | -0.16 | -0.03 | 100 | 160 | 400 | -100 | 181.25 |
| Share price | 216.62 | 217.74 | 170.03 | 146.58 | 117.57 | 100 | 100.52 | 88.09 | 86.21 | 80.21 |
| P/E ratio | -1083.1 | -2721.75 | 1062.6875 | -916.125 | -3919 | 100 | -51.29 | 239.04 | -86.21 | -227.78 |
The investment ratio of an organisation is performed to assess the level of profit for the shareholder. The scope of getting investment also increased with the investor ratio (Yahoo Finance, 2021). The P/E ratio of Vodafone has fluctuated over the five years but it has reached a high level in 2020.
Part C
In order to evaluate the strategic growth and performance of Vodafone, the annual report of the company for the past 5 years has been analysed. Overseeing the annual report, it is noticed that the company has been focused to develop technology and provide better services to the customers. The introduction of technology like 5G has been a major target of the company for over the past 3-4 years (Vodafone, 2021).
Along with this, improvement of service quality for customer satisfaction has also been a major part of the business. The investment of the company for such factors has shown the intention of Vodafone to grow in the market. Along with customer satisfaction, the organisation has also focused on improving the satisfaction of employees.
It is claimed that the improvement of employee satisfaction has been effective for the company to increase productivity and quality of services. Being a telecom service provider, the success of the company relies on the quality of service given by the staff and satisfaction level among customers after receiving the services.
Based on the factors, the organisation has focused on investing in training as well as improvement of employee capability to satisfy customers (Vodafone, 2021). Along with this, the organisation has also considered the competition in the market as a major component for the business.
By considering the competition in the market, Vodafone has focused on introducing new and innovative products in the market as well. The competition in the market has been the major factor for Vodafone to introduce 5G in the UK market before any other competitors.
Part D
Both the ratio and trend analysis have a number of limitations that can restrict to get better results for performing financial analysis. In terms of ratio analysis, it has a major limitation of using historic information rather than using current existing information (BBC, 2021). The current market has been fluctuating due to the Covid-19 pandemic.
However, the analysis has not considered the existing situation rather focus on historic data to analyse the information. Further, the ratio analysis does not consider account external factors like an incident of recession across the world. In this context, it can be said that the financial information of the company has been provided in general where the recession like situation due to Covid-19 has not been considered. Not considering the human element of the firm is also a major restriction of using ratio analysis for a company.
Ratio analysis also just provides information on the existing value of the ratio. However, the ratio analysis is more effective in doing a comparison between two companies. Based on the factor, it can be said that the ratio analysis has not included any comparison which also limits the ratio analysis of Vodafone.
On the other hand, trend analysis also has a number of limitations. The limitations of trend analysis involve the selection of a year as a base, but the selection of base year and base value is a major limitation (Supriyanto & Darmawan, 2018). The limitation has also been occurred and faced during performing the trend analysis of Vodafone UK.
Obligation to a consistent process of accounting principle also difficult in trend analysis. The same issue has also been during the identification of different ratios for Vodafone. It has led to making adjustments through the use of alternative principles for the trend analysis.
References
BBC, 2021. Ratios. [Online]
Available at: https://www.bbc.co.uk/bitesize/guides/zrxn47h/revision/5
[Accessed 22 May 2021].
Fullwiler, S., 2016. The debt ratio and sustainable macroeconomic policy. World Economic Review, 7(1), pp. 12-42.
Malik, M., Awais, M. & Khursheed, A., 2016. Impact of liquidity on profitability: A comprehensive case of Pakistan’s private banking sector. International Journal of Economics and Finance, 8(3), pp. 69-74.
Morningstar, 2021. Vodafone Group PLC. [Online]
Available at: http://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=10&vw=bs&SecurityToken=0P00007WPO%5D3%5D0%5DE0WWE%24%24ALL&Id=0P00007WPO&ClientFund=0&CurrencyId=BAS
[Accessed 22 May 2021].
Morningstar, 2021. Vodafone Group PLC. [Online]
Available at: http://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=10&vw=is&SecurityToken=0P00007WPO%5D3%5D0%5DE0WWE%24%24ALL&Id=0P00007WPO&ClientFund=0&CurrencyId=BAS
[Accessed 22 May 2021].
Morningstar, 2021. Vodafone Group PLC. [Online]
Available at: http://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=10&vw=kr&SecurityToken=0P00007WPO%5D3%5D0%5DE0WWE%24%24ALL&Id=0P00007WPO&ClientFund=0&CurrencyId=BAS
[Accessed 22 May 2021].
Supriyanto, J. & Darmawan, A., 2018. The effect of financial ratio on financial distress in predicting bankruptcy. Journal of Applied Managerial Accounting, 2(1), pp. 110-120.
Vodafone, 2021. Annual Report 2020. [Online]
Available at: https://www.vodafone.com/content/dam/vodcom/files/vdf_files_2020/pdfs/vodafone-annual-report-2020.pdf
[Accessed 22 May 2021].
Vodafone, 2021. Human Resources. [Online]
Available at: https://careers.vodafone.co.uk/hr-property-internal-communications-health-safety-wellbeing
[Accessed 22 May 2021].
Yahoo Finance, 2021. Vodafone. [Online]
Available at: https://uk.finance.yahoo.com/quote/VOD.L/history?period1=1585699200&period2=1617148800&interval=1mo&filter=history&frequency=1mo&includeAdjustedClose=true
[Accessed 22 May 2021].
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