Vodafone Company Analysis - Case Study Example

Introduction To determine, whether which investment to make or not, fundamental analysis of the factors deriving the value must also be explored to arrive at the fair value of the firm. There are fundamentally two types of analysis which are performed to determine whether an investment shall be made or not. The first approach is the fundamental analysis whereas the second approach is of technical analysis which is often done with the help of the charts. Fundamental analysis is then further divided into basic approaches of top-down and bottom-up approaches.

In the top-down approach, an analyst often starts the analysis of the macro factors such as the macroeconomy of the country, industry trends, and sector analysis before finally studying the company and its financial performance. Fundamental analysis is believed to be one of the most important tools that can be used to assess the financial performance of the firm to enable the analyst to assess a range of prices that can be taken as base prices to decide whether to buy or sell a security. This paper will discuss some of the fundamental analyses of the Vodafone Plc – one of the leading companies in the UK.

This analysis will look into some of the key financial ratios of the firm in 2009 besides studying some of the market news and information about the firm. Based on this analysis, recommendations will be made to whether the stocks of the firm shall be purchased or not. Introduction to Firm Vodafone Group Plc has considered one of the leading telecommunication services providers in the world having a strong market presence in the UK as well. Headquartered in the UK, it has more than 300 subscribers who are availing the services of the firm all over the world.

Over some time, the firm has been able to make some of the most important strategic investments in different markets of the world to continuously expand its services in its non-traditional markets even. The most recent initiative by the firm includes cost-cutting to improve profitability as well as create a sustainable business to maintain its market share. (Wray,2009). In 2009, the overall revenue of the firm recorded revenue of GBP 41 Billion whereas the overall net income of the firm decreased by approximately 68% in 2009.

The data from competitors, however, show that companies like Orange and Deutch Telekom have recorded relatively larger revenues as compared to the revenues recorded by Vodafone. This data indicates the recent performance of the firm may not be entirely satisfactory even though it has been able to increase its revenue. However; fierce competition in the market seems to be one of the leading causes of the decrease in the profitability of the firm during 2009. The following section will discuss the financial performance of the firm in great detail.

Financial performance of the firm Vodafone is the second to China Mobile in terms of the total number of subscribers in the world however, its recent performance has shown considerable decline in the financial performance of the firm as compared to its competitors. A review of the last three years of performance will indicate following performance in terms of revenue of the firm: 2009 2008 2007 41.006 B 35.458B 31.806 B The above performance indicates that the revenue of the firm has consistently increased during the last three years.

However, a further look at the profitability of the firm will suggest that diluted EPS of the firm decreased from 1.25 per share to 0.58 per share in 2009. This decline in the profitability of the firm, therefore, indicates that despite an increase in revenue of the firm, there is a decrease in the profitability of the firm. This decline in the profitability of the firm may be attributed to the increase in the overall cost structure of the firm as well as fierce competitive pressures that may have further decreased the prices of the firm.

As of Dec 2008, the firm’s total outstanding shares are 52.437 M with a declared buy-back program of the firm. The recent stock price history of the firm indicates a 52 weeks price range of 111.20p to 144.45 p whereas the current market price floating at 137.10 P. This performance of the firm indicates that the overall confidence of the investors’ in the performance of the firm may not be entirely satisfactory due to recent financial performance of the firm. Financial Ratios Profitability Ratios As of 2009, the profitability ratios of the firm are: Profitability Ratios 2009 2008 Revenue 41.917 35.478 Gross Profit 15.175 13.588 Net Profit 3.08 6.756 G.P. Margin 36.20% 38.30% Net Profit Margin 7.35% 19.04% This performance indicates that the overall Gross Profit of the firm has declined by approximately 2% whereas the net profit margin has declined by considerable margin i.e. from 19.04% to 7.35% which is a considerable decline over one year.

Liquidity Ratios Liquidity Ratios 2009 2008 Current Assets 13.029 8.724 Current Liabilities 27.974 21.973 Current Ratio 0.47 0.40 The above performance of the firm indicates that the firm’s current ratio is less than 1 however; it has improved in 2009 as compared to 2008. This trend may be reflecting the fact that the firm’s trade payables are relatively large thus increasing the overall current liabilities of the firm in a manner that is causing the decline in the current ratio. Stability Ratios Stability Ratios 2009 2008 Total Debt 41.373 27.154 Total Equity 84.777 78.043 Total Assets 152.299 127.27 Total debt to total assets 27.17% 21.34% Total debt to equity 48.80% 34.79% The above ratios indicate that the firm’s overall debt structure and ratios are stable and as such the overall stability of the firm is relatively good.

However, it is important to note that the total debt to total assets ratio and total debt to total equity ratio of the firm has increased. This increase in the critical ratios indicates that the firm’s overall riskiness may have increased during the year. Investors Ratio Investor Ratio 2009 2008 Net Profit 3.08 6.756 Total Equity 84.777 78.043 Return on equity 3.63% 8.66% Price Earnings Ratio 0.28   Diluted EPS 0.05 0.0125 The above ratios indicate that the return on equity has declined over two years.

This may not be a positive indication for the investors and as such the overall expectations of the performance of the firm may not be entirely up to the complete satisfaction of the firm. What is, however, important to note that the firm’s prospects may be relatively good because of its rapid expansion policy? This expansion into new markets may help to sustain the expectations of the investors. Recommendations The recent performance of the firm indicates that the overall profitability has declined in the current year whereas some other indicators are positive.

This is, however, may be attributed to the fact that overall economy of the UK and other developed countries remained depressed during the year and as such there was a general decline in consumer spending during this period. It is therefore advised that since due to the recent performance of the economy, the firm’s share price has declined to a level where it is an attractive buy option for the investors. Based on future expectations for the growth of the world’s economy as well as an increase in consumer spending, it is therefore advised that the firm’s stock is a buy/hold investment.

References 1. Wray, R (2009) Vodafone steps up cost-cutting as profits rise Guardian.co.uk, Available: http://www.guardian.co.uk/business/2009/nov/10/vodafone-cost-savings-increased Last accessed 16th November, 2009