Qatar Telecom and Vodafone Qatar - Research Paper Example

?Introduction The objective of public companies is to generate profits in order to maximize shareholders wealth. The use of financial analysis can help managers, accountants, or investors evaluate the financial performance of companies. One of the best sources of information to find data regarding the financials of a firm is the annual report. The annual report contains the financial statements of a company. The four major financial statements are the income statement, balance sheet, statement of retained earnings, and the statement of cash flow. One of the most effective tools to analyze the financial performance of an enterprise is ratio analysis. Ratio analysis uses data from the financial statements to develop financial formulas that calculate ratios. The purpose of this paper is to utilize ratio analysis to analyze the financial performance of Qatar Telecom Q.S.C. and Vodafone Qatar Q.S.C. during the last two years. Company profile Qatar Telecom Qatar Telecom is the leading telecommunications company in the small Persian Gulf country of Qatar. The company’s landline business operates in a monopoly market since the firm is the only company that provides that service. Some of the services that the company provides to its customers include landlines, wireless communication, internet, and cable television. The firm is a multinational corporation that operates in 17 countries. The majority ownership of the company is held by the government of Qatar who owns 55% of the firm. The remaining 45% is owned by private investors who openly trade their stocks in the Qatar Exchange. Company profile Vodafone Qatar Vodafone is a multinational corporation in the telecommunication industry that operates in over 30 countries. The firm was founded in 1985. The company has over 403 million customers around the world. The firm has used strategic alliances and partnerships to expand its reach. Its global network of partners is composed of 50 companies. The firm is considered the 7th most valuable brand within its industry. The organization has a diversified portfolio of products and services which includes mobile, business, and marketing solutions. Overview ratio analysis The use of ratio analysis can help companies evaluate the financial performance of an enterprise. The analysis is considered a quantitative tool. One of the advantages of applying ratio analysis is that it is easy to use. Any person that has basic business knowledge can retrieve the financial statements of a company and calculate its ratios. Nine additional advantages of the use of ratio analysis are listed below: Helpful in decision making Helpful in financial analysis and planning Helpful in communication Helpful in coordination Helps in control Helpful in shareholder’s decisions Helpful in creditor’s decisions Helpful in employees decisions Helpful in governmental decisions (Svtuition, 2011). Another virtue of the use of ratio analysis is its comparability. The ratios of different companies can be compare to evaluate which firm is the better investment alternative. The five major categories of ratios are liquidity, financial leverage, asset efficiency, profitability, and market value ratios. Ratio analysis Qatar Telecom A ratio analysis of Qatar Telecom for the years 2011 and 2012 is illustrated below. 2011 2012 Net margin 18.71% 13.79% Earnings per share QR 14.80 QR 9.88 Return on assets 5.82% 4.93% Return on equity 15.09% 12.60% Current ratio 1.01 1.05 Acid-test ratio 1.00 1.03 Working capital QR 304908000 QR 975749000 Debt ratio 0.61 0.61 Debt to equity 1.59 1.55 Qatar Telecom generated total revenues of QR 33.71 billion in 2012. The sales of the company increase by 6.14% in comparison with the previous year. The firm’s net income in 2012 was QR 5.94 billion. The organization was able to increase its net income by QR 1.3 billion since the previous year. The net margin of the company in 2012 was 13.79%. The net margin is a metric that measures the absolute profitability of the company. It is calculated by dividing net income by total sales. Qatar Telecom’s net margin decreased from the previous year by over 5%. A lower profitability is not a desirable outcome. The return on assets (ROA) and return on equity (ROE) of the company in 2012 were 4.93% and 12.60% respectively. The two formulas to calculate these ratios are: ROA = net income / total assets and ROE = net income / total equity. Return on assets measures how effective a company has been at generating profits from its total assets, while return on equity is a financial metric that measures the ability of the firm to obtain profits from its equity. The optimal outcome is to have high ROA and ROE results. Both the return on assets and return on equity of the company decreased in comparison with the previous year. The current ratio of the organization in 2012 was 1.05 which is slightly higher than its 2011 result of 1.01. A current ratio measures the ability of a company to pay off its short term debt (Investopedia, 2013). The formula to calculate current ratio is current assets divided by current liabilities. The firm’s current ratio during both years was acceptable due to the fact that a current ratio is considered good if is above the 1.0 threshold. The acid-test ratio is another solvency ratio similar to the current ratio. The difference between the acid-test and the current ratio is that in the acid-test ratio inventory is subtracted form the numerator of the formula. The firm’s acid-test during both 2012 and 2011 was good. The working capital of the company during 2012 was QR 975,749,000. The formula to calculate working capital is current assets minus current liabilities. Working capital is a ratio that illustrates the ability of a company to pay off its short term debt using solely its current assets. The result of the working capital of Qatar Telecom during both years was acceptable. The debt ratio of Qatar Telecom during both 2012 and 2011 was 0.61. A debt ratio is calculated by dividing total debt by total assets. The debt ratio of the company shows that the firm does not have a lot of debt in relation to its assets. The debt to equity ratio of the enterprise during 2012 was 1.59 which is 0.04 higher than the previous year. The debt to equity ratio is a measure of the amount of assets being provided by creditors for each dollar of assets being provided by the stockholders (Garrison & Noreen, 2003). Ratio analysis Vodafone Qatar A ratio analysis of Vodafone Qatar for the last two fiscal years is illustrated below. 2011 2012 Net margin -39.67% -29.97% Earnings per share QR -0.43) QR -0.39 Return on assets -4.39% -4.06% Return on equity -5.37% -5.24% Current ratio 0.24 0.57 Acid-Test ratio 0.22 0.54 Working capital QR -805549000 QR -273332000 Debt ratio 0.18 0.22 Debt to equity 0.22 0.29 Vodafone Qatar generated total sales in 2012 of QR 1,091,463,000. The sales of the company increase by 21.26% since the previous year. Despite the solid sales numbers that the company achieved its overall profitability was lackluster. The firm lost a combined total of QR 642,554,000 during 2012 and 2011. The net margin of the company in 2012 and 2011 were -29.97% and -39.67% respectively. The return on assets of the firm during 2012 was -4.06% and -4.39% in 2011. The return on equity results of the company during both years was also negative. The current ratio of the company during 2011 was 0.24. The result was dangerously low indicated that the company was having liquidity problems. The following year the company was able to boost its current ratio to 0.57. The working capital of the company during both years reflected that the company was not able to pay its current liabilities solely using its current assets. The debt to equity ratio of the firm in 2012 was 0.22. This metric indicates that the firm has a low amount of debt which is a favorable outcome. The debt to equity ratio results also confirmed that the company has low debt. Conclusion The use of ratio analysis is an excellent tool to compare the financial results of two companies. The results of the ratio analysis clearly showed that Qatar Telecom has superior profitability results than Vodafone Qatar illustrated by the fact that the net margin of Qatar Telecom in 2012 was 13.79%, while the net margin of Vodafone Qatar was negative 29.97%. Vodafone Qatar has not been generating any profits neither from its assets or equity. Investors that evaluate the EPS of both companies would be extremely disappointed by the negative EPS results of Vodafone Qatar. Qatar Telecom is in a solid position in terms of its liquidity. The current ratio, acid test, and working capital results of Vodafone Qatar all show that the firm is facing liquidity problems. Vodafone Qatar has less debt than Qatar Telecom. Typically having lower debt would be a preferable outcome, but this is not the case when comparing these two companies. Qatar Telecom has utilized debt to grow its business. The ratio analysis performed clearly shows that Qatar Telecom has superior financial performance and it is a better investment option. References Investopedia.com (2013). Current Ratio. Retrieved April 6, 2013 from http://www.investopedia.com/terms/c/currentratio.asp Garrison, R., Noreen, E. (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. Svtuition.org (2013). Advantages of Ratio Analysis. Retrieved April 6, 2013 from http://www.svtuition.org/2011/12/advantages-of-ratio-analysis.html Read More