Financial analysis of Vodafone and Exeter University - Essay Example

? FINANCIAL ANALYSIS OF VODAFONE AND EXETER Financial performance of an organization is the most indispensable factor that is considered to evaluate its success or failure in the dynamic competitive business world. It is important to analyze the financial structure of a firm in order to ascertain its financial position as well as its real worth among the stakeholders who are directly or indirectly attached to the working of the company. This current study aims to reflect upon the CORE analysis of two renowned organizations, one being a public firm, Nottingham City Council’’ and other being a private undertaking, ‘Vodafone’ in regard to their financial performance. Based on CORE analysis that is context, overview, ratio and evaluation a comparison between the two different organization in work and objectives would be made (Bates, K. and Moon, P, 1993). CORE ANALYSIS VODAFONE Vodafone Group being a private company deals in the global telecommunication business which is headquartered in UK and spread across 30 countries. The organization extends a wide span of voice and data services to many countries across the world through the medium of mobiles. The span of control extends from Europe, Africa, and Middle East, America to Asia-Pacific. The product line of the company ranges from fixed line, internet services to digital television. The total revenue of the organization in the year 2010 was ?44.47 billion; the operating income was calculated to be ?9.480 billion and the total profit was ascertained to be ?156.98 billion in 2010. The organization stands second in terms to total number of subscribers. The company is a listed company featured in the primary list of London Stock Exchange and secondary listing on NASDAQ, also being a fundamental component of 100 Index. The total revenue of the Vodafone group has witnessed an 8.4 percent increase, reaching almost ?44,472 million. The earning before income and tax also marked a significant increase by 1.7%, reaching almost ?14,735 million. The strategic objectives of Vodafone are: The organization aims to increase its revenue manifolds and attain a significant reduction in costs especially in European region. The company aims to satisfy its customer clientage and deliver the most innovative solutions for meeting the communication needs and requirements of its customers. Establish a robust and emerging market. The organization aims to manage a dynamic portfolio in order to render the maximum gains to its investors and shareholders. The capital structure of the firm must be aligned in such a manner that the return and strategy are both in tandem with each other and the shareholders gain maximum returns with the new three year dividend target. The Key Performance Indicators of Vodafone are based on the continuous monitoring and control by the Board of the Directors along with the Executive Committee to measure the financial performance of the company against the strategic objectives. The performance is measured on both the financial and non-financial terms reflecting upon the organizational strategy and operations. The free cash flow generated by the organization values ?7,241m which can be used by investments and other financial purposes such as manager’s salary etc. The organic growth of the company is estimated to be ?4,051m , almost 19.3 % The capital expenditure incurred by the company for meeting the needs and requirements of its customers is ?6,192m It was witnessed that at the end of the financial year 2010, many markets relocated to NPS that is another source to measure the customer satisfactory levels. EBITDA is used as a measure to monitor and control segment wise performance of the company which is calculated to be ?14,735m (7.4) % in 2010. Apart from the above, the performance of the company can also be judged from the total increase in employees from last year to a count of 5893 employees out of which major senior positions have been grabbed by female employees. Vodafone has to combat threat of fierce competition among few players in the market. The financial reports and statements generated by Vodafone are in compliance to International Financial Reporting Standards (IFRS). The organization has added a special feature in its accounting analysis that is a “proportionate turnover" analysis. However, the company has been criticized on grounds such as the tax avoidance. It was revealed that Vodafone had acquired Mannesmann via a Luxembourg subsidiary, just to fulfill its sole objective of saving taxes and displayed all the profits incurred as a part of Luxembourg. . The corporate image of the company was greatly hindered due to which many stores were shut down. Tax avoidance is generally rare seen in multinationals. Vodafone has been under constant tax issues and on the other hand it is trying to polish its tarnished image by emphasizing on sustainable strategy and reducing carbon emissions. However, the company statements reveal that by the end of 31st March, 2010, the projected interest charges on all tax amounts were estimated to be ?1,312 million in comparison to the year ?1,635 million). Even the tax rate has been reduced to a considerable amount due to the German contract influence where most of the losses were written down. The German authorities have imposed a total tax worth ?2,103 million, saying that all the benefits that have derived by Vodafone in the past years are tax deductible. Such events have made Vodafone a part of consistent tax issues arising in recent past. Evaluation The operating return on equity for Vodafone is almost 0.09 which means that for every additional ? of equity investments, the firm earns 0.09 pence as profit which is to an extent a positive sign for the firm but can be improved by incorporating effective changes in the capital structure and investment opportunities of the firm. The firm is able to earn a reasonable ROI, however better management of current assets can further add additional gains for the company. The company has attractive net profit margins which reveal that lot of opportunities are opened for the firm. The average debtor collection period is 72 days which is quite high. The organization can opt for attractive schemes of discounts through which the debtor collection period can be reduced and cash collections could be increased. The outstanding cash amounts for creditors reveal that the company does not have enough liquidity to pay off the short terms cash needs, hence measures need to be adopted for effective cash management. The current assets of the company are less than its current liabilities in comparison to the ideal ratio where assets must be double then the liabilities. Under such circumstances, it is clear that Vodafone does have not had enough liquid funds to meet its current liabilities. Proper working capital management techniques have to be applied for improvising the current scenario. The inventory turnover also reflects a smooth running of the business. Out of the total capital employed, a significant amount is financed through equity which is a positive sign for the firm in future. Overall the financial position of the company is attractive but has scope for additional areas that can be improvised upon. According to the auditor’s report of the company, it has been reflected that the management of the firm must impose effective controls over the company’s financial reporting as proper assessments of profits has not been done so far. The comparisons and calculation of ratios between a private and a public organization cannot be dome on a uniform basis as the method of preparation of accounts is dissimilar and the overall presentations of financial statements also differ. Hence accurate comparisons are difficult due to the varied nature of the two industries as well as the different span of work (McLaney, E. and Atrill, P, 2010), However ratio analysis individually for both organizations can be calculated and a comprehensive analysis can be made on the individual findings. UNIVERSITY OF EXETER Exeter propounded in the year 1955 is regarded as a top most university in UK that entails very high quality research standards and aims to extend maximum satisfaction for the students. The Exeter University has initiated progressive programmes whereby almost ?450 million funds are to be invested in student development and growth. ?48 million is supposed to be invested in the student services building, another ?25 million in establishment of Business School and approximately ?18 million in specific area for Biosciences. In the 2010-11 annual report published by the government, a total of ?66 million was granted to the university to propel its research activities, the grant was almost increased by 5.5% as compared to past years funding. From a comprehensive financial perspective, the university has witnessed: Consistent growth in incomes from the activities related to academics and other areas. The earnings of the university are increased on a continuous and supportive basis. The resulting impact and influence of the financial activities on the infrastructural developments have been progressive. The university aims to improvise on its performance levels by marking a growth of ?10 million annually. There has been a 12 percent increase in the total income totaling it almost ?227.2 million. At the same time the total earned income of the institution has also augmented by 15%, thereby reducing a significant amount of aid almost 31 percent that the institution receives from the Funding Council. Such enormous increase in the incomes is due to the hike in tuition fees and contracts that involve a considerable amount of ?14.2. The key performance indicators of the university are: The payroll which is depicted as a total percentage of the income is calculated to be 52 percent, quite less than the permissible figures. The cash and near cash position of the firm is quite strong for 2010 as ?54.7 million far above the warning level of ?15.0 million. The current ratio of the University for 2010 is 2.7, well satisfactory for management of day to day operations of the institution. The net liquidity days are calculated to be 90 whereas the alarming time period for the university is 40 to 50 days; hence all liquid liabilities are met to the optimum. When loan amount is calculated as a percentage of income, it is derived to be 41% when compared with the permissible warning level of 60%. Hence it clearly depicts the pace at which the university is expanding and growing. The university ensures that all the bank conventions and agreements are fully complied with. Evaluation Apart from the above financial indicators, being a public corporation and an educational institution, the objectives of Exter are different when compared to a private firm (Christensen, M., and Skaerbaek P, 2007). The university lays more emphasis on other performance parameters such as international recognition for intensive research programmes for the welfare of the students as well as the community, a challenging education structure benefitting students all across the world, enriching quality of education to students in campus as well as external competitive world, emerging as a university with a global perspective. On the contrary there have been negative notions regarding the quality of education delivered by the university. Though it is recognized among the top ranks institution who offer great research opportunities but at the same time, the academic excellence is somewhat ignored. The students are not very satisfied with the service delivery of the university when compared to the other top institutions. However the performance of the university is none the less when it was noticed from the statements that Exter has delivered almost ?400 million capital worth to the country in the year 2010 when compared to previous figures of 2002 that accounted for ?150 million contributed by Exeter to the UK economy. The university aims to strengthen its financial performance and make strong ties with the private sector. The university is supporting more than 5000 jobs, excluding other employments such as contractors, laborers etc. the students of physically challenged people. The university has slowly and gradually moved from 34th rank to 12th by the year 2010. Another perspective which is quite important for judging the performance level of Exter is its debt and fund management. The university currently requires ?4.8 million to pay off its interest accumulated on the bank debts. This is paid off by the interest received on the short term investments worth ?0.6 million. On the whole it can be said that the net debt position of the university has improved in the year manifolds, moving from ?1.5 million to ?37.8 million. The university is aiming to reduce its net debt to the maximum extent possible and relying less on state grants which have now been reduced to just 32 percent. As per the ratios calculate the debt – equity ratio of the organization is calculated to be 0. 78 %, this clearly reveals that the organization is trying to reduce its debt percentage and at the same time bear high risk by investing more in equity. However the organization has enough funds to bear the total debt risk as the solvency ratio of the firm shows that the total assets held by the firm are almost 2.5 times more than the total amount of debt entailed by Exeter. Even the current assets of the company are sufficient to bear the current debt risk of the institution. Hence slowly and gradually Exeter is aiming to reduce its external liabilities and emerge as an independent funding body. (As both the organizations chosen are different in objectives as well the nature of work, hence inter comparison within firms is not appropriate, however individual analysis has been given above) PART II Profit is the lifeblood for any organization to survive and grow at a consistent pace in the intense competitive world, however the profit perspective is quite different when a private and a public corporation is considered as the nature of the above organizations and their objective are completely different. For a private firm, its performance is primarily judged on its financial parameters while for a public organization what matters more is its compliance with social norms and social welfare of the community as a whole Anthony, R. (1978). As far as Exeter university is concerned, its aim is not to earn enormous profits but certainly raise its income level so that its debt and dependence on government grants can be reduced to a considerable level and all surplus gained can be put to profitable ventures such as research programmes etc for the welfare of the students and the UK economy. EXETER The main sources of income for Exeter University are recognized through the intermittent grants extended by the funding bodies almost 31 percent that are responsible for making all funding allocations for the university for the year 2010. All such sources and allocations are recorded in the income and expenditure account of the organization. The university has complied with the IFRS 18 Accounting policies and standards; however the principles for funding of various departments within universities as revealed in one of the papers by Whittington, G (1994) has not been followed completely. The organizations statements have been based on going concern concept as well as the historical cost concept that would certainly have an impact on its income statements as depreciation charged is on the original value of the asset and not on its revalued or current cost. The main source of income is the tuition fees charged to the students whereas in case of Vodafone the main sources are through the sale of telecommunication services. A major chunk of university’s income is accredited to the research grants availed by the government and other organizations. Such feature is completely eliminated in a private company where the profit perspectives are different and government support is minimal. The income statement is subjected to vary from a private firm as Exeter statements reveal Income from endowments and donations which are recorded in absolute value on a receivable basis. The profit figures are also influenced by the non-recurring grants extended by the funding bodies for the purpose of purchasing fixed assets or construction purposes of more campuses etc. these incomes are treated as Overdue capital aids and repaid through depreciation over the life of the assets purchased. Exeter is recognized as a truly charitable organization has exempted from all kinds of taxation to the extent where all gains and profits are attributed to charitable purposes. Straight line depreciation is charged hence, the deteriorated value or depreciated value is ignored charging a constant rate of depreciation which is usually higher thereby reducing the profit figures for the university. The inventory is recorded at a lower realizable value. Fair accounting concept is adopted whereby the income received internally from various subsidiaries of the university without including the Value Added Tax which in turn bloats the income figures for the institution. Accounting is critical and has deep impact on the funding aspects especially related to high education institutions, thus must be presented in the truest possible manner (Broadbent, J. and Guthrie, J, 1992). The income level are also high as the long term contracts of the university and the total turnover includes those values which are simply estimated but not yet invoiced or billed. Such recording do not represent the accurate income levels as they have not been realized yet (Jones, R. and Pendlebury, M, 2010). On the whole it can be said that a true and fair accounting standards have been adopted by Exeter and have recorded a considerable increase in the surplus when compared to past year, an increase of almost 1.8% of total income. However the fair value concept is based on the fact that the market is perfect and meets all requirements of stakeholders, however in the practical world it is difficult to find a perfect market, thus all records presented by the company are subjected to market changes and fluctuations (Whittington, G, 2008). VODAFONE Vodafone’s financial statements are ascertained based on historical cost basis and in compliance with the accounting standards as laid down by the ‘UK Accounting Standards Board” and recommended guidelines by the Urgent Issues Task Force. The profit statements, the key sources of income and their accountability are completely different when Vodafone, a performance driven organization is taken into consideration. The main attractions of the company have been its total cash generated even in times of economic recession, restructuring of its capital to give optimal gains to its shareholders and attractive working capital figures that eliminate all possible critical financial conditions for the company. The total turnover for the Vodafone group has increased by almost 8.4% accounting to ?44,472 million. However the operating profit of the firm has increased by 1.7% that is ?14,735 million. This increase in the profit figure is due to the changes resulting in the impairment losses. In the year 2010, Vodafone realized net impairment losses worth f ?2,100 million which were mainly offset by the gains realized from Vodafone Turkey and other groups due to the changes in discount rates. Unlike the case of Exter university, Vodafone ensures whether the current value of assets coincides with the net present value of future cash flows or not. For deriving at the profit figures, Vodafone generally determines the true and fair value of each and every component based on the prices at which the element is sold originally. According to Hoskin K. and Macve, R (1986), there have emerged numerous accounting practices for educational purposes. No organization adopts a single or straightforward way of accounting and so does Vodafone. The information revealed is presented to display the best image in front of outsiders. Vodafone also follows the same mode for revealing its profits. For every organization estimation of depreciation is critical for its profit figures, Vodafone uses the straight line basis for measuring the value of its fixed assets, however the impairment feature is inclusive. Vodafone believes that EBITDA that is ascertains does not entail few items that may have an impact on the company’s performance, hence to offset the imbalance the EBITDA is evaluated in coordination with the other GAAP and non-GAAP principles that gives a fair view of its operating profit figures. However the adjusted operating profit calculated by the firm does not include non-operating income, the impairment losses etc. Accounting is supposed to be manipulative, just to make it pleasing for the outsiders; the treatments are maneuvered (Hines, R, 1988 & Page, M. and Spira, L, 1999). However, there have raised issues regarding the reliability of the profit figures depicted by the company as the auditors also believe that Vodafone has not kept adequate records for verification of transactions, apart from it the parent company statements do not tally with the accounting records and returns, directors remuneration is not in accordance with the rules and regulations laid by the law. Under such circumstances the data revealed by the company is not sound and completely reliable so as with its profit statement, though the statements do show an attractive profit figure earned by the company in the current financial year where operating profit has increased by 25%, service revenue again by 25% and free cash flow by 35%. BIBLIOGRAPHY Anthony, R. (1978) Financial Accounting in Non-Business Organisations, Financial Accounting Standards Board (FASB), Stamford Broadbent, J. and Guthrie, J. (1992) Changes in the public sector: a review of recent ‘alternative’accounting research, Accounting, Auditing & Accountability Journal, 5, 2, pp. 3-31. Bates, K. and Moon, P. (1993) “Core analysis in strategic performance appraisal” Management Accounting Research, 4, 2,  pp.  139-153 Christensen, M., and Sk?rb?k, P. (2007), Framing and overflowing of public sector accountability innovations. Accounting, Auditing & Accountability Journal, 20, 1, 101-132 Elliott, B. and Elliott, J. (2009), Financial Accounting and Reporting, (13th edition), FT Prentice Hall, London Hines, R, (1988) Financial Accounting: In Communicating Reality, We Construct Reality, Accounting, Organizations & Society, 13, 3, 251-261 Hoskin K. and Macve, R. (1986), Accounting And The Examination: A Genealogy Of Disciplinary Power, Accounting, Organizations & Society, 11, 2, pp 105-136 Jones, R. and Pendlebury, M. (2010) Public Sector Accounting (6th Edition), Prentice Hall - McLaney, E. and Atrill, P. (2010), Accounting: an Introduction (5th edition), Prentice-Hall Page, M. and Spira, L. (1999) The conceptual underwear of financial reporting, Accounting, Auditing & Accountability Journal, 12, 4, 489 Whittington, G. (2008) “Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View” Abacus, 44, 2, p139-168, Whittington, G. (1994) On The Allocation Of Resources Within Universities. Financial Accountability & Management, 10, 4, p305-323 APPENDIX Calculation of Ratio for Vodafone 1. Operating Return on Equity = Net profit before interest and tax (PBIT)/equity = 8,671.9 ? m / 90,381 * 100 = 9% 2. Return on capital employed = PBIT / Capital employed Capital employed = non-current assets + current assets = 8,671.9 ? m//156,985 * 100 = 5% 3. Net profit margin = PBIT/ sales revenue = 8,671.9 ? m/ 44,461.4 ? m * 100 = 19.5% 4. Asset turnover =sales revenue/ capital employed = 44,461.4 ? m/ 156,985 = 0.28 times Activity (working capital) ratios Debtor days = Trade Debtors (x365)/sales = 8,784 * 365/ 44,461.4 = 72 days Creditor days = Trade creditors (x365)/purchases = 14082 * 365 / 29,432.0 = 174 days [Cost of sales is assumed as purchases as according to the IFRS, organizations are not required to reveal their purchase figures] Inventory days = Inventory (x365)/purchases = 433 * 365/ 29,432.0 = 5.36 days Liquidity and leverage (gearing) = Current ratio = current assets/current liabilities = 14,219/ 28,616 = 0.49 Financial leverage multiplier = Capital employed/ equity = 156,985/ 90,381= 1.7 Statements attached: University of Exeter Gearing Ratios 1. Debt Equity ratio : Total Debt/ Total Equity = 18151/23377 = 0.78 2. Equity Ratio : Owner’s Equity = 19660/3717 +37811 = 0.47 3. Solvency Ratio : External Debt/Total Assets = 18151/3717 + 37811 = 0.43 4. Current Asset Net Worth : CA/Net Worth = 37811/23377 = 1.62 Read More