Finance and Accounting - Essay Example

Finance and Accounting The companies chosen for the financial analysis are Vodafone Qatar and Qatar Telecom (Qtel) also known as Ooredoo. Vodafone and Ooredoo are the only two telecommunication service providers within Qatar. Both the companies are listed on the stock exchange. Ooredoo, formerly known as Qatar Telecom (Qtel), initiated its business within Qatar in 1949 by starting the first telephone exchange within the country’s capital Doha. Qatar Telecom led as a giant within the telecommunication industry within Qatar until 2008. By June 2008, Vodafone received was awarded telecom operating license within the country, making the company as the second mobile phone service provider within the country. Vodafone started its services within Qatar on 1st March 2009. Since both the companies operate within the same sector, a fair comparison between the performances of the two would be more fruitful. The best technique available to analyze the financial performance of both the companies would be to use ratio analysis. There are various ratios which can be used to evaluate the performance. Following are the ratios which have been calculated to assess the financial performance of both the telecom service providers. Ratios 2011 – Qatar Telecom 2010 – Qatar Telecom 2011 – Vodafone Qatar 2010 – Vodafone Qatar Liquidity Ratios Current Ratio 1.01 1.73 0.49 0.62 Acid Test Ratio 0.99 1.71 0.48 0.56 Gearing Ratios Debt-to-Equity 1.59 1.96 0.19 0.09 Debt to Total assets 0.61 0.66 0.16 0.09 Efficiency Ratios Interest Cover 4.60 3.57 -18.66 -25.41 Receivables Turnover 5.46 5.77 4.67 3.05 Average Collection Period 67 days 63 days 78 days 119 days Total Asset Turnover 0.31 0.27 0.11 0.04 Profitability Ratios Net Profit Margin 18.71% 14.93% -64.25% -186.26% Return on Investment 5.82% 4.03% -7.13% -8.00% Return on Equity 15.08% 11.94% -8.45% -8.79% (Annual Report – Vodafone, 2011; Annual Report – Qatar Telecom, 2011) Liquidity Ratios Liquidity ratios tend to assess a company’s ability to clear off their debts when they fall due. The Current Ratio assesses a company’s ability to pay off its shot term obligations via its current assets. While Acid Test ratio evaluates a company’s performance to pay off its obligations with its most liquid assets (except the inventories). Both these ratios address the bankruptcy issue. According to the calculated ratios, Qatar Telecom’s liquidity position seems to be strong as compared to Vodafone in both the years 2010 and 2011. Qatar Telecom’s personal liquidity ratios have deteriorated in 2011, compared to 2010, but then even the company has a stronger position as compared to Vodafone, which almost has balanced proportion between its current liabilities and its current assets. Vodafone’s personal current and acid test ratio has reduced in the year 2011 and it currently has a ratio of 0.49:1 and a 0.48:1 current and acid test ratio. Gearing Ratios Gearing ratios analyze the proportion of debt to equity within the financing of a company. These ratios illustrate as to how much a company is financed via and how much via equity. A company having more loans and less equity is said to be highly geared and is considered to be more risky but having said that, it can never be stated that a low geared company is good, since it is considered to be taking less initiative, hence a balance is to be maintained. According to the calculated ratios, Qatar Telecom is highly geared as compared to Vodafone. The ratios clearly illustrates that the Qtel’s debt financing is 1.59 times its equity financing. Qtel has reduced its debt financing by paying off some of its debt as compared to the year 2010 but this has not been a significant reduction. Qtel’s debts almost amount to 61% (0.61) of their total assets, hence it can be seen that the company has heavily relied upon debts. Vodafone on the other hand has too little debt financing and it can be seen from the ratios that the company prefers equity financing over debt financing. As compared to the year 2010, Vodafone has increased its debt financing in the year 2011. The company has increased its debt financing, creating a hike of 10% to its debt to equity ratio. The 2011 debts of Vodafone are almost 19% (0.19) while its equity financing is almost 81% (100-19). Efficiency Ratios These ratios assess a company’s ability to use their resources efficiently and make the most out of them. Interest Cover This ratio evaluates a company’s ability to pay off its financing costs from its earnings. The ratio assesses the strength of the earnings of a company in comparison to its interest costs. According to the calculated ratios, Qtel’s interest cover ratio has improved in the year 2011 as compared to 2010 as its suggests that the company has 4.6 times the earnings to its present finance/interest costs and that it can pay off such costs easily. Vodafone, on the other hand has a unfavorable position as the company has not produced profits within the year 2010 and 2011. Hence the company’s interest cover ratio does not seem good, though the company has improved on that in the year 2011 as compared to 2010. Receivables Turnover This ratio reflects a company’s ability to extend debt and gives and insight to the amount of receivables in comparison to the Sales revenue. This ratio tells how much of the revenue has been stuck up within debtors. According to the calculated ratios, Qtel has higher debtors than Vodafone with respect to the revenue that both the companies generate. Average Collection Period This ratio gives an idea as how quickly the debts are recovered. According to the calculated ratios, Vodafone takes too much time to recover its debtors as compared to Qtel but they have improved their recovery rate from being 119 days in 2010 to 78 days in 2011. Qtel on the other hand has minutely increased its collection days. Total Asset Turnover This ratio illustrates a company’s ability to generate revenue in comparison to its investment within the assets of the company. Qtel’s Asset Turnover ratio has improved from being 0.27 in the year 2010 to 0.31 in the year 2011. Vodafone’s asset turnover ratio has also improved from being 0.04 in 2010 to 0.11 in 2011. Comparing between the two companies, the asset turnover of Qtel is much better. Profitability Ratio These ratios evaluate a company’s ability to generate profits. Net Profit Margin Net Profit margin shows the percentage of the net profit to the company’s revenue. Qtel’s net profit margin has improved from being 14.93% to 18.71%. This suggests that the company is performing well with respect to profitability. Vodafone, on the other hand, due to its losses has not been able to show good results for its shareholders, but considering the net profit margin ratio of Vodafone, it can be said that the company performance has improved in the year 2011 as compared to the year 2010 as the company has hugely reduced its net profit margin ration from 186.26% (2010) to 64.25% (2011). Return on Investment This ratio provides an idea to the investors as to the return that that would extract from the company. The return on investment for Qtel has improved and has increased by 1.79% (5.82-4.03). Vodafone’s return on investment has also improved but the company’s losses would not be able to make them give any good to their investors. Return on Equity This shows the return to the shareholders of a company. According to the ratios, the return to the shareholders within Qtel has increased from being 11.94% (2010) to 15.08% (2011). Vodafone on the other hand has improved a little but there would not be anything good for the shareholders because of the losses. Conclusion From the ratios, it can be derived that the financial performance of Qtel is way better than Vodafone but it can be argued that Vodafone is still within its early and growing phase and that the company has shown good prospects, hence it can improve with the passage of time. Work Cited Acca - F9 Financial Management: I-learn. Gardners Books, 2009. Print. Consolidated Financial Statements. Qatar Telecom (Qtel) Q.S.C. 2011. Web. Retrieved from: http://www.ooredoo.qa/idc/groups/public/documents/document/annual_report_2011p4_en.pdf?CSRT=16284820931862690394 Annual Report. Vodafone, 2011. Web. Retrieved from: http://www.vodafone.qa/files/dmfile/AnnualReportwebsiteversionEN.pdf Read More