Vodafone Ratio Analysis

What can you tell us about the liquidity, activity, profitability and coverage results for your company? Vodafone’s liquidity ratios increased in 2012 from the 2011, showing that they are increasing their short term ability to pay their obligations due. In 2011, Vodafone’s liquidity ratios showed that they had a short term ability to pay for just over half of their obligations, whereas in 2012, they were able to pay for about three-quarters of their obligations. Vodafone’s activity ratios decreased from 2011 to 2012. This would mean that they were less effective in the usage of their assets in 2012 versus in 2011. Similar to their activity ratios, Vodafone’s profitability ratio’s decreased from 2011 to 2012. This would lead investors or creditors to believe that the success of Vodafone is declining, although not by much.

For example, the rate of return on assets decreased because the both the net income and average total assets have been slowly declining since 2010, but the average total assets have declined at a steeper rate than the net income has been declining. Unfortunately, the two coverage ratios that were calculated did not bring similar results to each other. Although the debt to assets and the times interest earned ratios both increased from 2011 to 2012, the debt to assets ratio increased by 0.02 times whereas the times interest earned ratio increased by almost 613 times. Vodafone seemed to have an unusually low interest expense in 2012, creating a high times interest earned ratio.

Is there anything in your Wall Street Journal search that provides additional information to help you interpret these ratios? The Wall Street Journal article simply reinstates what the ratios for 2012 and 2011 are showing; Vodafone’s business is declining due to a number of reasons such as unsuccessful mobile expansions, and the declining business throughout Europe. The article stated that the pace of declined almost doubled, hinting investors and creditors to what their 2013 ratios might look like at the end of the year if the decline continues at the same rate. Current and future investors should be cautious of Vodafone’s future.

LONDON—Mobile revenues at PLC dropped slightly more than analysts expected in the final quarter of 2012, as Chief Executive Vittorio Colao said he can’t make out when a steepening revenue decline at the company will abate or turn around. “I cannot give you a quarter when this will happen,” Mr. Colao said Thursday. He said the situation would improve as Vodafone cuts costs and moves customers onto service plans that charge for different levels of data usage while offering unlimited calls and texts. Revenue fell 2% to £11.39 billion for the quarter. Service revenue, the more closely watched figure that excludes handset sales, dropped 2.2% to £10.37 billion for the quarter compared with the prior year. Performance was worse when stripping out merger and acquisition activity and currency fluctuations: a 2.6% decrease in service revenue globally for the quarter, compared with analyst expectations of a 2.4% fall. The pace of decline nearly doubled from the previous quarter. Vodafone has been reeling primarily because its growing mobile businesses in countries such as India and Turkey have failed to offset exposure to challenged European markets that comprise the bulk of its empire.

More than two thirds of Vodafone’s service revenue comes from Europe, where a drawn-out decline has been led by hemorrhaging businesses in Italy, Spain, Greece and Portugal. Service revenue for the quarter in Vodafone’s Southern Europe region—which includes those four countries, as well as Albania and Malta—dropped to £2.34 billion, a 17% decline from the prior year. Chief Financial Officer Andy Halford declined to say whether Vodafone would log another write-down on its businesses in hard-hit European regions. “In markets that have been on a progressive downward slide, it is not easy to call the bottom on all of those,” he said. The company announced a £5.9 billion write down on the value of its Spanish and Italian businesses in November because of challenging market conditions. The move came after Vodafone booked £10.2 billion in impairment charges in the 2011 and 2012 fiscal years because of struggling European markets. “We don’t see a dramatic change in economic conditions in Europe in the coming quarters, so we expect headwinds,” Mr. Colao said. Vodafone also struggled in European markets with better macroeconomic outlooks.

Revenue suffered a 5.9% decline in Germany after the country’s network regulator drastically slashed the rates mobile operators are allowed to charge one another to connect calls. When stripping out merger and acquisition activity and currency fluctuations, German revenue declined only 0.2%. Intense competition in the U.K. also drove a decline there. Service revenue in Northern and Central Europe jumped 5.9% to £4.84 billion but declined 0.9% when stripping out currency fluctuations and M&A. One bright spot for Vodafone apart from its booming Turkish business has been its 45% stake in Verizon Wireless, or VZW, the U.S. mobile operator formed in 2000 as a joint venture with Verizon Communications Inc. Service revenue at VZW jumped 8.7% in the quarter, when stripping out currency fluctuations and M&A, as the U.S. operator added customers.

Verizon Communications Chief Executive Lowell McAdam has expressed interest in buying Vodafone’s stake in the venture. Meantime, Vodafone is benefiting from exposure to the U.S. Vodafone “must be thinking ‘good thing we didn’t sell that VZW thing,'” Sanford C. Bernstein & Co. analyst Robin Bienenstock said in a note on Thursday’s results. Mr. Colao said Vodafone’s troubles in Europe aren’t linked to his thinking about the future of the company’s minority stake in VZW. “We have a portfolio benefit in having made the decision to stay there,” Mr. Colao added. “Having said that, we regularly review the situation. For the time being, we are happy with this portfolio allocation.” Vodafone reiterated its guidance for the fiscal year. It said full-year operating profit would fall between £11.5 billion and £11.9 billion, while free net cash flow would come in between £5.3 billion and £5.55 billion