Accounting & Finance

Rationale for choice of ratios:

Ratio analysis is one of the most commonly used measures of performance of companies. One of the key advantages of ratios is the ability to enhance comparison of companies with different sizes and hence it will be the most appropriate measure of historical performance for the three companies. Ratios can be categorized as liquidity, solvency, efficiency and profitability. This report will make use of ratios from all the four categories to give an objective measure of the company financial performance over the five year period. The following ratios will be used in this study.

Liquidity ratio:

These are ratios that measure the ability of the company to meet its short term debt obligations when they fall due. This is a very important ratio as it shows the company prudent working capital management. The following ratios will be used in this report:

Current Ratio:
It measures the ability of the company to meet its short term debt obligations using the current assets. This ratio is very important as it shows the ease with which a company is able to undertake its daily operations.

Quick Ratio:
This is a similar ratio to current but it is the most accurate measure of liquidity as t shows the ability of the company to meet its debt obligations using the most current assets which are basically cash and cash equivalents as well as short term marketable securities. The current asset consideration excludes inventories.

Profitability ratio:

These are ratios that measure the performance of the business over a period of time. These are very important ratios as they indicate whether the company operations are able to meet its economic objectives of creating returns to shareholders.

Gross profit margin:
This is a measure of the company returns from its normal business activities. It shows how much the company earns after factoring out the costs of goods sold or costs of provision of services.

Net profit margin:
This is a measure of returns from operations and other expenditures. This is the most valuable measure of profitability as it shows how much earnings that should be distributed to the owners of the company or shareholders.

Efficiency ratios:

Return on assets:
This is a measure of efficient use of assets to create earnings and as such shows how well the company has used its assets over a specific period of time.

Return on Equity:
This measures the efficient use of funds contributed by the owners of the business to create earnings.

Inventory turnover:
This is measure of inventory management and shows the movement of inventory into and out of business within a specific period.

Days sales outstanding:
This is a measure of debt collection policies by the company and shows the number of days it takes a company to collect accounts receivables.

Solvency ratios:

Debt ratio:
This ratio shows the composition of the company’s capital which is basically debt and equity. This ratio is very important as it affects the company’s future borrowings.

Preliminary competitive Analysis:

Telecommunication industry is one of the most dynamic in the world and such companies in this industry have to remain competitive to achieve their economic and strategic objectives. This part of study tries to explore the competitive advantage by each of the three companies and how they have used the advantage to dominate the market.

Vodafone:

As mentioned earlier Vodafone is one of the most global companies in the telecommunication industry with presence in almost all the continents of the world. The company has a portfolio in Africa, Europe, US, Middle East and Asia pacific regions. This is a key competitive advantage as the company is able to reach a large number of customers and this translates to higher revenues. The company has also invested heavily in data services across its subsidiaries and this is inline with the high demand for mobile phone internet and other internet services. This is a key advantage in the business and makes it a superior compared to other competitors that still stick to the conventional telecommunication business services. Vodafone has recently ventured into other businesses and expanded its scope of services among the new services are broadband, convergence of fixed and wireless communication systems and sale of mobile devices under its own brand name. Product diversification is a key advantage in Vodafone future business. Compared to the three companies Vodafone boosts of the largest capital base and this allows the company to drive its strategy of growth and expansion (Vodafone.com).

Telefonica:

This is another leading company in the provision of telecommunication services in the UK market. The company part of telefonica group Europe which runs its operations in Germany, Ireland, Czech Republic and Slovakia among other countries. The company currently uses O2 as the business brand. The company main advantage lies in its ability market differentiation strategy and as such the company has become a specialist in non voice services within the UK market. Some of the products include media messaging, text, music, video and internet connections through GPRS, HSDPA, WLAN and 3G platforms. The company has also diversified its operations through strategic partnerships which help in reducing its costs of operations. The current partnerships include Tesco mobile in UK and Tchibo Mobifluke in Germany. The company also boosts of a superior human resource policy which has made it ranked 6th best company to work for in 2008 survey done for best companies to work for. It has also been awarded a three star award as and extraordinary company (O2.co.uk).In 2007 the company had 40 million fixed and mobile customers with 29,000 employees.

BT group plc:

This is another leading company in the provision of telecommunication services in the UK market. The company part of telefonica group Europe which runs its operations in Germany, Ireland, Czech Republic and Slovakia among other countries. The company currently uses O2 as the business brand. The company main advantage lies in its ability market differentiation strategy and as such the company has become a specialist in non voice services within the UK market. Some of the products include media messaging, text, music, video and internet connections through GPRS, HSDPA, WLAN and 3G platforms. The company has also diversified its operations through strategic partnerships which help in reducing its costs of operations. The current partnerships include Tesco mobile in UK and Tchibo Mobifluke in Germany. The company also boosts of a superior human resource policy which has made it ranked 6th best company to work for in 2008 survey done for best companies to work for. It has also been awarded a three star award as and extraordinary company (O2.co.uk).In 2007 the company had 40 million fixed and mobile customers with 29,000 employees.

Prior research (PEST Analysis):

Business environment is a key consideration for any industry and determines how a successful a company will be within the industry. Pest analysis basically studies the factors affecting an industry and how the factors impacts on the operations of the companies within the industry. The term PEST stands for political, economic, social and technological which are the key factors in any industry. This part of study focuses on the four factors and how they affect the companies within the UK market.

Political:

Political factors entail the impact of government interventions on the industry and this could be in terms of the policies set in place to influence the operations of the companies. One of the key interventions may include tariffs relating to importation of raw materials for production and corporate taxes on the services and products offered by the companies. Other factors include regulations relating to safety of the products as well as restrictions on the type and standard of services that companies can offer.

The UK telecommunication industry has remained largely unregulated since the government decision to privatize BT in 1984.The need for regulation of the telecommunication industry has been necessitated by the rapid changes in technology and complex markets. The main developments in the telecommunication industry have included the increased use of mobile phones, broadband and internet. Some of the main government interventions in the telecommunication industry are contained in the telecommunication act 2003 which set a framework on how the players in the telecommunication industry should conduct their business. The act also sought to harmonize the telecommunication regulations in the Euro zone. To further help in the implementation of the act the government also set up the office of communication. Among other regulatory issues was the abolishment of need for a license and introduction of a self certification scheme. These factors have really encourages many operators in the industry as entry has been made easy. Other regulations relates to number portability, interconnection standards, deployment of telephone numbers, access to emergency services and marketing and sales standards for all companies. The government reviews the regulations and this could enhance the businesses or disadvantage them in one way or another. Companies therefore monitor closely the government policies as they directly affect their operations (bcs.org).

Economic:

Economic factors include inflation, interest rates and general economic growth within the country. Inflation affects the purchasing power of households and hence the higher the rate of inflation the lower the consumption of the services offered by the companies in the telecommunication industry. Interest rates affect the company’s ability to raise more funds for its operations and other expansion programs. Higher interest rates discourage borrowing by both consumers and the companies and this reduces their scope of consumption and production and provision of services to the customers respectively. The general economic conditions in the country affect the households and the companies operations. A growing economy will encourage companies to expand their operations and scope of their services but a shrinking economy discourages consumption by households and limits the chances of growth of companies. One of the key economic factors facing the UK market is the effects of the Euro zone crisis which has affected many countries in Europe and being that most of the country economies are intenerated, they all suffer from the problems of one economy. Most of the telecommunication companies in UK have operations in other parts of Europe which compounds the effects of the Euro zone.

Social:

Telecommunication companies mainly derive their revenues from customers who utilize their services and products and the world has seen a lot of transformation socially that has affected their consumption patterns. It’s therefore important that telecommunication companies consider the impact of social changes in their businesses.Techonological advancements have led to a lot of innovations in communications and hence the companies have to keep the pace with the changing consumer trends in the market. For instance the mobile phones have come with enhanced features that make communication and interaction between people easier. The bottom line to companies in the industry is to keep pace with developments in communication technology. Other areas that businesses need to look at are the safety of the current mobile phone gargets and their life span.

Technological:

As mentioned in the last paragraph technology has driven the telecommunication industry over the last two decades and companies in the industry have to keep monitoring the technological changes and come up with innovative products and services that reflect the current technological trends (nap.edu). The emergence of new phone devices and other communication devices has led to the growth of the industry and hence companies have been using the new technological advancements to create a competitive advantage in their products and services. Some of the key factors that affect telecommunication companies are advancement in broadband communications.

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