Market Models - Guide To Financial Data Analysis

Question: Describe about the Essay for Market models for a guide to financial data analysis? Answer: Introduction This report analyzes the two major players in the telecommunication industry. Vodafone Plc and BT Group are amongst the major British players in a telecom Industry. Vodafone Plc is British multinational company and is the third largest by subscribers and revenue, behind the China Mobile and Verizon Communication. The company owns and operates networks in 26 countries and operates in 50 other companies through partnership in a network. Vodafone Plc has a primary listing on the London Stock Exchange and is a constituent of the FTSE 100. The company has a market capital of 58.49 billion GBP. The stock has a secondary listing on the New York Stock Exchange. BT Group is a holding company of British Telecommunication Plc. BT Group is British multinational company and has HO in London. The company operates in more than 120 countries. Initially, the company was started as Electric Telegraph Company by the government. In 1984, British Telecommunication became private when the government sold 50% of a stake to investors. The government further reduces its holding from 1991 to 1993. The stock has a primary listing on the London Stock Exchange and a secondary listing on the New York Stock Exchange. Below sections analyze both the companies on profitability and investor performance indicator. Also, the comparison has also made to find out better investment opportunity for individual shareholder for long-term value creation. Profitability Analysis Vodafone Plc Gross Margin: Gross margin shows how much the firm retains after covering direct cost associated with the product and services. Higher margin means the company retains a higher percentage of sales after covering the cost of goods. 2012 2013 2014 2015 Revenue 46,417 44,445 38,346 42,227 Gross Profit 14,871 13,940 10,404 11,345 Gross margin % 32.04% 31.36% 27.13% 26.87% Vodafone Plc has witnessed downturn in revenue from 2012 to 2014 and a slight recovery in 2015. The gross profit has also followed the same trend. Gross Profit margin declined gradually year on year through last four years. There was the major drop in gross margin in 2014 compared to previous year. Operating Margin: Its a measure of what proportion of revenue is left after covering the variable cost of the production. 2012 2013 2014 2015 Revenue 46,417 44,445 38,346 42,227 Operating Profit 11,187 4,728 - 3,913 1,967 Operating margin % 24.10% 10.64% -10.20% 4.66% The trend of operating margin is not clear and difficult to draw any conclusion from it. But it seems operating margin has a declining trend over last four years. The major downturn in 2014 was due to higher expenses on other operating expenses. Return on capital employed: Return on capital measures the companys profitability and efficiency with which its capital is employed. Higher return is desirable. 2012 2013 2014 2015 EBIT 11,187 4,728 - 3,913 1,967 Total Asset 139,576 142,698 121,840 122,573 Current Liability 24,025 31,224 25,039 28,897 Operating Profit % 9.68% 4.24% -4.04% 2.10% The above table shows that total asset declined over the years when current liability increased. It means, capital employed in the firm declined over last four years. Also, operating profit declined over last four years which is very evident in return on capital employed. The trend of the return on capital employed is declining. Return on capital employed was 9.68% in 2012 which declined to 2.10% in 2015. Hence, profitability and efficiency both measures are concerned for Vodafone Plc. Net Asset Turnover: Net asset turnover shows how asset intensive business is and how efficiently business is using resources. A higher ratio shows the business is asset intensive and its using resource efficiently. 2012 2013 2014 2015 Revenue 46,417 44,445 38,346 42,227 Total Asset 139,576 142,698 121,840 122,573 Current Liability 24,025 31,224 25,039 28,897 Net Asset Turnover 0.40 0.40 0.40 0.45 The trend of net asset turnover is constant over last four years and doesnt signify much about efficiency. As revenue also declined with a decline in total capital employed, the ratio is constant except in final year. Net asset turnover improved marginally in 2015. Looking at the range of values, its clear that the firm is not asset intensive. BT Group Gross Margin: 2012 2013 2014 2015 Revenue 19,265 18,416 18,287 17,979 Gross Profit 5,635 5,952 16,737 16,406 Gross Profit % 29.25% 32.32% 91.52% 91.25% BT Group has witnessed downturn in revenue from 2012 to 2014 and. The gross profit has also followed exactly the opposite trend. Gross Profit margin improved drastically year on year through last four years. There was a major hike in gross margin in 2014 compared to previous year. Operating Margin: 2012 2013 2014 2015 Revenue 19,265 18,416 18,287 17,979 Operating Profit 2,919 2,986 3,145 3,480 Operating Profit % 15.15% 16.21% 17.20% 19.36% The trend of operating margin is positive and its easy to draw the conclusion that operating margin improving year on year. Though revenue declined over the years, operating profit improved drastically year on year in last four years. Its very clear that improved gross profit is helping to maintain the higher operating profit. Return on Capital Employed: 2012 2013 2014 2015 EBIT 2,919 2,986 3,145 3,480 Total Asset 23,948 24,826 24,898 27,191 Current Liability 9,255 7,551 7,687 7,708 Operating Profit % 19.87% 17.29% 18.27% 17.86% The above table shows that total asset increased over the years when current liability witness declined. It shows capital employed to the company increased over the years. Also, earnings before interest and tax improved year and year. The trend of return on capital employed is not showing any pattern and expect a marginal decline in 2013, the ratio is trading in the narrow range. Net Asset Turnover: 2012 2013 2014 2015 Revenue 19,265 18,416 18,287 17,979 Total Asset 23,948 24,826 24,898 27,191 Current Liability 9,255 7,551 7,687 7,708 Net Asset Turnover 1.31 1.07 1.06 0.92 Net asset turnover shows a clear trend. The trend shows negative slope which indicates the efficiency of the firm utilizing its resources declined over the years. Investor Performance Indicator Analysis Vodafone Plc EPS: EPS measures the net profit per share. Here, Earnings per share for Vodafone Plc has been very volatile. It seems there has been profit adjustment between the year 2013 and 2014. In 2012 and 2013, earnings per share have been 0.25 GBP and 0.22 GBP respectively. 2012 2013 2014 2015 EPS 0.25 0.02 2.22 0.22 There is a sharp decline in earnings in 2013 and a sharp increase in 2014. Though operating profit was negative in 2014, there is a significant improvement in earnings per share which shows income improved because of extra-ordinary items (income from discontinuing operations). Overall, the trend of EPS is declining. P/E Ratio: P/E ratio shows multiple at which share trades against its earnings. 2012 2013 2014 2015 EPS 0.25 0.02 2.22 0.22 Share Price 172.20 186.60 220.30 220.45 P/E 6.89 93.30 0.99 10.02 Though earnings of Vodafone Plc. have been very volatile in last four years, the share price has shown improvement year on year. Its reflected also in P/E ratio. P/E ratio remained in a broad range of 0.99 to 93.30. In 2013, due to poor performance earnings per share declined to as low as 0.02 GBP. But share price didnt react to poor performance as a market was expecting to sell off one business segment in 2014. Due to business spun off in 2014, earnings boosted to 2.22 GBP per share but share didnt react much as it was due to non-operational reason. Except 2013 and 2013, P/E traded around a multiple of 10. Dividend Yield: 2012 2013 2014 2015 Div. 0.17 0.18 0.19 0.11 Share Price 172.20 186.60 220.30 220.45 Yield 9.87% 9.65% 8.62% 4.99% Though earnings of Vodafone Plc have been very volatile, the dividend paid to the shareholders remained consistent and increasing. The dividend yield has been in a range of 4.99% to 9.87%. Though earnings declined to 0.02 level in 2013, the company paid the dividend of 0.18 GBP per share which shows management is confident about future earnings. The trend of dividend yield is declining and is a major concern for the shareholders. Dividend Cover: Dividend cover shows the portion of the earnings paid to the shareholders as a dividend. 2012 2013 2014 2015 Div. 0.17 0.18 0.19 0.11 EPS 0.25 0.02 2.22 0.22 Cover 0.68 9.00 0.09 0.50 As earnings of Vodafone Plc have been very volatile while dividends paid remained constantly increasing, the trend of dividend cover doesnt help to draw any conclusion. Dividend cover has been in a range of 0.09 to 9. Dividend cover ratio higher than 1 means company is paying higher than earnings which were the case in the year of 2013. BT Group: EPS: 2012 2013 2014 2015 EPS 0.26 0.27 0.26 0.27 The trend of earnings is constant. Though it doesnt show any growth, it also doesnt show any decline though the industry is under pressure which is a positive sign. P/E Ratio: 2012 2013 2014 2015 EPS 0.26 0.27 0.26 0.27 Share Price 226.40 278.00 379.90 438.00 P/E 8.71 10.30 14.61 16.22 The trend of P/E is increasing as share price improved year on year significantly though earnings have been constant. It shows the market expects the better result in coming years and the company has performed better than its peers. P/E ratio improved year on year in last four years and almost doubled. Such increasing trend of P/E is unusual for large cap stock. The trend of P/E shows market confidence for BT Group. Dividend Yield: 2012 2013 2014 2015 Div. 0.08 0.10 0.10 0.11 Share Price 226.40 278.00 379.90 438.00 Yield 3.53% 3.60% 2.63% 2.51% Except 2015, the company paid increasing dividend year on year. As share price increased at a higher rate than the dividend, yield declined gradually over the years. The trend of dividend yield is declining. From the point of share price, dividend return may seem lower as the share price is increasing around 45% on an average year on year. Dividend Cover: 2012 2013 2014 2015 Div. 0.08 0.10 0.10 0.11 EPS 0.26 0.27 0.26 0.27 Cover 0.31 0.37 0.38 0.41 Dividend cover shows that the company is paying a higher portion of earnings as dividend year on year. This shows management confidence in improved future earnings. Dividend cover ratio improved from 0.31 to 0.41. A shareholder can expect higher dividend per share with improved earnings next year. Comparison and contrast of profitability between the two companies Gross margin: Gross margin % 2012 2013 2014 2015 Vodafone 32.04% 31.36% 27.13% 26.87% BT Group 29.25% 32.32% 91.52% 91.25% Gross margin of Vodafone is declining while Gross margin of BT Group is improving year on year. The trend of gross margin favors BT Group. Operating margin: Operating margin 2012 2013 2014 2015 Vodafone 24.10% 10.64% -10.20% 4.66% BT Group 15.15% 16.21% 17.20% 19.36% Operating margin of Vodafone is volatile and the trend is negative while operating margin of BT Group is stable and in positive growth trajectory. Return on capital employed: Return on capital employed 2012 2013 2014 2015 Vodafone 9.68% 4.24% -4.04% 2.10% BT Group 19.87% 17.29% 18.27% 17.86% Return on capital employed has the same trend as operating margin. The performance of Vodafone is very volatile and the trend is negative. The performance of BT Group is stable and the trend is constant. Net Asset Turnover Net asset turnover 2012 2013 2014 2015 Vodafone 0.40 0.40 0.40 0.45 BT Group 1.31 1.07 1.06 0.92 Though the historical trend of BT Group is declining, net asset turnover is significantly higher than Vodafone Plc. Comparison and contrast of investor performance ratios between the two companies EPS: EPS 2012 2013 2014 2015 Vodafone 0.25 0.02 2.22 0.22 BT Group 0.26 0.27 0.26 0.27 Earnings of Vodafone is volatile and its hard to draw any conclusion based on that. Earnings of BT Group is constant in an unfavorable market condition which is a positive indicator. P/E: P/E 2012 2013 2014 2015 Vodafone 6.89 93.30 0.99 10.02 BT Group 8.71 10.30 14.61 16.22 P/E ratio of Vodafone is very volatile and share is commanding very low P/E most of the times. P/E ratio of BT Group is increasing year on year and its robust. Yield: Yield 2012 2013 2014 2015 Vodafone 9.87% 9.65% 8.62% 4.99% BT Group 3.53% 3.60% 2.63% 2.51% Though there is a decline in yield for both the companies, but the decline of BT Group is much slower. Dividend Cover: Cover 2012 2013 2014 2015 Vodafone 0.68 9.00 0.09 0.50 BT Group 0.31 0.37 0.38 0.41 Dividend cover of Vodafone is very volatile and its difficult to predict its behavior. While dividend cover of BT Group is very stable and cover improved year on year. Its expected that dividend cover of BT Group will improve in coming year in-line with the historical performance. Conclusion Based on the profitability analysis and investor performance indicator analysis, one can conclude that profitability of Vodafone Plc is under pressure and efficiency of the company is declining. While BT Group is performing relatively better on profitability and efficiency than Vodafone. As far as investor performance indicator analysis is concerned, the performance of Vodafone is very volatile and poor while BT Group outperformed Vodafone Plc on every measure. Recommendation Based on the historical analysis of Vodafone Plc and BT Group, we recommend investing in a share of BT Group primarily due to three factors: Growth, Stability and Investors confidence in stock (P/E). The trend of the share price in last four years also confirms our recommendation. References Alexander, C. (2001). Market models: a guide to financial data analysis. John Wiley Sons. Brigham, E., Daves, P. (2012). Intermediate financial management. Cengage Learning. Brigham, E., Ehrhardt, M. (2013). Financial management: theory practice. Cengage Demonstratingvalue.org. (2015). Financial Ratio Analysis | Demonstrating Value. [online] Available at: https://www.demonstratingvalue.org/resources/financial-ratio-analysis [Accessed 7 Jun. 2015]. Hawkins, David F. "Basic Ratio Analysis and Equity Valuation." 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