Accounting Final Project - analysis of three companies in the UK telecommunication sector.

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ACCOUNTING PROJECT

The companies:

  • Vodafone
  • Telefonica
  • BT group

Industry: Telecommunication

Telecom industry is characterized with great competition, regulation and is having few major players sharing the majority of market. It is highly oligopolistic in nature, creating huge barrier for the new entrants. It is dominated by few key players like Vodafone, BT and Telfonica in UK. It is characterized with low growth, stable revenue, high capital requirements, great operating margins, stable cash flow and high dividends.(Research Report on Telecom, Indigo, 2012)

The main objectives to select the telecom industry are as follows:-

  1. It represents a very significant amount of GDP i.e. 3 to 5% of the whole UK economy.
  2. It is one of the most important services which are essential for humans as well as business in their day to day needs.
  3. It consists of type of stocks which can be termed as non-cyclical and is providing huge amount of dividends just like Utilities Company means the company here provides regular cash flow.
  4. It can be characterized as highly levered industry which means the major players has huge debt in their balance sheet. Hence, one can understand the significance of leverage through analysis of this industry.( The University of Bath. Engelhardt, A., 2005)

Hence, the telecom industry provides a way to understand the role played by various firms in grabbing the major market share through different strategies like low pricing, differentiation etc. Besides these it also helps in understanding the financials of highly leverage and high dividend paying company.

The telecommunications is one of the most important machines around the world, the worldwide system that no one can deal without it. It made the connecting way much easier and the distance very closer between us. It permitted us to speak, share the idea and do businesses, regardless of where in the world you might be. Telecommunication companies operating all this happen.

This report will consider a research about a three companies within this industry which is the telecommunication in UK, involving a PESTEL (Political, Economic, Social, Technological, Environmental and Legal) analysis of the industry. In addition, analysis of the most important ratios

The aim and objective of this report is to show the differences between these three companies in their profitability and financial performance.

Rationale for Choice of Industry and companies:

Telecommunication industry is of the most dynamic with history dating back to 1969 but has seen tremendous growth over the period and has become a major contributor in the economy of UK and other countries. Telecommunication industry has therefore become very competitive in the country and hence firms are striving to achieve their economic and strategic goals in a market that has many players (Plunketts,2008 p.42). Vodafone is one of the leading telecommunication companies in UK with operations in other countries all over the world. Other competitors in the UK market include Telef, Bharti airtel, BT group and America Movil SAB among others (yahoofinance.com).The three companies chosen have market capitalization of 79 billion,48 billion and 19 billion respectively  and as such can be categorized as medium to large. The closeness of market capitalization makes them exhibit almost the same strategic advantages and can therefore compete fairly in the telecommunication industry. The report therefore seeks to critically study their historical financial performance through ratio analysis to determine their past and give opinion for their future performance. Another key motivation behind the choice of the companies is the fact that they operate in the same market and their international businesses are in the same countries thereby making them face similar environmental factors (yahoofinance.com).

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 (Gibson,2010 p.118-120).

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).

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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 ...

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