Discuss about the Revenue Recognition in the Performance Reporting.
Financial statements of an organization are the documents that are used to determine the true position of the company in the market. The financial statements are very helpful to the stakeholders of the company because they provide major information which can be used by them in order to make crucial decisions. Specific terms and data are contained in the statements which will help to maintain the principle of the disclosure. Additionally, the evaluation of ratios is done in order to improve the financial performance of the company (Laux,2014).
The different types of ratios that are used by the customers in the process of decision- making are liquidity ratio, profitability ratio, gearing ratio and investor’s ratio. Hence, the computation of different type of ratios will be made in order to evaluate the financial position of Vodafone PLC.
The main business around which the company Vodafone operates is the key technology and resources of the telecommunication licenses and well-developed infrastructure. It has been observed that the company Vodafone is having a diversified business control over 22 well-established markets spread around the world. The major function of the company is to provide telecommunication services and also fixed line services in some of the countries where it functions. The company aims to work on a long-term scale and have very diversified approaches to the marketing schemes. It helps them to promote the growth with ease and flexibility does arise a necessity of network infrastructure that provides mobile as well as fixed voice services and data services. The main objective of the organization was to establish a network of voice call routing system which can help the customers to connect.
The organization always look to fulfil and carder all the needs of its customers by providing them with the wild ranges of facilities and services. Therefore this has also helped the company to improve its efficiency buy enhancement and increment in the workforce. There are many facilities like secure remote access, applications, etc. which provide the solid base in order to function the business. These functions and facilities that are conducted by the organization have helped the company to pursue new and ample opportunities. The customers are also having and beneficial and enhanced experience with the improvement in the infrastructure of the company (Vodafone Plc, 2018). The development of the company which had have made in the past years is the main reason behind immense progress.
The process of ratio analysis is very important when it comes to analyzing the financial activities that are operated or conducted by the company. It is not only beneficial in order to find the profitability of the organization but it also helps to analyze the various areas of capital structure, investment performance, etc. This information that is collected with the help of ratio analysis is used by shareholders in order to prepare strategies and decisions.
There are many uses of the financial ratio that can be used by the customers in order to evaluate the performance of an organization or compare data with other competing companies. The information that is collected can be used to analyze the performance certain period of time which helps in completion of the main aim to study the organization (Leo, 2011).
Profitability ratio can be utilized to know about the capacity of the business to generate earnings in comparison to the overall expenses and other costs that appear to be relevant in nature. When it comes to the computation, it can be commented that the maximum of the ratios should project a higher value that indicates the potential of the business. Even if the ratios are better as compared to another period, it stresses the fact that the business is running in a strong fashion (Merchant, 2012). For Vodafone, the common profitability ratios computed are the asset turnover ratio, gross profit margin, and net profit margin. After evaluating the ratios of Vodafone PlC, it came to the forefront that the ratios have fluctuated and there is a sharp decline in all the profitability ratios except the gross profit margin
Gross profit margin can be defined as the ratio that stresses the financial health of the company that projects how actively the company is using the labor, as well as material. From the computation, it can be seen that the ratio has fluctuated in all the past 5 years and remained in the range of (25-30%). This is owing to the fluctuation in the sales of the company.
On the other hand, the net profit margin indicates the manner in which the company utilized the operational expenses. For the company to have a strong ratio, it is essential that the operational expenses should be managed in a prudent manner (Choi & Meek, 2011). The NPM for Vodafone has declined in all the 5 years and was negative in 2016 and 2017 that indicates losses for the company. The operating profit margin is positive yet resides on a weak ground and any fall will lead to trouble for the management. The net return on assets is negative and meaning assets could not be utilized properly. Hence, profitability of the company is under immense pressure.
Liquidity and efficiency are used to ascertain the resources of short-term that belong to the company and the management that supports the company. The liquidity ratio is being projected by the current and the quick ratio. Both the ratio provides an interpretation that whether the company is in a position to repay the debts of short tenure. This, in turn, projects about the future position of the company in terms of growth or downfall in the scenario of performance (Deegan, 2011).
The current ratio indicates the ability of the company to honor the obligations. As per the computation of ratio, it can be commented that the ratio kept on fluctuating in all the five years and remained below 1 in all the years except 2017. Hence, Vodafone has less than $1 of current assets for every $1 of current liabilities that project a huge danger for the company in the foreseeable future.
Similarly, acid test ratio is a better indicator of liquidity as it excludes stock. From the computation, it is clear that Vodafone has a disturbance in liquidity as the quick ratio is even lower than 1. The liquidity of the stock is not considered in this scenario as this ratio eliminates the stock at the very beginning (Needles & Powers, 2013).
The cash ratio of Vodafone has declined and below 30% meaning the cash position is not adequate to meet the current liabilities. On the other hand, the accounts receivable ratio of the company has declined meaning that the business will collect the accounts receivable less number of times.
Hence, going by the computation, it can be commented that the liquidity position of the company is under immense difficulties. This is due to the fact that there is a sharp fluctuation in the level of current assets and current liabilities.
As per the computation of the gearing ratio, it can be commented that the company is aggressive when it comes to gearing. It has crossed 100% and hence indicates that the company is more inclined to debts. On the other hand, in terms of asset financing it is neither conservative nor aggressive in nature. It is higher than 35% and less than 65% indicating a balanced action.
Efficiency ratios, which are generally referred to as the activity ratios, helps to determine the income which is generated by an organization using their assets. The main function of the efficiency ratio is to analyze the time period which is required by the organization in order to convert its inventory into cash or make sales in simple language. This type of ratios is not only helpful for the organization’s management to make purposeful and efficient decisions but also it helped the shareholders and investors of the company to estimate the profitability aspect of the business. The efficiency of the company is weak because inventory turnover period has increased meaning more days will be undertaken to convert the stock into cash. On the other hand, the accounts payable days has reduced from 70 day to 65 days. This means the company needs to make payments earlier. Hence, the efficiency of the company is disturbed.
Price to earnings ratio: this ratio can be evaluated by dividing the current price of the share sold by the business with the reported earnings per share. The value which is obtained by calculating the price to earnings ratio is used to compare the price conditions of the shares sold by the company to its competitors.
The ratios are not very much analyzed by the managers of the company because the managers are generally more concerned with the operational issues of the business. The ROE of the company is negative in number and hence, a very critical situation for the company. It indicates the downfall in the earnings and questions on the profit earning capacity. Further, the EPS of the company is negative in numbers meaning that the company is losing money. Further, the dividend payment has declined meaning that the company is unable to generate adequate profits.
There are many unseen and untamed services and factors that are needed to be performed by the Vodafone Company in order to grow in the world market. The improvement in the business of the company in the developing countries like India has also provided the company with a huge opportunity of expanding the customer base. The market size said to have over 150 million customers of which Vodafone is holding 3.72% (Vodafone Plc, 2018).
It is very necessary for the company Vodafone in order to improvise the coverage facilities in these emerging markets so that it can sell the mobile plans in a much responsible rate by reducing the cost and realizing the capitals that are made in order to enhance the networks. The company should try to focus on the increment in the retail base of the selling department by adding new agents and subscribers who can help to build a costly distribution infrastructure (Vodafone Plc, 2018). An exponential growth was observed in the Asian markets which made it necessary for Vodafone to keep up with the pace of the market. It was made necessary for the partners of the company in order to grow and handle the distribution of products and services by application of logistics and improvise infrastructure.
The improvisation of the phone technology by the application of new generation technology has resulted in the great changes to be observed in the market. This is a very major concern for Vodafone as it can now provide the customers with new mobile phones having access to this technology. The application of 5G mobiles and services will improve eyes the sales of the telecommunication industry. The wide approach will also attract many kinds of ethical hackers who may use the technologies to cause harm to other customers. Therefore it should be observed by the company that it needs to diversify the optimal quality of service that it provides to the customers with a better endowment of the plans. The company should also try to keep in mind the context of security so that the customers can be kept safe from any kind of vulnerability present in the system. The company should the company should start the practice of informing the customers and the staff about their responsibility towards protection from technological advancements thus stating their role in order to identify the potential threats that may prevail upon them (Vodafone Plc, 2018). The expansion and growth that has been observed in the mobile industry have opened a lot of new gates and potentials that can be achieved by the company in near future with the help of technological advancements (Petersen & Plenborg, 2012). It has been clearly stated in the reports that the present data services and providers are not able to cater all the needs of customers this leading to enhancement of the market. The prices at which the services are available are observed to be very high in order to be purchased by the customers
The company Vodafone should always keep in mind that with the application of new services that are having low prices the customer will try to shift his needs. The major mobile brands like O2 and T mobile are trying to improve their image in the market. Therefore the substitute products are major factors that may affect the profitability of the firm over the years.
The assumption taken into consideration is that the accounts of the company depicted a true and fair view of the state of affairs of the company. Hence, it is assumed that the accounts of the company reflect a correct position and on the basis of it, the computations of ratios are done. Financial ratio helps in comparison of the figures of one year with that of another. However, it must be ensured that the data are genuine. In the case of Vodafone, it is assumed that the financial data that is selected for ratio computation is correct and the results depend on the data. Any differences in the amount or a deviation can lead to a significant change in the comparison and the study as a whole.
There are many disadvantages or limitations that are experienced while analyzing the different ratios of the organization. The ascertainment of the short-term fluctuations is very difficult because short-term changes are not easy to study. Ratio analysis is a potent tool however; the information that is undertaken is historical in nature that means the same results will not happen in the future. Moreover, the information that is projected on the income statement of Vodafone is provided in current costs while various elements of the balance sheet are projected at historical cost. It is one of the biggest disparity when it comes to the usage of the ratios. Further, the change in the rate of the inflation remained unchanged and hence, no accountability is given to the concept of inflation.
It is highly recommended for Vodafone Plc that it must stress the performance as it is operating under losses. In order to structure the operation, it must stress the performance and keep a hold on the operating expenses. Further, the liquidity of the company is disturbed that implies it will face an acute problem when it comes to discharging of debts. Hence, it must ensure that it has sufficient current assets under its possession. Moreover, Vodafone Plc should ensure that higher level of debt is dangerous for the company and in the wake of it ensure that the debt level should be kept in tune with the equity component of the company. Further, it should try to introduce more of innovations so that it gets the first mover advantage. It is very clear that the customers will flow towards the company which provides them with the best and cheap offers. The competitive market makes it harder for the company to retain its customers. Therefore, new and advanced techniques of attracting the customers should be used in order to retain them. The poor barrier to entry of new products and services will increase the buying power of the customers which can be corrected by the use of elevated entry barrier
Conclusion
The overall projection of Vodafone Plc indicates that the company has faced trouble with the business. The telecommunication sector is under immense pressure and the same has put adverse impact on the functioning of the company. Further, the presence of rivalry has also led to the decline in the business and profitability. Therefore, it is imperative that Vodafone should vouch for a proper strategy that will keep a strong liquidity level and ensure balanced profitability. It should stress upon the liquidity and solvency. A strong projection on both these will lead to a balanced business and will ensure a positive change in the profitability. Further, the company Vodafone should strive to provide its customer with the services at best possible rates and also improve quality with the help of technological advancements.
References
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