This report will aim to critically analyse the financial performance and position of Vodafone Plc with respect to their profitability, liquidity, solvency, cash-generating capability and other non-financial information to determine whether lending a short-term (less than a year) or long-term (more than a year) bank loan to this company is a viable decision. The analysis will utilise information from the company’s financial statements across a five-year and 2 years from 2018 to 2022 and 2021-2022. This information will then be assessed relative to company performance over time and against peers while leveraging on popular assertions concerning the industry and industrial outlook to obtain a comprehensive analysis of the company's current debt position and repayment abilities.

It will further examine the quality of the earnings and financial statements used in obtaining data and provide insight into the strengths and weaknesses observed in creating the report.

From the analysis, It will be concluded that the current industrial outlook, asset efficiency, CAPEX management and business solvency position do not qualify it as a suitable benefactor of this loan, notwithstanding the resilient revenue growth.

How analysis confirmed that Vodafone has been making a significant effort to recover from the impact of the covid-19 pandemic and showing resilient in revenue generation but its huge debt burden and inefficient asset management has limited its profitability as depreciation constitutes a large portion of revenue and interest rate has risen significantly.

Vodafone Group Plc (VODAFONE) is a publicly listed telecommunication company based in Southeast England, Berkshire, United Kingdom. It serves private and public sector customers of different geographical areas and sectors with a broad range of connectivity and digital services, supported by its dedicated global network to become the new generation connectivity and digital service provider. Vodafone's revenue can be divided into both service and other revenue. It operates in Europe, Africa, Middle-east and the Asian Pacific. Its major operations are in Europe, which has been faced with the debilitating effect of covid-19 and the ongoing Russia-Ukraine war affecting the demand levels.

According to Nick Read, the CEO of Vodafone, in the year-end financial review, Vodafone hopes to ensure organic growth while building success around portfolio priorities that focus on asset efficiency and a more improved capital structure for a stronger balance sheet. In connection to this and according to Wiggins (2022) in financial times news, Vodafone has agreed to sell up to 50 per cent of its €14.8bn mobile phone masts business to a consortium including the private equity firms KKR and Global Infrastructure Partners and Saudi Arabia's Public Investment Fund. In this paper, we focused on analysing the company's financial statement to determine if a loan application should be granted for it. We employ the 5 Cs of credit analysis to determine the creditworthiness of Vodafone, which are character, capacity, capital, collateral, and conditions. To measure this, we shall analyse the profitability, liquidity, solvency, and cash flow ratios while comparing them with the competitor and industrial standards. The analyses will focus on Vodafone's 2022 year-end financial statements measured against its 2021 financial statements while considering a trend analysis that evaluates the ratios on a 5-year-end.

As considered in this paper, the major competitor is Telefonica, one of the leading telecommunication firms in the UK and Europe. Its major revenue source is in Europe as Vodafone, which makes it suitable for comparison.

In conducting a credit analysis on Vodafone, character will be measured by evaluating non-financial and background information regarding Vodafone; capacity is measured by the ability to cover interests from cash flow generated or net profit. The profitability of the business and its cash flow management will also be evaluated. The capital structure of the business, gearing ratio, and the debt-to-equity ratio will measure capital. This is to evaluate the solvency risk of the business. Collateral will focus on the asset and capital base of the business and how it can cover the principal to be repaid. Conclusively, we shall also look at necessary conditions under which the loans can be evaluated, such as the working capital efficiency ratios, the scope of the long-term investment and the macro-economic environment.

Vodafone's revenue showed an improvement of 4% between 2021 and 2022. According to the chairman, this was driven by consistent growth in Europe and Africa. However, considering the compounded annual growth rate (CAGR) from 2018 to 2022, revenue has decreased by 0.4% over the five years. In essence, Vodafone's revenue has been dwindling and has not achieved a 2years growth trend for the past 5 years. A deep dive into the revenue segments revealed service revenue as the major revenue driver. It generates more of its revenue in Europe, which accounts for 78% of its revenue. Although the dwindling revenue of Vodafone is a concern, it fared better than its competitors in 2022. With Telefonica, a top performer in the UK telecommunication industry and a close competitor, showing an 8.82% decrease i n revenue, Vodafone has shown resilience in its revenue generation. According to the CEO's recent statement in Gross (2022)'s article, Vodafone is committed to maintaining its resilience in a challenging environment.

The increase in Vodafone's revenue in 2022 can be attributed to the 2% increase in the subscriber base and 3.9% price adjustment done for the 2020 and 2021 contracts, as confirmed by Vodafone on their customer pricing page (Vodafone, 2021). The service revenue also played a significant role in the revenue growth. According to Provan (2022), Service revenue is a key metric that includes sales from contract payments, network use and roaming. The CEO in the same report confirmed that roaming revenue is gradually increasing because of the post-lock-down migration within the European countries.

However, the future of telecoms in Europe seems unfavourably as the current outlook has been deeply affected by the Russia-Ukraine war, which is the primary reason for high inflation and cost of living. Recently, Ofcom, a UK regulator, has confirmed that in the UK alone, 8 million residents find it difficult to meet their telecom needs (Muzyka, 2022). This can ultimately affect the demand level and threaten revenue projections. According to the forecast by Bonacci (2022), a senior analyst at Analysis Mason, total telecoms service revenue in Western Europe will grow modestly at a CAGR of 0.4% between 2021 and 2026. This further confirms the uncertainty in the industry's future. However, Vodafone can be said to have performed well in 2022 compared to 2021 and more than the competitor.

In considering the profitability ratios, consideration is given to the annual report and the Bloomberg report, which aided an inquiry into the effect of non-underlying items on the profitability ratio. Vodafone has efficiently managed its cost of sales, of which depreciation is a huge portion. The gross profit increased in 2022 by 9.3% because of the 4% increase in revenue and a marginal increase of 1.6% in the cost of goods in the same year. A common size analysis revealed that the cost of sales as a percentage of revenue actually reduced by 2% in 2022. The reduction can be attributed to the efficient management of the fixed asset, which led to a 2% reduction in depreciation, regarded as a cost of sales in Vodafone's statements. Vodafone's gross profit performance is also the best in 5 years as it was more than the 5-year gross profit CAGR of 1.7%. Despite the performance in Gross profit, EBITDA only grew by 1.6%. This is because of the effect of administrative costs on the profitability of Vodafone. Administrative costs increased by 6.8% to make up 13% of the revenue making administrative expenses the most expensive cost line after the cost of sales. Moreover, compared with its competitor, Telefonica, It has performed at a suboptimal level. While Telefonica was able to sell off the excess asset to increase efficiency and boost EBITDA to 56% in 2021, Vodafone's EBIDTA limited its increasing administrative expenses have fluctuated with the revenue over the years.

Also, Vodafone's interest level has increased by 91%, doubling the interest-to-revenue rate to 4% with a depreciation reduction of only 1.6%. Compared to Telefonica, which managed to reduce finance costs by 16% and depreciation by 10%, Vodafone's growing interest expense is a concern and can indicate an excess debt level.

However, Vodafone can cover its interest expense more than 2 times with its operating profit, and its operating cash flow can cover interest expenses more than 7 times. The reason for this wide difference in both interest cover ratios is the impact of depreciation on the Net profit; the effect of Depreciation was not considered in the operating cash flow.

Despite the performance of Vodafone compared to its competitors in the profitability ratios, it has not replicated the same in Asset Turn over and return on asset. With a 30% asset turnover ratio representing a 1.35% increase in asset efficiency in 2022 and a 1.78% return on assets, it is at a suboptimal level compared to Telefonica, which managed its asset by achieving an asset turnover ratio of 36% and ROA of 10%. Although, as confirmed by Mercieca et al. (2014) in the KPMG report, telecommunication is a capital-intensive industry and return from assets employed might translate into something other than an instant revenue or net profit increase. However, Vodafone’s CAGR over the 5 years, which relates to a long-term period, confirms a 1.5% decrease in asset turnover and an 11.4% decrease in return on assets over the years. This was caused by the increasing CAPEX investment which has increased by 8% over the 5years as confirmed by the depreciation to revenue ratio of 30%. However, current year 1% decrease is lesser than the global telecoms’ CAPEX investment increase by 10% as confirmed by Menon (2022).

Vodafone has shown prudence in the management of its cash balances. As earlier noted, it can cover interest expenses more than 7 times with its operating cash flow. Considering the cash balance growth within two years, it has increased by more than 130%. When considering the composition of the cash balance negatives, CAPEX investment and repayment of LT debt have been a significant pull on the cash balances over the last 5 years. This is commendable since borrowings are being repaid increasingly, and borrowings are effectively used to fund fixed asset investment. Free cash flow to the firm has also increased by 2%, with a CAGR of 4% between 2018 and 2022. The cash conversion cycle has also been managed effectively. With a continuously decreasing receivable days from 46 to 29 days and a 4.9% increase in payable days within 5 years, there has been an 18% improvement in the cash conversion cycle in the same period.

The solvency ratios, however, are cause for concern. The capital gearing and debt-to-equity ratios have been increasing consistently for the past 5 years, reaching 51% and 170%, respectively. While Vodafone maintained the capital gearing ratio for 2021 in 2022, there was an increase of 2% in the debt-to-equity ratio in 2022. Compared with its industry counterpart Telefonica, it performed worse, as Telefonica reduced its debt-to-equity ratio to 145% in 2021, although the capital gearing ratio was 59% in 2021. This can be traced to the CAGR of LT debt to 12% and LT making up 38% of the total asset. Vodafone needs to re-evaluate its capital, and debt management as its present status casts doubt on its ability to fulfil long-term liability obligations.

Moreover, on a short-term basis, Vodafone's short-term liquidity position has also worsened. The current ratio has reduced to 85% from 98%, while the quick ratio has also witnessed a 14% decrease to 82%. Compared to Telefonica which improved both current and quick ratio to 132% and 125%, respectively in 2022, Vodafone is highly leveraged, both considering the short and long-term positions, and it may impact its profitability and future cash flow. Interest expense has grown 15% in the past 5 years and may continue to grow even more should any credit facility be granted to Vodafone. The Research done by Hasbiah (2022) on the Indonesian telecommunication industry between 2014 and 2020 confirms the negative effect of an unfavourable liquidity and solvency position on a company's performance. This is because the higher the level of debt, the higher the interest expense, which will reduce the company's profits. A similar effect of increasing debt has been seen in the case of Vodafone, with a decrease in profitability and revenue over the 5years considered.

This section will analyse the earnings and reporting quality of Vodafone's financial statements from 2021 to 2022. Three indicators will assess this within the financial reports: Earnings quality is evaluated by analysing the extent to which exceptional items impact earnings and if the earnings are backed by cash flow. The audit report assesses the reporting quality, and earnings management will be evaluated based on the elements in the income statement.

In measuring the sustainability of the revenue, which grew by 4% in 2022, we evaluate the impact of inflation causing price adjustment against the actual revenue driver-subscriber base. According to Vodafone's customer pricing website, prices are subjected to an annual price adjustment for the 2021-2022 period at 3.9% based on an inflation effect. Although revenue increased by 4%, the subscriber base grew less than the revenue growth by 2%, which suggests that the inflation rate may have played a role in the revenue growth more so as revenue growth is only higher than the price adjustment by 0.1%. The impact of non-underlying items on the 2022 profit level is marginal and can be assumed not to have impacted the profit of Vodafone for the period. Although the previous period showed that gains from derivatives outside the core business function significantly impact the company's profitability by increasing profit from a net loss of 2.04% to a net profit of 1.2%, the profit can be said to be sustainable since the non-underlying items only undervalue the profit growth rate. Overall, the statement demonstrates evidence of earning quality.

Vodafone's 2022 Auditor's report confirmed that, in their opinion, Vodafone has presented an accurate and fair view of its financial statements and that they have been adequately prepared in accordance with International Financial Reporting Standards. The auditor also confirmed that the accounts had been prepared against relevant accounting standards. This improves the financial reporting quality and is beneficial when comparing the two companies. In conclusion, the reporting quality is high due to the external auditor's conclusion. Concerning earnings management, there appears to be no case of earning management.

We have considered the elements that measure 5 Cs of credit to conclude Vodafone's creditworthiness and recommend whether a bank loan should be given. Character relating to credit background and trustworthiness is evaluated with the credit rating history provided by a leading international credit rating agency, Fitch. According to the diagram below, we can confirm that Vodafone was downgraded 3 years ago, suggesting an increasing credit risk attributed to the company.

Evaluating the capacity of Vodafone via its profitability and cash flow, we discover that while the cash flow showed an impressive performance. The profit has reduced more than 10% over the 5years period, and revenue also suffered a 0.4% decrease over the same year trend. Cashflow was only higher because of the impact of depreciation that was added back. A further investigation has revealed that Vodafone has not been efficient in its asset management strategy. The debt-to-capital ratio, a significant measure of solvency, also suggests they have a low capacity to manage more debt as they are already highly leveraged at a 170% debt-to-equity ratio. With this, we can safely conclude that Vodafone does not have sufficient capacity to take on more debt without becoming a concern for credit risk. However, since this only relates to long-term debt obligation, our liquidity ratios also prove that Vodafone may need help to fulfil its short-term debt obligation since both quick and current ratios are at a high rate of 82% and 85%, respectively. The capital base measured by the gearing ratio also confirms that Vodafone is highly geared, with a ratio of 51%. This shows that Vodafone already has more debt obligation than its capital base, and an additional debt burden might be detrimental to the business.

Considering conditions by looking at the macro-economic environment and industrial outlook, the consensus analyst revenue forecast is only 0.73%, and there is already a hike in household reporting problems with telecoms affordability, as depicted in the below graph. The future remains bleak regarding Vodafone's revenue generation and profitability. Moreover, there is an increasing risk of price regulation on the adjusted pricing strategy of Vodafone. According to Gross (2022), there is a growing call for action by the labour party on the government to prevent a price increase considering the economic situation of the UK.

Overall, we recommend that a loan application should not be granted by its bank. However, this is for the long term. In the short term, we consider the liquidity position and the cash management in terms of free cash flow to the firm and cash flow to profit margin. Although the liquidity position is not favourable, Vodafone has shown prudence by selling off the excess asset to offset its debt balance. Aside from the recent asset sale, "Vodafone Group Plc has agreed to sell a stake in its towers unit to KKR & Co. and Global Infrastructure Partners in a deal valuing the business at €16.2 billion ($16.3 billion)." (Nair et al., 2022).

Moreover, its core strategy is ensuring asset efficiency, and its vast asset base suggests that collateral is one of the 5 Cs sufficient if liquidated to cover debt obligations. The company has also shown character by honouring its asset efficiency commitment through the continuous sale of assets to reduce its asset base. Therefore a conditional short-term loan can be considered if Vodafone reinstates the commitment to asset efficiency and real organic growth.

The report showed a detailed analysis of the creditworthiness of Vodafone. A wide range of ratios, from financial information and non-financial information, have been employed. Consideration was also given to the macroeconomic environment, industrial outlook and analyst consensus on the industry's future. We summarise this using the 5 Cs of credit analysis. These ratios were compared to a similar peer company to understand Vodafone's position better. However, a wider range of top telecommunication operators would have improved the quality of our competitive analysis. Also, Telefonica has a more subscriber base and more market reach compared to Vodafone, but given that Vodafone outperformed Telefonica, it can be concluded that this did not significantly affect the strength of the report.

Additionally, concerning the period covered, Vodafone's financial year ends in March 2022 for 2022, and Telefonica's ends in December 2021. Although they seem to reflect different financial years, we discover that Vodafone's financial year only overlaps Telefonica's financial year by 3 months and may not undermine the analysis negatively.

The major issue discovered in the financial statements of Vodafone is that there was no division between underlying and non-underlying items. This made it quite challenging to evaluate the earnings quality from Vodafone's point of view. However, an evaluation of Bloomberg's report provided details of this. Hence, we were able to mitigate the effect of the financial statement structure on the strength of the analysis.

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