Finding Financial Information

Return on capital is calculated by first determining the earnings before interest and tax (EBIT). EBIT and is the income generated from the operating activities. Capital employed is also used in the determination of ROCE (Sarngadharan and Kumar, 2011, p. 144). Using the funding view, capital employed is composed of equity capital and the long-term liabilities.

ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed

2012 2013 2014

EBIT 10,798 9,450 6,967

Capital employed 98,262 89,718 92,600

ROCE 10.99 % 10.53 % 7.52 %

Return on sales shows the operational efficiency of the organization. It is calculated using the earnings before interest and tax and net sales.

Return on sales (ROS) = EBIT /sales

2012 2013 2014

EBIT 10,798 9,450 6,967

Sales 62,356 57,061 50,377

ROS 17.32 % 16.56 % 13.83 %

Assets utilization ratios evaluate how effective assets are used in a company. They are calculated by dividing the earnings before interest and tax generated with the capital employed.

Asset utilization ratio (AUR) =EBIT /capital employed

2012 2013 2014

EBIT 10,798 9,450 6,967

Capital employed 98,262 89,718 92,600

AUR 0.10988989 0.10533 0.075238

Gross profit margin is determined by calculating gross profit and then dividing it with the sales revenue. In the case of Telefonica, cost of sales if assumed to be composed of cost of supplies and personnel expenses.

Gross profit margin = gross profit/ sales

2012 2013 2014

Gross profit 21,231 19,077 15,515

Sales 62,356 57,061 50,377

Gross profit ratio 0.34048047 0.334326 0.307978

Current ratios measure the ability of an organization to meet its obligation when they become due. The ratios show the effects of the business operations in the cash flows. They are calculated using the components of the current assets and the current liabilities.

Current ratio= current assets / current liabilities

2012 2013 2014

Current assets 25,596 29,265 22,864

Current liabilities 31,511 29,144 29,699

Current ratio 0.81228777 1.004152 0.769858

Quick ratio measure how first current assets can be converted into cash. It shows how more liquid a firm is in comparison with the current ratios. It is calculated by subtracting the less liquid current assets such as inventory from the current assets.

Quick ratio = (current asset - inventory) / current liabilities

2012 2013 2014

Current assets 25,596 29,265 22,864

Inventory 1,188 985 934

Current liabilities 31,511 31,511 31,511

Quick ratio 0.77458665 0.897464 0.695947

Gearing ratio shows how a firms enterprise is funded. It shows the level of debt compared to the total of shareholders capital, long-term and shorty term liabilities. The total debt is calculated by adding the short-term and long-term liabilities.

Gearing ratio = total debt / shareholders equity + total debt

2012 2013 2014

Total debt 102112 91380 92010

shareholders capital 122,573 111,841 112,471

Gearing ratio 83.31 % 81.71 % 81.81 %

Interest cover shows the effect of external sources of capital on the profitability of a firm. It is calculated as earnings before interest divided by the interest paid to the debt capital.

Interest cover = EBIT/Interest expense

2012 2013 2014

EBIT 10,798 9,450 6,967

Interest expense 4,025 3,629 3,511

Interest cover 2.68273292 2.604023 1.984335

Inventory days show the period that inventory remains outstanding. It is calculated by dividing the average stock and the cost of goods sold and then multiplied by 365 days in a year. In this case, a year is assumed to have 365 days.

Inventory days = (inventory/COGS)*365

2012 2013 2014

Inventory 1,188 985 934

COGS 26643 24249 22280

Inventory days 16.278 days 14.83 days 15.30 days

The trade and other receivables days shows the period a company takes before collecting money from the debtors. It is calculated by dividing the accounts receivables and total sales then multiplying by 365 days. In this case, all sales in Telefonica are assumed to be in credit.

Trade and other receivables days = (accounts receivable / total credit sales)*365

2012 2013 2014

Accounts receivable 10,711 9,640 10,606

Sales 62,356 57,061 50,377

Trade and other receivables days 62.70 days 61.66 days 76.84 days

The trade and other payable days are calculated by dividing accounts payable and cost of sales multiplied by 365 days. It shows the number of days that are required to for the company to creditors.

Trade and other payable days = (accounts payable/ cost of sales)*365

2012 2013 2014

Trade payable 17,089 15,221 16,943

COGS 26643 24249 22280

Trade and other payable days 234.11 days 229.11 days 277.57 days

The return of consolidated assets evaluates the performance of the organization in relation to the whole company. The ROE for consolidated company is calculated by dividing the net income of the organization with the total equity capital (Vinter, Price and Lee, 2013, p. 152). It includes both non-controlling interest and the share attributes to majority shareholders.

ROE = Net Income/Shareholder's Equity (consolidated)

2012 2013 2014

Net Income 4,403 4,969 3,252

Shareholder's Equity 27,661 27,482 30,289

ROE 15.92 % 18.08 % 10.74 %

The return on equity attributable to shareholder is calculated by dividing the net income attributable to shareholders and the equity of shareholders.

ROE = Net Income/Shareholder's Equity (attributable to shareholders)

2012 2013 2014

Net Income 3,928 4,593 3,001

Shareholder's Equity 20,461 21,185 21,115

ROE 19.20 % 21.68 % 14.21 %

Financial analysis

The return on capital employed of Telefonica was relatively better than Deutsche Telekom and the industry in the years 2012 and 2013. Telefonica had a good performance and ROCE implied that it was more profitable than the close competitors. It was also good to invest in it because its returns were also better than the one for the industry. In the year 2014, the companys performance was poor than the close competitor and the industry (telefonica.com, 2014). The return on capital employed was lower that the industry hence a poor performance. Over the three years, the return on capital employed was also reducing for the company over the period. The trend shows a negative performance towards the return on capital employed (Ryan, 2007, p.49). Reduction in the ROCE in the Telefonica is because of the reduced capital earnings before interest over the period.

Return on sales of Telefonica indicates that the company converted more sales into profits over the three years higher than Deutsche Telekom. The performance was also better than the one for the industry. The higher sales being converted into profits indicate that the company had a good performance in the reduction of operational costs. The costs of generating the profits over the period were lower than the one for the industry and the closest competitor. However, the return on the sale of the company was reducing over the three years with the year 2012 recording the highest return on sales while on the year 2014 with the lowest. The reduction of the gains on the sales indicates that the company is incurring increasing rate of expenses per sales made over the period.

Assets utilization ratio of Telefonica means that the business has poor assets utilization than Telekom. Telekom has better utilization of the assets than the industry over the three years. While the Telefonica ratios were lower than the industry ratios in the three years (John and Makhija, 2011, p. 125). The ratios show that the company needs to improve the utilization of the asset. The deviation of the companys usage of the asset from the industry benchmark is high and therefore, a lot needs to be done to correct the difference. The deviations of the ratios from the benchmark were worsening over the three years showing the utilization of the assets in the generation of profits reduced over the period.

The gross profit margins of Telefonica as compared to the ones of Deutsche Telekom were lower. The higher gross profits margins over the three years of Deutsche Telekom indicate that the company was doing better in the conversion of sales into gross profits. The ratios suggest that Telefonica lowers efficiency of utilizing the raw material, labor, and other direct manufacturing resources as compares to Deutsche Telekom. The ratios of the two companies reduced over the three years with the year 2012 having the highest ratio of the respective companies. The systematic reduction of the gross margin ratios indicates that the cost of production in the industry was increasing (Telefonica.com, 2013). However, Deutsche Telekom has a better performance overall in the management of the cost of output as compared to Telefonica that had a higher margin between the highest ratio and the lowest one.

The administration of the working capital over the three years was lower in the Telefonica and Deutsche Telekom that expected benchmark of the industry. The current ratios of the two competitors were however mixed in the three years. In the years 2012 and 2013, the current ratios of Telefonica were better than the ones for Deutsche Telekom while in 2014 they were worse. In the two years, Telefonica had a better performance that Deutsche Telekom and hence was in a better position to meet the financial obligation when due. Telefonica and Deutsche Telekom ability to meet obligations when due were poorer than the average market expectations in the three years. The quick ratios, on the other hand, indicate that Deutsche Telekom had better management of the liquidity than Telefonica. Telefonica over the three years had lower quick ratios than the industry while Deutsche Telekom had a better one in the year 2013. The quick ratios show in average that Deutsche Telekom had a better performance than Telefonica. The working capital of the two competitors had a mixture of negative and positive figures. The negative working capitals were in two years in the two companies though in different periods. The working capital indicates that Telefonica and Deutsche Telekom are not doing well in the management of the working capital. However, Deutsche Telekom had higher figures in the net working capital showing it had better performance than Telefonica.

The leverage ratios indicate that Telefonica is funded with more debt capital than shareholders equity as compared to the Deutsche Telekom. However, both Deutsche Telekom and Telefonica had higher leverage ratios than the industry. The high ratios show that the two companies are riskier than the industry in case there is a deep in the economy. Telefonica is riskier than the close competitor. The gearing ratios indicate that Deutsche Telekom had relatively lower ratios that the industry. Telefonica had ratios higher than the competitor and also greater than the industry except in the year 2012. The ratios indicate that the in a case of economic crisis, Deutsche Telekom would be in better position to survive than Telefonica. The interest rate cover shows that in the years 2012 and 2103, Telefonica had a better performance management of interest rate than Deutsche Telekom. However, in the year 2014, Deutsche Telekom had a better interest rate cover. The industry interest rate cover was better than Telefonica in the years 2013 and 2014. The interest rate covers, however, indicate that the Telefonica was in a position to pay interest rates over the three years since it had a ratio greater than one (Scott, 2012, p. 194).

Telefonica had longer outstanding inventory days than Deutsche Telekom in the three years. The two companies have more extended inventory periods than the industry. Deutsche Telekom has a better performance that Telefonica in the stock day though worse than the industry. The trade receivables of Telefonica were highe...