The Vodafone (LSE:VOD) share price popped up this morning following its latest earnings report. At the time of writing, it’s jumped 5%, undoing some of the lacklustre performance seen in 2021. Over the last 12 months, the stock is down by around 8%, but is that soon about to change?
Let’s look at the latest results and see whether I should consider this business for my portfolio.
The share price rises on “good” performance
The telecommunications giant has achieved a good financial performance over the last six months. At least, that’s how management described it. And looking at the numbers, I tend to agree. Revenue for the period has continued to climb by a further 5% from €21.4bn to €22.5bn. This growth stems mainly from organic sources, namely its European services and its fintech venture in Africa – M-Pesa.
The financial platform continues to evolve, serving over 49 million customers with 9.3 billion transactions flowing through the payment network. That’s up from 6.8 billion just last year during the height of the pandemic.
Combined, this good performance translated into an operating profit of €2.6bn. That’s actually down from the €3.4bn over the same period in 2020. However, last year’s profits were inflated by a one-off gain of around €1bn due to the merger of Vodafone Hutchison Australia and TPG Telecom Limited. When adjusting for this, underlying profits climbed by about 8%, indicating margin expansion.
That’s obviously fantastic news for the business. And with its mobile customer base also increasing despite fierce competition, seeing the Vodafone share price rise on this report is hardly surprising.
Taking a step back
As impressive and encouraging as it is to see Vodafone continue to charge ahead, I still have some concerns about the group’s financial status. Running and maintaining a telecommunications infrastructure network is hardly cheap. And, consequently, the company has racked up a pretty substantial pile of debt that’s still growing.
Coupling the firm’s obligations to banks and bondholders, Vodafone has just over €54.2bn of loans to repay. That’s up from €52.5bn last year. The recent expansion of margins is undoubtedly going to help keep interest payments in check.
However, it seems working capital requirements and licensing fees are on the rise. Combining this with €1bn of dividend payments and another billion-or-so of share buybacks to undo equity dilution from maturing convertible bonds resulted in net debt actually rising nearly 10% to €44.3bn.
Needless to say, seeing an increasing degree of leverage on the balance sheet isn’t a positive sign and could lead to problems for the Vodafone share price later down the line.
Time to buy?
All things considered, I continue to be impressed by management’s strategy to expand the business, especially its activities in Africa. However, my opinion ultimately remains unchanged. Vodafone’s balance sheet simply isn’t strong enough for my tastes. Therefore, I’m keeping this business on my watch list for now.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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