The Price Earnings ratio

A business is solvent when it can pay its debts as they become due; this means that it can pay its suppliers by having enough working capital. 6 From analyzing the two years before and after the acquisition of Orange, the current ratio has seemed to improve quite significantly.

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In 1999 the year before Orange’s acquisition, the relationship between the current assets and the current liabilities was very low even though more and more companies are beginning to work within a ratio of 1:17. This was also reflected in the liquidity ratio, which can be a more precise measure as it ignores the value of stock within current assets, at 0.70:18.

These figures suggest that not only did Orange have a very low current ratio before France Telecom’s takeover, but also that a large portion of the current assets were stock. The liquidity ratio also indicates that Orange had a lot of stock that it was not selling at the time, and the fact that it was coming close to being insolvent. France Telecom on the other hand appears to be doing even worse when both company figures for current and liquidity ratios are compared like-for-like. The two years before and after the acquisition, France Telecom’s ratio is below 1:19.

This can also mean that France Telecom also had issues of insolvency, although it can be assumed that financing the takeover could have caused this low. The inadequate and extremely low liquidity figure of 0. 29:1 in 2002 implies that on one hand Orange was able to improve its liquidity figure whereas France Telecom was having a problem with too much stock. Alternatively the solvency ratio (%) from the annual reports suggest Orange prior to the takeover was in negative figures compared to France Telecom, and after the takeover improving dramatically to 83. 96% in 2002.

10There is insufficient data to comment on Orange’s Gross profit, but France Telecom had increased its gross profit following the takeover of Orange, although this has also correlated in a rise in operating profit as well. The increasing gross profit can be miss leading as the percentage profit margin was rising following up to the takeover, but this declined and became negative after the takeover. This could have been for various reasons, such as increasing costs within the company if not for financing the takeover of Orange. Orange was increasingly losing out on its percentage profit margin -11. 31% in 1999.

This shows how they were slowly becoming less profitable as a business but drastically enhanced their performance to 67. 78 in 2002 after the takeover. The borrowing ratio (or gearing) looks at total borrowing of the company and divides it by the net worth to show the level of security there is for borrowings. 11 Creditor payment days were beginning to increase in 1998 and 1999 for Orange but there is not enough information in this section, although it can be assumed that as the amount owed to creditors is also increasing as shown in the annual report of Orange (between 1997 to 1999) the creditor days were also rising.

This could mean that Orange was taking longer to pay back more money that it owed. However France Telecom didn’t seem to be having this problem, which is why it may have had a better chance at the takeover as it possibly had a better credit history than Orange in the same sector. Stock turnover is a broad ratio that looks at how quickly a company turns its stock in to sale, so it is a good measure of efficiency. 12 The only information regarding Orange’s stock turnover is for the two years before the takeover and is in decline.

However France Telecom is able to turnover its stock very quickly, and even more so after the takeover in 2002, suggesting the company is quite efficient at selling its products. The Earnings per Share (EPS) of France Telecom dramatically decreased after 2000, which could be due to the large amount required to acquire Orange Ltd. EPS has returned to its previous health by 2003 and is showing to be strong in comparison to one of their biggest rivals the Vodafone group.

The Price Earnings ratio is a commonly used performance indicator, and represents the markets confidence in a company. A high PE will usually indicate that investors have a high level of confidence that profits will grow strongly in the future. High PE can also be linked to rumours of potential takeover bids. France Telecoms high PE ratio in 2000 can be linked to the acquisition of Orange Limited in February 2000. Following 2000 investors lost confidence in the company, mirroring the large drop in EPS. Investor confidence returned in 2003.