Most appropriate ratio for comparing companies in the telecommunication industry

After careful calculations and critical evaluations of the four telecommunication companies,
we conclude that the most appropriate ratio analysis for comparing company’s stock
performance and value in this industry out of the four ratios calculated is the price-to-sales
ratio.

The price to sales ratio is an incredible value indicator in the event that you need to compare
a company’s stock and its historical value or with the stocks in a similar industry. The price
to sales ratio works particularly well when you need to contrast the stock's present value and
its historical value. The price to sales ratio is an awesome valuing tool for assessing recurrent
businesses where the P/E ratio works ineffectively. It works the best when contrasting the
present value and the historical value on the grounds that after some time, a business overall
revenue has a tendency to return to the mean.

At the point when the price to sales ratio is connected to the entire securities exchange, it can
be utilized to assess the present market value and projected returns. In this situation, the price
is the aggregate market top of all stocks that are exchanged, and sales are the Gross domestic
product of the nation. It is a great tool used by Warren Buffett to gauge the broad market
value and speculate future returns.

Like the Price/Earnings ratio and Price/Cash Flow or Price/Free Cash Flow, the P/E ratio
measures the value in light of the earning power of the organisation. This is where its
uniqueness comes in in relation to Price/Book ratio, which measures the value in light of the
organization's balanced sheet.

Recommendation

However we recommend that the best or most appropriate ratio for comparing companies in
the telecom industry is the debt-to-equity ratio which is not included in our assignment. This
is because of a high expenditure on the utilities of these telecom companies. These
expenditures are normally financed by borrowing which means a high debt to equity. These
utilities varies as result of a large number of consumers and their service areas. In order to
service this high debt, there must be stable revenues and cash flows for them to be certain to
finance it on an ongoing basis. The other four listed ratios above did not provide information
on this. For example, a company with a high debt to equity ratio indicates that its leverage is
being financed by a high debt and if it varies much from that of the industry average, the
company’s ability to repay its debt will be minimal which will raise a red flag.

Table 1.

Company Market Cap (M) Debt-to-Equity

Digi.com Bhd $ 9,859.41 5.01
Maxis Bhd $ 11,566.43 1.09
Axiata Group Bhd $ 12,723.30 0.78
Telekom Malaysia Bhd $ 5,060.95 1.04
Source: https://www.gurufocus.com/term/deb2equity/DIGBF/Debt-to-
Equity/Digi.com%20Bhd

Looking at the table, a high debt to equity ratio for Digi Berhard indicates that the company
has been financing its growth with debt. For Axiata being the lowest, it means the company
has the ability to fulfil its debt obligation.

Stock valueanalysis besides financial ratio analysis

1. Common size analysis

It is the reforming or restatement of a financial statement to a summarized or
standardized form. Its aim is to bring out those amounts in the financial statements
that are important to the investors in a percentage form for easy reading and better
comparison among companies in same industry. There are two types of common size
analysis of stock performance namely:
I. Horizontal common size analysis: this involves the use of a financial statement
amounts in a specified year as a base while stating the subsequent year amount as
a percentage of its value (base value). It is useful when the growth of a company
is been compared over a period of time.
II. Vertical common size analysis: This analysis involves the use of the aggregate
value of the financial statement in a given year as the base and the amount of each
accounts rewritten as a percentage of the aggregate.ie. The balance sheet
aggregate amount is normally the total assets while that of the income statement is
revenues or sales.
2. Financial analysis
This is the selective use of information’s and other data in evaluating and interpreting
a company’s present and future financial position and stock performance. These
includes:
 Financial disclosure: e.g. annual report of the company
 Market data: e.g. the stocks market price
 Economic data: e.g. the purchasing power of the consumer, country’s GDP.