The Vodafone (LSE:VOD) share price crashed last week by nearly 10% following the publication of its latest results. I think it’s fair to say that investors weren’t particularly impressed given the downward trajectory the stock has been on. But has the business performed as badly as its share price indicates? And if not, is this a buying opportunity for my portfolio?
The Vodafone share price collapse
The preliminary results posted by the company were a mixed bag. And while they certainly weren’t terrible, it seems investors were expecting more. Looking at the top line of the income statement, total revenue fell by 2.6% to €43.8bn. Given that the rollout of 5G has only just started, a declining level of sales isn’t exactly a pleasant sight, especially from one of the biggest UK mobile network operators.
But despite the sales slowdown, the operational efficiency of the firm improved. As a result of these boosted margins, total underlying profit increased by 24.3%, rising from €4.1bn to €5.1bn in the space of a year. Subsequently, Vodafone returned to profitability for the first time since 2018, albeit by a small margin.
Unfortunately, while restored profitability is a welcome sight, full-year adjusted earnings missed analyst expectations, leading to last week’s collapse of the Vodafone share price.
A buying opportunity?
While investors may not have been impressed, the Vodafone management team did achieve results within the guidance range issued earlier in the financial year. And looking ahead, it continues to expect growth from both its domestic and international markets. As such, the firm has issued EBITDA guidance for FY22 to be anywhere between €15bn and €15.4bn. Comparing these figures to the €14.5bn recently achieved, this represents potential growth of up to 6%.
That’s hardly an exciting level of profit expansion. But for an established blue-chip company with a 6% dividend yield, it’s not too bad, I fell. So the recent decline in the Vodafone share price could be a buying opportunity. But there remains a significant risk to this business that stops me from personally pulling the trigger.
The growing pile of debt
As previously stated, Vodafone has struggled to generate profits for a few years. Therefore to keep the lights on, the firm has had to raise additional capital through both debt and equity. Share dilution can harm the stock price, but it doesn’t directly compromise the company’s solvency. Debt, on the other hand, does. And Vodafone has a lot of it.
Even though the management team was able to reduce net debt last year, it still stands at just over €40bn. And with a pile that big, comes an enormous interest bill. This is particularly troublesome given that interest rates are expected to rise in the near future. To make matters worse, the firm has also been deferring its corporation tax. There’s now around €2bn of unpaid tax on the balance sheet that will eventually have to be paid.
Combining these two factors, a 6% boost in earnings may not be enough to stay in the green. And should profitability once again fall, the Vodafone share price may do the same. Therefore I won’t be adding any shares to my portfolio today.