De La Salle UniversityGraduate School of Business

Globe TelecomsFinancial Statement Analysis Report

Financial Accounting ACC5000

Members:Baluma, BrendaDaquioag, Alvin

Tan, Des

COMPANY BACKGROUND

Globe Telecom is one of the leading providers of digital wireless communication services in the Philippines under the Globe brand using a full digital network based on the Global System for Mobile Communication (GSM) technology. Globe Telecom offers its wireless services including local, national long distance, international long distance, international roaming and other value-added services through three brands: Globe Postpaid, Globe Prepaid and TM. Globe Postpaid is the postpaid brand of Globe. This includes all postpaid plans such as G-Plans and consumable G-Flex Plans, and Platinum (for the high-end market). Globe Prepaid and TM are the prepaid brands of the Globe Group. Each brand is positioned at different market segments. Globe Prepaid is focused on the mainstream, broad market while TM is focused on value-conscious, working class market. Additionally, Globe has customized services and benefits to address specific market segments, each with its own unique positioning and service offerings. Globe also provides our subscribers with mobile payment and remittance services under the GCash brand and through our whollyowned subsidiary, G-Xchange, Inc. This service enables our subscribers to perform international and domestic remittance transactions, pay annual business registration fees, income taxes for professionals, utility bills, avail of micro -finance transactions, donate to charitable institutions, and buy Globe prepaid reloads.

Globe Telecom’s principal executive offices are located at 5th Floor, Globe Telecom Plaza, Pioneer corner Madison Streets, Mandaluyong City, Metropolitan Manila, Philippines. Globe Telecom is listed in the Philippine Stock Exchange (PSE) and has been included in the PSE composite index since September 17, 2001.

Globe Telecom owns 100% of Innove Communications, Inc. (“Innove”). Innove is a stock corporation organized under the laws of the Philippines and enfranchised under RA No. 7372 and its related laws to render any and all types of domestic and international telecommunication services. Innove offers cellular services under the TM prepaid cellular brand which is supported in the integrated cellular networks of Globe Telecom and Innove. Innove also offers a broad range of wireline services, including fixed line voice, consumer broadband, high-speed internet and private data networks for enterprise clients, internet protocol-based solutions as well as domestic and international long distance communications services or carrier services. Innove’s principal executive office is located at 18th Floor, Innove IT Plaza, Samar Loop corner Panay Road, Cebu Business Park, Cebu City, Philippines.

Globe Telecom is a grantee of various authorizations and licenses from the National Telecommunications Commission (NTC) as follows: (1) license to offer and operate facsimile, other traditional voice and data services and domestic line service using Very Small Aperture Terminal (VSAT) technology; (2) license for inter-exchange services; and (3) Certificate of Public Convenience and Necessity (CPCN) for: (a) international digital gateway facility (IGF) in Metro Manila, (b) nationwide digital cellular mobile telephone system under the GSM standard (CMTS-GSM), and (c) local exchange carrier (LEC) services in Makati and surrounding areas in Metro Manila, Batangas, Cavite, Mindoro, Palawan and certain areas in Mindanao.

On July 23, 2002, the NTC also issued the CPCN for Innove’s IGF, CMTS and LEC services which is valid and renewable after 25 years.

On August 7, 2003, the NTC granted Globe Telecom’s application to transfer its wireline business, assets, obligations and subscribers to Innove. With the transfer of Globe Telecom’s wireline voice and data services to Innove on September 30, 2003, Innove now holds the following: (a) the authorizations and licenses from the NTC issued to Globe Telecom to offer and operate telex, facsimile, and other traditional voice and data services and domestic leased line service using VSAT technology; and (b) the CPCN previously issued to Globe Telecom on July 23, 2002 to offer LEC services in Makati and surrounding areas in Metro Manila, Batangas, Cavite, Mindoro, Palawan and certain areas in Mindanao.

On August 23, 2004, Globe Telecom invested in G-Xchange, Inc. (GXI), a wholly-owned subsidiary, with the primary purpose of developing, designing, administering, managing and operating software applications and systems, including systems designed for the operations of bills, payment and money remittance, payment and delivery facilities through various telecommunications systems operated by telecommunications carriers in the Philippines and throughout the world and to supply software and hardware facilities for such purposes. GXI handles the mobile payment and remittance service using Globe Telecom’s network as transport channel under the GCash brand. The service, which is integrated into the cellular services of Globe Telecom and Innove, enables easy and convenient person-to-person fund transfers via short messaging services (SMS) and allows Globe Telecom and Innove subscribers to easily and conveniently put cash into and get cash out of the GCash system. GXI started commercial operations on October 16, 2004. GXI is a stock corporation organized under the laws of the Philippines. GXI is registered with the Bangko Sentral ng Pilipinas as a remittance agent. GXI’s principal executive office is located at 6th Floor, Globe Telecom Plaza, Pioneer Highlands, Pioneer corner Madison Streets, Mandaluyong City, Metropolitan Manila, Philippines.

On June 17, 2005, NTC issued a provisional authority (valid for 18 months from date of approval) to Innove to establish, install telephone, operate and maintain LEC service, particularly integrated local telephone service with public payphone facilities and public calling stations in all regions, provinces, cities and municipalities across the nation that are not yet covered by its existing CPCN and to charge therefore monthly rates at par with the approved rates of the LEC operators in the area, subject to certain conditions.

On December 28, 2005, NTC approved Globe Telecom’s application for third generation (3G) radio frequency spectra to support the upgrade of its CMTS network to be able provide 3G services. Globe Telecom has been assigned the 10-Megahertz (MHz) of 3G radio frequency spectrum.

FINANCIAL STATEMENT ANALYSIS

Figures are shown in thousand pesos, except per share figures. Currency is PHP

OVERALL PERFOMANCE MEASURES

Overall Performance Measures     2007 2006 2005Market Price per Share* 1,570.00 1,235.00 720.00 Net Income per Share 99.58 88.32 76.60 Price/Earnings Ratio 15.77 13.98 9.40 * taken from citiseconline.com, price at the end of the last business day of the year.   Net Income 13,277,019.00 11,754,673.00 10,314,508.00 Interest 2,996,347.00 4,213,976.00 4,657,748.00 Tax Rate 35% 35% 35%Total Assets 116,620,852.00 124,579,833.00 125,102,390.00 Return on Assets 13% 12% 11%   Net Income 13,277,019.00 11,754,673.00 10,314,508.00 Interest 2,996,347.00 4,213,976.00 4,657,748.00 Tax Rate 35% 35% 35%Long-term Liabilities 33,604,473.00 41,873,541.00 49,250,296.00 Shareholders' Equity 55,416,810.00 56,948,151.00 51,618,810.00 Return on Invested Capital 17% 15% 13%   Net Income 13,277,019.00 11,754,673.00 10,314,508.00 Shareholders' Equity 55,416,810.00 56,948,151.00 51,618,810.00 Return on Shareholders' Equity 24% 21% 20%

Price-Earnings Ratio

"When it comes to selling stocks, it is plain that nobody can sell unless somebody wants those stocks. If you operate on a large scale, you will have to bear that in mind all the time."

- Jesse L. Livermore

The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay Php20for Php1 of current earnings.

Globe Telecoms has shown a consistent increase in its P/E ratio. While it does mean that the stock is getting more “expensive” on a per-peso-invested basis,

It is important that investors note important problems that arise with the P/E measure, and to avoid basing a decision on this measure alone.

The numerator (price) is based on the market prices. The “market” is composed of people who generally will be affected by prevailing market conditions. A “good”

market condition will make this market feel good about investing and therefore stock market prices rise. A “bad” market condition (such as the economic crunch we are experiencing now) will also pull the market down. This emotional response of prevailing sentiment causes an emotional roller-coaster in the stock prices, and the majority of the market generally overlooks the facts behind the solid financial figures.

The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

New US studies indicate, though, that using the P/E ratio to perform long or short trades is possible. However, we have not seen a study for the local PSE for this yet.

Return on Assets

The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. It is important to see how the managers are wisely (or unwisely) allocating its resources.

Globe’s figures show an increasing income over a decreasing asset base, therefore showing a trend of an increasing ROA as well.

Return on Invested Capital

The ROIC is used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns.

Looking at the figures, it is evident that Globe has a good history of efficiently allocating its funds for investments. The good, consistent upward trend will lend a sense of confidence to its stakeholders and provide goodwill to the company name.

Return on Shareholders’ Equity

ROSE helps investors determine if a company is a lean, mean profit machine or an inefficient clunker. Firms that do a good job of milking profit from their operations typically have a competitive advantage - a feature that normally translates into superior returns for investors. The relationship between the company's profit and the investor's return makes ROSE a particularly valuable metric to examine. In general, financial analysts consider return on equity ratios in the 15-20% range as representing attractive levels of investment quality.

The consistently rising ROSE for Globe gives its shareholders a literally rosy outlook for the company. We can definitely determine from these that the Globe management has been a good steward for shareholders’ money, and that given the same management team, shareholders can expect good times ahead with the company.

PROFITABILITY MEASURES

  2007 2006 2005 2004Net Sales Revenue 68,041,818 62,955,443 62,248,493 56,470,308Cost of Sales 3,322,777 4,618,735 6,024,711 6,326,879Gross Margin Percentage 95% 93% 90% 89%

Gross Margin Percentage

Gross Margin Percentage is the measure of Gross Margin in relation to the company’s net sales revenue. Gross Margin is obtained from the difference between Revenue and Cost of Sales. It is an indication of the average margin obtained on products (goods or services) sold. The higher the Gross Margin Percentage the better position of the company in terms of profitability. In the case of Globe Telecom, Gross Margin Percentage is significantly very high ranging from 89%-95%. Also, since 2004, the company was able to consistently improve their GM Percentage showing greater indication of profitability.

  2007 2006 2005 2004Net Income 13,277,019 11,754,673 10,314,508 11,396,242Net Sales Revenue 68,041,818 62,955,443 62,248,493 56,470,308Profit Margin 20% 19% 17% 20%

Profit Margin

Profit Margin also refers to the measure of profitability. The profit margin is usually use in internal comparison. It is an indicator of a company's pricing policies and its ability to control costs. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss. As for Globe, they registered 20%, 17%, 19% and 20% Profit Margin from 2004 to 2007. Except for the decline in Profit Margin from 2004 to 2005, the company showed an increasing profitability status based on a steady increment in their Profit Margin.

Basic Earnings per Share

Basic Earnings Per Share is a measurement of the corporation’s per share performance over a period of time. It is computed by dividing net income applicable to the common stock by the number of shares of common stocks outstanding. The company was able to show an increase from 2005 to 2007 indicating a good stocks turn-over in a given period of time.

Diluted Earnings per Share

Diluted Earnings per Share is another measurement of a corporation’s per share performance. It is the amount of earnings for the period applicable to each share of common stocks outstanding (basic earnings per share) adjusted for the period applicable to each share of common stock outstanding (basic earnings per share) adjusted to reflect dilution (lower earnings per share) assuming all potentially dilutive common shares were outstanding during the period. This reflects the potential dilution of earnings per share that could occur if these contracts and securities were exercised or converted into common stock. Same as with the Basic Earnings Per Share steady increase registered during the period of 2005 to 2007 indicating a good profitability of the company.

  2007 2006 2005 2004Cash Generated by Operations 41,793,012 40,416,674 35,101,793 32,036,810Net Income 13,277,019 11,754,673 10,314,508 11,396,242Cash Realization 3.15 times 3.44 times 3.40 times 2.81 times

Cash Realization

CR ratio indicates how close a company’s net income is to being realized in cash. A ratio higher than one is considered to signal high-quality earnings. This means that the 3.15 times value in 2007 for Globe reflects great cash earnings.

TESTS OF INVESTMENT UTILIZATION

  2007 2006 2005Sales Revenue 68,041,818.00 62,955,443.00 62,248,493.00 Total Assets 116,620,852.00 124,579,833.00 125,102,390.00 Asset Turnover 0.58 0.51 0.50    Sales Revenue 68,041,818.00 62,955,443.00 62,248,493.00 Long-term Liabilities 33,604,473.00 41,873,541.00 49,250,296.00 Shareholders' Equity 55,416,810.00 56,948,151.00 51,618,810.00 Invested Capital Turnover 0.76 0.64 0.62    Sales Revenue 68,041,818.00 62,955,443.00 62,248,493.00 Property, plant and equipment 91,527,820.00 95,052,719.00 97,692,207.00 Capital Intensity 0.74 0.66 0.64    Cash 6,191,004.00 7,505,715.00 10,910,961.00 Cash Expenses 24,627,250.00 22,699,666.00 25,166,973.00 Days' Cash 90.50 119.04 156.08

   Accounts receivable 6,383,541.00 5,527,905.00 6,764,130.00 Sales 68,041,818.00 62,955,443.00 62,248,493.00 Days' Receivable 33.77 31.61 39.12    Inventory 1,112,146.00 993,495.00 1,372,459.00 Cost of Sales 3,322,777.00 4,618,735.00 6,024,711.00 Days' Inventory 120.49 77.44 82.01    Cost of Sales 3,322,777.00 4,618,735.00 6,024,711.00 Inventory 1,112,146.00 993,495.00 1,372,459.00 Inventory Turnover 2.99 4.65 4.39    Sales Revenue 68,041,818.00 62,955,443.00 62,248,493.00 Current Assets 18,740,373.00 24,214,990.00 22,894,035.00 Current Liabilities 27,599,569.00 25,758,141.00 24,233,284.00 Working Capital Turnover (7.68) (40.80) (46.48)   Current Assets 18,740,373.00 24,214,990.00 22,894,035.00 Current Liabilities 27,599,569.00 25,758,141.00 24,233,284.00 Current Ratio 0.68 0.94 0.94    Current Monetary Assets 17,628,227.00 23,221,495.00 21,521,576.00Current Liabilities 27,599,569.00 25,758,141.00 24,233,284.00 Quick Ratio 0.64 0.90 0.89

Asset Turnover Ratio

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.

Observations on the financials show a consistent but small upward trend in the Asset Turnover Ratio of Globe. While it may be said that the turnover is low (<1), the best way to determine its strength is to compare it with a competitor’s figures. A quick check with so-called Philippine Telecom giant Philippine Long Distance Company shows a 2007 Asset Turnover Ratio of 0.60, which is a tad bit higher than Globe. However, considering that PLDT has a good foothold on the fixed line industry for decades before Globe, the ratios that Globe has recorded so far is a good indicator of comparable performance.

Invested Capital Turnover

In accounting, Turnover is the number of times an asset is replaced during a financial period.

Globe shows that while there is no 1:1 return on invested capital yet, there is still a considerably consistent upward trend. While certain factors are possible to increase this ratio to reach 1:1 such as an increase in profit margins, it should be well

considered that Globe is in a very tight competitive market and increasing its margins might adversely affect actual subscriber base figures and generally affect its entire financials as well.

Again, a quick comparison with PLDT shows that both companies have the same 0.76 turnover ratio for the year ending 2007.

Capital Intensity

Capital Intensity (or Fixed Asset turnover) is financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

PLDT has a better fixed asset turnover rate of 0.91, compared to Globe’s 0.74. It has to be noted, however, that one should consider how long both companies’ PP&E investments have been depreciated already to fully assess the impact of this ratio. A substantial PP&E purchase for the next year will greatly impact on the next year’s ratio as well.

Days’ Cash

One of the gauges to see how a company manages its cash properly is by checking how many days worth of bills it can cover with its cash on hand.

As can be seen from the table, Globe has slowly eased from 5-month to a 3-month cash inventory. While this means there is lesser cash on hand, it also means that its fund managers are looking into more ways of using funds for company benefit, thereby not allowing cash to idly sit and do nothing.

Days’ Receivables

This provides us with the average collection period for receivables. Considering that Globe has both postpaid and prepaid accounts (with prepaid accounts being sold through dealers who have credit terms as well), it is expected that there is still a receivable window of anywhere from 30-90 days. The 33-day collection period of Globe is very good, considering that it is in the low end of the collection window assumed.

Globe’s 33-day receivable average is comparable with industry leader PLDT with its 31-day receivables average.

Days’ Inventory

Possessing a high amount of inventory for long periods of time is not usually good for a business because of inventory storage, obsolescence and spoilage costs. However, possessing too little inventory isn't good either, because the business runs the risk of losing out on potential sales and potential market share as well.

For Globe Telecoms, inventory means their stock of handsets, sims, and Call Cards. Of these three items, the bulk of the cost is poured into handsets. Globe’s 120-day inventory stock might still be big for their industry. Considering that their business hinges on technical advances, newer models of handsets are being churned out by cellphone companies quarterly, if not monthly.

This is the point where Globe’s 120-day inventory levels cannot be compared to PLDT’s 0.25-day inventory levels, since PLDT’s core business is still in the fixed line category which means that all telecom infrastructures would have been classified under PP&E and not much investment are spent on handsets for bundled services.

Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over a period. An inventory turnover ratio of 3 is low, and this could be attributed to their 120-day inventory levels.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

Working Capital Turnover

A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.

The FS notes explained why there is a negative WCT for Globe. Again, inventories played a major part in increasing Assets, and the 3G rollout has increased its Liabilities section. Weighing these two factors, it is evident that the rollout facility would eventually be a good asset for the company, while Globe has to make sure that the inventories would be sold instead of eventually being re-classified under “Provision for Inventory Losses, Obsolescence and Market Decline”.

Current Ratio

This ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on

their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.

Globe’s current ratio has gone lower than its performance in the past years. As it is said above, it is not a bad thing but it is not good either. A good look at the financials also shows that dividends are being paid back to shareholders consistently. Further, there has been major expenditures in their telecommunications hardware (the 3G compliance rollout). The lower ratio therefore is not a case of fund mismanagement. While there is an expected low ratio result even for the 2008 report, it is a temporary setback considering that the major fund expense was poured into infrastructure upgrades. In the meantime, management expertise in accessing financing comes in to keep the shareholders happy and to keep the profits coming in as well.

Quick Ratio

The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength.

While much has been said about Globe’s high inventory levels, it is to be noted that the quick ratio results do not vary so much with the current ratio.

TEST OF FINANCIAL CONDITION

Equity Multiplier

Like all debt management ratios, the equity multiplier is a way of examining how a company uses debt to finance its assets. Also known as the financial leverage ratio or leverage ratio.

In other words, this ratio shows a company's total assets per dollar of stockholders' equity. A higher equity multiplier indicates higher financial leverage, which means the company is relying more on debt to finance its assets.

  2007 2006 2005 2004Total Assets 116,620,852 124,579,833 125,102,390 129,703,928Total Equity 55,416,810 56,948,151 51,618,810 54,506,902Asset / Equity 2.104430984 2.187601016 2.423581443 2.379587231

A decreasing equity multiplier shows the independence of the company from using debt to finance its assets. However, from the given table, it shows that the assets of the company is decreasing annually since 2004.

  2007 2006 2005 2004Current Assets 18,740,373 24,214,990 22,894,035 21,980,879Noncurrent assets 97,880,479 100,364,843 102,208,355 107,723,049

The table provided shows the trend of the company’s current and noncurrent assets since 2004.

Current assets showed a steady increase from year 2004 to 2006 but fell significantly in 2007 due to repayment of Globe’s Senior Notes and higher dividend payouts.

Noncurrent assets showed a decrease in value mainly because of the depreciation of the company’s Property and Equipment.

Debt-Equity Ratio

Indicates the proportion of debt the firm holds in relation to equity. This measures the risk of the firm's capital structure in terms of amounts of capital contributed by creditors and that contributed by owners. This expresses the protection provided by owners for the creditors.

Computed as Total Liabilities / Total Equity.

  2007 2006 2005 2004Total Liabilities 61,204,042 67,631,682 73,483,580 75,197,026Total Equity 55,416,810 56,948,151 51,618,810 54,506,902Debt to Equity 1.104430984 1.187601016 1.423581443 1.379587231

The company’s Debt-Equity ratio shows a healthy decrease in proportion. This reflects a good sign for creditors to invest as the value of equity shows strength over liability. If the value of the company’s asset increases, value of equity increases exponentially with the decrease in the Debt to Equity ratio.

Under the company’s loan agreement, this ratio is compliant with the target debt to equity not exceeding 3:1.

Debt Ratio

This ratio measures the amount of debt a firm has for each value of assets. Essentially, total debt ratio is a measure of the company’s ability to meet financial obligations.

Low debt ratios shows a greater cushion against creditor's losses in liquidation

Computed as Total Liabilities / Total Assets.

  2007 2006 2005 2004Total Liabilities 61,204,042 67,631,682 73,483,580 75,197,026Total Assets 116,620,852 124,579,833 125,102,390 129,703,928Debt Ratio 0.524812167 0.542878252 0.587387499 0.579759049

In reference with Debt-Equity ratio, Debt ratio also shows a descending pattern that signifies a strong capability of the company to payoff its debt yearly. A ratio of less than 1 (one) indicates that the company will be able to distribute part of its asset value to shareholders in time of liquidation.

Long-term Debt to Capitalization Ratio

This ratio computes the proportion of a company's long-term debt compared to its available capital. By using this ratio, investors can identify the amount of leverage utilized by a specific company and compare it to others to help analyze the company's risk exposure. Generally, companies that finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios.

Computed as Long-term debt / Total Capitalization. Total Capitalization is the sum of Long-term debt and total equity.

  2007 2006 2005 2004Long-term liabilities 33,604,473 41,873,541 49,250,296 50,051,048Total Capitalization 89,021,283 98,821,692 100,869,106 104,557,950Debt-Capitalization 0.377488078 0.423728234 0.488259468 0.478691941

A declining long-term debt to capitalization ratio implies the decrease in allocation of funds for long-term debt or the ratio implies an increase in equity. From the equity turnover ratio, we can assess that equity shows an increase in value thus affecting this ratio. In effect, this shows the capability of the company to pay off long-term debts by means of revenues (retained earnings).

Cashflow from operations – Debt Ratio

This ratio compares a company's operating cash flow to its total debt, This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt.

Computed as Cashflow generated by operations / Total Liabilities.

  2007 2006 2005Cashflow generated by operations 41,793,012 40,416,674 35,101,793Total Liabilities 61,204,042 67,631,682 73,483,580Cashflow - Debt 0.6828473 0.5975997 0.4776821

The less than one (1) ratio result shows the incapability of the company to pay off its debt just by cash flow from operations. The decrease of cash flow generated by the operations is due to the higher actual income taxes paid.

Times Interest Earned (TIE)

A metric used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. It is usually quoted as a ratio and indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy.

Computed as (pretax operating profit + interest expense) / interest expense.

  2007 2006 2005 2004Pre tax operating profit 20,050,348 17,598,693 14,281,451 12,722,934Interest Expense 2,996,347 4,213,976 4,657,748 4,368,716Times interest earned 7.691597469 5.176267971 4.066170819 3.912282236

An increasing TIE ratio shows the capability of the company to pay off interest expenses. This may mean either an increasing in pretax operating profit or decreasing interest expense.

From the given data, pre tax operating profit is increasing annually from year 2004. This implies a steady increase in TIE ratio as well. Interest expense, on the other hand, has an estimated average of 4,400,000 from 2004 to 2006 and significantly decreased in the year 2007. This decrease in interest expense for the year 2007 jumped the ratio by up to 50 percent from the previous year’s ratio. The 29 percent decline, in interest expense, of P1,218 million from P4,214 million to P2,996 million for the full year of 2007 mainly due to repayment of loans to foreign and local banks during the period, coupled with decrease in peso interest rates.

TEST OF DIVIDEND POLICY

  2007 2006 2005 2004

Basic Earnings per Share Php

100.07 Php

88.56 Php

76.74 Php

80.92 Fully Diluted Earnings per Share 99.58 88.32 76.60 80.78 Dividends per Share 116.00 50.00 40.00 36.00 Share Price 1,570.00 1,235.00 735.00 955.00 Dividend Yield 7% 4% 5% 4%

Dividend Yield

This is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Globe shown an increasing dividend yield from year 2004 to 2007. Due to the increase in cash dividends by 132% to P116 per share brought dividend yield for 2007 to 7%, one of the highest in the Philippine stock market and among the highest of telecom companies in the region.

  2007 2006 2005 2004Dividends 15,403,412 6,668,151 5,511,145 5,104,496Net Income 13,277,019 11,754,673 10,314,508 11,396,242Dividend Pay-out 116% 57% 53% 45%

Dividend Pay-Out Ratio

Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends. The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited

capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is a reciprocate ratio to dividend cover, which is calculated as EPS/DPS.

For Globe, dividend pay-out has increased from 2004 to 2006 from 45-57%. For 2007, Globe paid dividends more than its net income coming out a tremendous increase in dividend pay-out of 116%. Total cash dividends paid in 2007 reached a high of P15.3 billion, equivalent to 130% of their net income the prior year. The P2.2 billion deficits from the net income for dividend allocation was deducted from the retained earnings.

CONCLUSION AND RECOMMENDATION

We can see from the trends in the Overall Performance Measures that Globe looks to be an ideal investment vehicle for interested investors. Even if its P/E ratio has been constantly increasing, it only means that an early purchase of the stocks in the market will lend to a higher yield over time. The fact that all measurable returns are consistently increasing also points to a good management team with sound financial decisions.

The company shows a strong position with regards to their financial condition, which has the capability of earning and paying off its debts. However, the Equity Multiplier does not show a favourable trend for investors as the value of their investment against the company’s asset is decreasing. Even though asset is decreasing, we can attribute this to the dividends and notes payout by the company. In addition, other financial condition ratios are showing good signs of leveraging asset, liability and equity.

Globe’s increasing Profitability Measures and Dividend Ratios only shows the company’s strong financial results translated to significantly higher returns to their shareholders. This only shows a substantial pay-out that underscores the company’s continuous potential to generate strong cash flows and earning. This also balances the company’s objectives of attaining an efficient balance sheet while retaining financial flexibility to make further investments in new growth areas

REFERENCES

Anthony, Hawkins, and Kenneth Merchant, Accounting Test & Cases, 12th Edition, (Boston: McGraw-Hill, 2007).

http://www.investopedia.com

http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html

www.wikipeida.com