Fundamentals of Finance - IITV Plc - Essay Example

…………………………………………………………………………..xxxxx ……………………………………………………………………….xxxx …………………………………………………………………………..xxxx ………………………………………………………………………xxxx @2012 Fundamentals of finance 1. Company summary IITV plc is a media company based in the United Kingdom and cover new, broadcasting and production. The company owns all of the three regional channel licenses in Wales and England. ITV owns ITV1 and ITV2 and has partial interest in GMTV. ITV began its broadcasting in 1955 following the Television Act of 1954 which made commercial television possible in the United Kingdom. ITV broadcasting operates a group of channels which include ITV1 and also delivers content across a number of platforms like ITV player and itv.com. Its studios produce and sell formats and programmes both in UK and globally. WPP Plc operates a communications services group. The operations of the company encompass media, information and consultancy, public affairs, public relations, identity services, branding, investment management and advertising. WPP is a global leader in the marketing of communication services, and it comprises of public relation and public affairs companies, advertising companies and promotion and relationship marketing companies. The history of WPP dates back in 1985 when Martin Sorrel builds a worldwide marketing services company after a search on public entity. 2. Company strengths and weaknesses Analysis of the financial performance of each company WPP Plc Current ratio The current ratio for WPP Plc in 2011 was 0.94:1. Current ratio measures the ability of a firm to cater for its short term obligations using its short term assets. The current ratio is lower than 1, and this means that WPP Plc was not in a better financial position to cater for its obligations. Gearing ratios 1. Debt to equity ratio The debt to equity ratio for WPP Plc during the 2011 financial year was 2.67. This ratio is obtained by dividing total liabilities by shareholders equity and this ratio means that the total liabilities are more than the shareholders equity. This high ratio is an indication of how aggressive WPP plc has been when it comes to using debts to finance its growth. A lot of debt was used to finance the 2011 growth and this ahs led to increased operations and hence the company was able to generate increased earnings using this financing than it would have done without these finances. 2. Debt ratio The debt ratio for WPP plc in 2011 was 0.72. The debt ratio is less than 1, and this indicates that the company has less debts than assets or has more assets that the debts. As a result, the company faces fewer risks when it comes to debt loads. Profitability ratios 1. Profit margin Profit margin for WPP plc in the 2011 financial years was 9.14%. This ratio measures how much a company generates from each dollar of sales (Bull 2007). This means that the company keeps $0.914 of each dollar of revenue collected. The profit margin ratio for the company in 2011 was low which indicates a high risk that any decline in sales will erase or do way with the profit and lead to a net loss. 2. Return on assets WPP plc return on assets ratio for the 2011 financial year was 3.7%. The low ratio is an indicator of how inefficient the company was in managing its assets in order to generate income. In simple terms, the ratio shows how less profitable the company was relative to its total assets. 3. Return on equity The return on equity for WPP for the 2011 was 13.6%. This low percentage is an indication the company did not generate much profit from the shareholders funds invested in the company. Dividend payout ratio Dividend payout ratio for WPP plc was 33% during the 2011 financial year. The high dividend ratio for the company is an indication the earnings of the company highly support the payment of dividends (Bull 2007). Price earning ratio Price earning ratio for WPP plc in 2011 was 12.58. This is a high ratio, and this indicates that the company investors are expecting higher earnings growth in the future. This ratio also shows that how much the company investors are willing to pay per each dollar of earnings. ITV plc Current ratio The current ratio for ITV Plc in 2011 was 1.96:1. The higher current ratio is a clear indication that ITV plc was in a better financial position to use its short terms assets in catering for its obligations. Gearing ratio 1. Debt to equity ratio The debt to equity ratio for ITV plc in the 2011 financial year was 2.62. This high percentage is an indication of how aggressive the company was in using debt to finance its growth. The high debt used in financing the operations of the company is estimated to have led to increased earnings than it would without these funds (Bull 2007). 2. Debt ratio The debt ratio for IVT plc in 2011 was 0.72. The debt ratio is less than 1, and this indicates that the company has less debts than assets or has more assets that the debts. As a result, the company faces fewer risks when it comes to debt loads. Profitability ratios 1. Profit margin Profit margin for ITV plc in the 2011 financial years was 11.6%. This means that the company keeps $0.116 of each dollar of revenue. The profit margin ratio for the company in 2011 was high hence high profit margin which indicates a lower risk that a decline in sales will result into a net loss (Bull 2007). 2. Return on assets Return on assets ratio for ITV plc for the 2011 financial year was 8.5%. The high return on assets ratio shows how efficient that company’s management was in using its assets in income generation. The high ratio also shows how profitable the company was when it comes to the use of its total assets. 3. Return on equity The return on equity for ITV plc was 30.8% during the 2011 financial year. This high percentage is a clear indication that the company was able much profit from the shareholders money invested in the company. Dividend payout ratio Dividend pay out ratio for ITV was 33.15% during the 2011 financial year. The high dividend payout ratio means that the earnings of the company highly support the payment of dividends Price earning ratio Price earning ratio for ITV plc in 2011 was 10.65. This is a high ratio, and this indicates that the company investors are expecting higher earnings growth in the future. This ratio also shows that how much the company investors are willing to pay per each dollar of earnings (Bull 2007). Comparison of the financial performance of each company The current ratio of WPP plc was 0.94 while that of ITV plc was 1.94, and this shows that ITV was in a better position of catering for its short term needs than WPP. Current ratio is obtained by dividing current assets by current liabilities. The current ratio of less than 1 in WPP plc is an indication that the current liabilities of the company were more than the current assets making the company not to be in a better financial position to cater for its obligations unlike the case of ITV plc which was able to cater for its obligations given that it had more assets than liabilities (Bull 2007). Debt to equity for WPP was 2.67 while that of ITV was 2.62 an indication that WPP was making use of debts to fund its operations more than in the case of ITV. The debt ratio for the two companies was the same, and this means that the two companies had more assets than debts and hence faced fewer risk when it comes to the debt loads. Profit margin for ITV was 11.6; return on assets was 8.5%, and return on equity was 30.8%. On the other hand, profit margin for WPP was 9.14%, return on assets was 3.7%, and return on equity was 13.6%. From these profitability ratios, it is quite evident that ITV is far much profitable than WPP for investments. Dividend payout ratio and price earning ratio for WPP was 33% and 12.58 respectively. Dividend payout ratio and price earning ratio for ITV was 33.15 and 10.65 respectively during the 2011 financial year. From the above financial ratios, it is evident that ITV plc was in a better financial performance in 2011 compared to WPP plc. From all indications, the finances of ITV plc performed well in the 2011 financial year compared to the performance of WPP plc. ITV plc was more profitable than WPP plc and any investment in the company is likely to yield more returns on investment than investment done on WPP plc (Kieso 2009). The healthy financial performance of IVT plc acts as its business strengths to attract more investors while the poor financial performance of WPP plc is a weakness to the company. 3. Security Market Lines Security market line is a graph which is used to display the expected rate of return. It is also a line which graphs risks versus the expected rate of return and also shows all marketable securities which are risky. Market risk premium is the difference between the expected returns on a given portfolio and the risk free rate (Fama and French 1988). Risk free rate is a representation of the interests which an investor would expect from an investment which is free from any risk. WPP plc The above security market line shows scattered data on market risk premiums and risk free rate. Majority of the data is scattered and does not fit in the line of best fit, and this shows how the market securities of WPP plc is quite risky (Fama and French 1988). Majority of the data used in this graph is either above or below the line of fit though they are too close and congested around the line of fit. In graphing risks versus the expected rate of return, it is evident from the above graph that the risks are higher than the expected rates of return making any investment in WPP plc quite risky (Drury 2005). IVT plc The above security market line shows scattered data on market risk premiums and risk free rate. The line of fit contains enough data with the rest being either above or below the line of fit. The line of fit shows how the marketable securities of ITV plc are less risky and hence worthy of investment (Fama and French 1988). The graph maps risks against expected rate of return and from all indications, it is quite clear that the risks are less making any investment in IVT plc being less risky. 4. Summary, Conclusions, and Recommendations With his kind of lifestyle and needs, it would be advisable for Timothee to choose the investment portfolio of ITV plc because the investment will yield high returns and in a short period compared to the portfolio of WPP plc which has low yields when it comes to return on investments. With his kind of life, Timothee requires an investment portfolio which is not risky and in a company which is promising when it comes to profitability. ITV plc is quite profitable and does not stand any risk of being declared bankrupt. When a company is declared bankrupt, its investors stand to lose a big time as they will not be able to earn dividends and return on investment and their shares may become obsolete or decrease in the prices. The marketable securities for WPP plc are riskier than those of ITV plc and this makes investment in ITV plc a worthy course. For Timothee, investing in ITV plc would be a good course for a starter like him as he will be assured of continued returns on investments and dividends. This is because from the past financial performance of ITV plc, it is predictable that the finances of the company will continue performing well in future (Drury 2005). References Brealey, R. A., S.C. Myers and A.J. Marcus, 2012. Fundamentals of Corporate Finance, McGraw-Hill International Edition. David Hillier, Stephen Ross, R. Westerfield, J. Jaffe, B. Jordan, 2010. Corporate Finance, European version, New York, McGraw-Hill Irwin. Atrill, P. & McLaney, E. J., 2011. Accounting and finance for non-specialists 7th edn. Harlow & New York: Prentice Hall Financial Times. Gowthorpe, C., 2005. Business accounting and finance for non-specialists. London: Thomson Learning. Drury, C., 2005. Management accounting for business decisions 3rd edn. Thompson Kieso et.al, 2009. Managerial Accounting: Tools for Business Decision Making. John Wiley & Sons Fama, E., and French, K. “Dividend Yields and Expected Stock Returns.” Journal of Financial Economics, 22 (1988), pp. 3-25. Fama, E., and French, K. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, Vol. 33, No. 1 (1993), pp. 3-56 De Carvalho, R.L., Lu, X., and Moulin, P. “Demystifying Equity Risk–Based Strategies: A Simple Alpha plus Beta Description.” The Journal of Portfolio Management, Vol. 38, No. 3 (2012), pp. 56-70. Fama, E., and French, K. “The Cross-Section of Expected Stock Returns.” Journal of Finance, Vol. 47, No. 2 (1992), pp. 427-465. Richard Bull, 2007. Financial Ratios: How to use financial ratios to maximise value and success for your businesses. Elsevier ITV Plc, http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=ITV:LSE. Accessed on 3rd December, 2012 WPP plc, http://finance.yahoo.com/q/ks?s=WPPGY. Accessed on 3rd December, 2012 Read More