Financial Analysis of Portsmouth FC and Southampton FC - Essay Example

? Financial Analysis of Portsmouth FC and Southampton FC Financial Analysis of Portsmouth FC and Southampton FC Introduction In the global economy currently, investors are increasingly investing their financial capital in the football clubs. This is due to the high returns the business has been making in the last couple of years. The returns of the different football clubs in the past has been varied depending on the performance of the teams in the title aggregations. In addition, the management of the different teams has been very crucial in determining the financial performance of the teams. Consequently, this paper undertakes a valuation review of two leading teams in the English premier league namely the Southampton Football Club and Portsmouth Football Club. This has been done by reviewing the financial performance of the two clubs over the last five years to depict the current and future possible value of investing in the two different clubs. Southampton Football Club Southampton football club is one of the oldest football organizations in the English premier league since its formation in 1885. The club has been associated with the church since its formation that has earned it the saint’s nickname (Southampton.com, 2013). The performance of the team in the past has been relatively poor since it was relegated on 15 May 2005 from the premier league competitions. However, the club has been able to return to the premier league tournaments in the latest season. Furthermore, the club has been able to win the FA cup title in 1976 and second position in First Division tournament in 1984 (Southampton.com, 2013). Accordingly, the performance of the club in the past has been relatively poor compared to other clubs in the English major tournaments. Currently, the team is ranked at position 33 in the English premier league tournament after it was promoted last season. Historically, the club has been a rival of Portsmouth club due to their closeness of the two cities and the maritime history (Southampton-FC, 2012). Portsmouth Football Club Portsmouth Football Club was founded in 1898 in the city of Portsmouth as a football club organization. The club has experienced a relative success since its formation having been able to secure the English championship twice and FA cup twice (Portsmouth.com, 2013). This has seen the financial returns of the club been relatively stable and attractive. Indeed, the club is one of the highest owned clubs by the fans due to its performance over the years. In addition, the club has been able to attract a number of the best players in the English tournaments. Currently, the club is at position 24 in the English premier league (Portsmouth.com, 2013). Financial Ratios valuation To demonstrate the financial valuation of the two organizations, a five years financial ratios computation has been undertaken. In addition, financial valuations of the two clubs have been undertaken by using the financial results of 2012. This is as demonstrated by the computations below. Financial Ratio 2012 2011 2010 2009 2008 Liquidity ratios Current ratio = (current assets/ current liabilities) (Stickney, 2010) Southampton Football Club = (20,07700/ 37,306,000) = 0.54 Portsmouth Football Club = (3133294/ 361,098) = 8.68 Southampton Football Club = (14,694,000/ 25,650,000) = 0.57 Portsmouth Football Club = (6046092/ 339482) = 17.81 Southampton Football Club = (15472/ 7990 = 1.9 Portsmouth Football Club = (2480024/ 314692) = 7.88 Southampton Football Club = (1359.2/ 620) = 2.2 Portsmouth Football Club = (1974021/ 239,815) = 8.23 Southampton Football Club = (1362.0/ 614.8) = 2.22 Portsmouth Football Club = (1471235/ 235240) = 6.25 Quick ratio = (quick assets/ current liabilities) Quick assets = (current assets – inventories) Southampton Football Club = [(20,077,00 – 2,806,000)/ 37,306,000] = 0.46 Portsmouth Football Club = (3,133,294 – 32,541)/ 361,098) = 8.5 Southampton Football Club = [(14,694,000 – 1,902,000)/ 25,650,000] = 0.45 Portsmouth Football Club = (2207669 – 30,282)/ 339482) = 6.41 Southampton Football Club = (15472 – 4397)/ 7990 = 1.3 Portsmouth Football Club = (2480024 – 20822)/ 314692) = 7.81 Southampton Football Club = [(1359.2 – 348.5)/ 620] = 1.63 Portsmouth Football Club = [(1974021 – 19192)/ 239,815] = 8.2 Southampton Football Club = (1362.0 – 430.8)/ 614.8) = 1.51 Portsmouth Football Club= [(1471235 – 21428)/ 235240] = 6.16 net working capital ratio = (net working capital/ total assets) (Fridson & Alvarez, 2011) Southampton Football Club = (20,077,00 – 37,306,000)/ 493,215,000 = -0.035 Portsmouth Football Club = [(3,133,294 – 361,098)/ 7,029,792] = 0.39 Southampton Football Club = (14,694,000- 25,650,000)/ 482,213,000 = -0.023 Portsmouth Football Club = (2207669 – 339482)/ 6046092 = 0.36 Southampton Football Club = (15472 – 7990)/ 23666 = 0.32 Portsmouth Football Club = (2480024 - 314692)/ 6264630 = 0.34 Southampton Football Club = [(1359.2 - 620)/ 2014.1] = 0.37 Portsmouth Football Club = [(1974021 – 239,815)/ 5617107] = 0.31 Southampton Football Club = [(1362.0 – 614.8)/ 1898.7] = 0.39 Portsmouth Football Club = (1471235 – 235240)/ 4969276 = 0.25 Profitability ratios Return on assets = (net income/ average total assets) (Beaver, Correia, & McNichols, 2011) Southampton Football Club = [12,071,000/ (493,215,000 + 482,213,000)/2] = [12,071,000/ 487,714,000] = 0.024 Portsmouth Football Club = [503,505/ (7029,792 + 6046092)/ 2] = [503,505/ 6537942] = 0.077 Southampton Football Club = [230.1/ (2581.8 + 2,366.6)/2] = [230.1/ 2474] = 0.093 Portsmouth Football Club = [111,117/ (6046092 + 6264630)/ 2] = [111,117/ 6155361] = 0.018 Southampton Football Club = [2022/ (23666 + 19250)/ 2] = [2022/ 21458] = 0.094 Portsmouth Football Club = [157133/ [(6264630 + 5617107)/ 2] = [157133/ 5940868.5] = 0.026 Southampton Football Club = [125/ (2014.1 + 1898.7)/ 2] = [125/ 1956.4] = 0.063 Portsmouth Football Clubs = [143904/ (5617107 + 4969276)/ 2] = [143904/ 5293191.5] = 0.027 Southampton Football Club = [232.8/ (1898.7 + 1863)/ 2] = [232.8/ 1180.85] = 0.19 Portsmouth Football Club = [(207923/ (4969276 + 4722353)/ 2] = [(207923/ 4845814.5] = 0.042 Return on equity (ROE) = (net income/ average stockholders, equity) Southampton Football Club = [12,071,000/ (113,032,000 + 97,669,000)/2] = [12,071,000/ 105350500 = 0.11 Portsmouth Football Club = [503,505/ (2671805 + 2321625)/ 2] = [503,505/ 2496715] = 0.2 Southampton Football Club = [230.1/ (1605.2 + 1386.4)/ 2] = [230.1/ 1495.8] = 0.15 Portsmouth Football Club = [111,117/ (2321626 + 2377881)/ 2] = [111,117/ 2349753.5] = 0.5 Southampton Football Club = [2022/ (13864 + 11333)/ 2] = [2022/ 12598.5] = 0.16 Portsmouth Football Club = [157133/ (2377881 + 2291598)] = [157133/ 2334739.5] = 0.1 Southampton Football Club = [125/ (1240.1+ 1177.2)/ 2] = [125/ 1208.65] = 0.1 Portsmouth Football Club = [143904/ (2291598 + 1931714)/ 2] = [143904/ 2111656] = 0.1 Southampton Football Club = [232.8/ (1177.2 + 1154.8)/ 2] = [232.8/ 1166] = 0.2 Portsmouth Football Club = [(207923/ (1913714 + 2214163)/ 2] = [(207923/ 2063938.5] = 0.1 Profit margin = (net income/ sales) Southampton Football Club = (12,071,000/ 32,853,000) = 0.37 Portsmouth Football Club = [503,505/ 2004541) = 0.25 Southampton Football Club = [230.1/ 3,009] = 0.08 Portsmouth Football Club = [111,117/ 1765801) = 0.1 Southampton Football Club = (2022/ 27064) = 0.07 Portsmouth Football Club = (157133/ 1539794) = 0.1 Southampton Football Club = [125/2460.7) = 0.050 Portsmouth Football Club = (143904/ 1399182) = 0.1 Southampton Football Club = [232.8/ 2524.2] = 0.09 Portsmouth Football Club = (207923/ 860577) = 0.24 Activity ratios Assets turnover ratio = (sales/ average total assets) (Drake & Fabozzi, 2012) Southampton Football Club = (32,853/ 487,714 = 0.07 Portsmouth Football Club = (2004541/ 6537942) = 0.31 Southampton Football Club = (3,009/ 2474) = 1.21 Portsmouth Football Club = (1765801/ 6155361) = 0.29 Southampton Football Club = (27064/ 21458) = 1.26 Portsmouth Football Club = [1539794/ 5940868.5] = 0.26 Southampton Football Club = (2460.7/ 1956.4) = 1.26 Portsmouth Football Club = [(1399182)/ 5293191.5] = 0.26 Southampton Football Club = (2524.2/ 1180.85) = 2.1 Portsmouth Football Club = (860577/ 4845814.5) = 0.18 Inventory turnover ratio = (cost of goods sold/ average inventories) Southampton Football Club = [4,189/ (2,806 + 1,902)/ 2] = [4,189/ 2,354] = 1.78 Portsmouth Football Club = [3043903/ (32541 + 30282)/ 2] = [3043903/ 31411.5] = 97 Southampton Football Club = [1,515.6/ (536.8 + 439.7)/ 2] = [1,515.6/ 487.85] = 3.12 Portsmouth Football Club = [4283142/ (30282 + 20822)/2] = [4283142/ 25552] = 167.62 Southampton Football Club = [13616/ (4397 + 3444)/ 2] = [13616/ 3920.5] = 3.47 Portsmouth Football Club = [2742351/ (20822 + 19192)] = [2742351/ 20007] = 137.1 Southampton Football Club = [1198.2/ (348.5 + 430.8)/ 2] = [1198.2/ 389.65] = 3.1 Portsmouth Football Club = [1945188/ (19,192 + 21428)/2] = [(1945188/ 20310] = 95.77 Southampton Football Club = [1217.6/ (430.8 + 373.6)/ 2] = [1217.6/ 402.2] = 3.03 Portsmouth Football Club = [1617948/ (21428 + 16955)/ 2] = [1617948/ 19191.5] = 84.3 Capital structure ratios Debt to equity ratio = total liabilities/ total stockholders’ equity Southampton Football Club = (380,166/ 113,032) = 3.36 Portsmouth Football Club = (3991772/ 2671805) = 1.49 Southampton Football Club = (379,126/ 97,669) = 3.88 Portsmouth Football Club = (3379490/ 2321626) = 1.46 Southampton Football Club = [(7990 + 1812)/ 13864] = 9802/ 13864 = 0.7 Portsmouth Football Club = (3886749/ 2377881) = 1.63 Southampton Football Club = (774/ 1239.9) = 0.62 Portsmouth Football Club = (3325509/ 2291598) = 1.45 Southampton Football Club = (721.5/ 1177.2) = 0.61 Portsmouth Football Club = (3055562/ 1913714) = 1.6 Interest coverage ratio = EBIT/ interest expense Southampton Football Club = (12,418 + 586)/ 586 = 22.19 Portsmouth Football Club = [(580,394 + 72,135)/ 72,135] = 9.04 Southampton Football Club = (20,515 + 597)/ 597 = 35.36 Portsmouth Football Club = [(169,072 + 62,475)/ 62,475] = 3.71 Southampton Football Club = (3068/ 53) = 57.89 Portsmouth Football Club = [(218596 + 68428)/ 68428] = 4.19 Southampton Football Club = (192/ 8.3) = 23.13 Portsmouth Football Club = [(200046 + 67515)/ 67515] = 3.96 Southampton Football Club = (325.4/ 8.3) = 39.17 Portsmouth Football Club = [(222306 + 68417)/ 68417] = 4.2 To compute financial values of the two clubs, a number of assumptions have been employed in the valuation models adopted. Accordingly, the taxation rate for both entities is 28% that is used by the government to collect taxation revenue from corporations (Hacker-Young, 2012). Secondly, since the two clubs operate in the same industry environment, the risk free rate facing the two clubs has been assumed equal. Accordingly, the LIBOR rate of 2012 has been employed as the free risk rate. In addition, a 1.5% has been added on the LIBOR rate since the football club investment is considered a risky investment due to high potential of loss of value in the investment depending on the season performance of the clubs. This implies that the LIBOR rate of 2012 that was 2.1% plus 1.5% (3.6%) has been employed as the free risk rate of the football clubs (Globalrates.com, 2012). The market return rate has been computed by taking weighted average return of FTSE index for the last five years. Market Return Rate (S&P-500, 2013) Year 2008 2009 2010 2011 2012 FTSE Index (%) -30.9 22.1 9 17 23 Weight (%) 10 15 8 6 11 Average = 0.8% The movement of the share prices of the two clubs is reflected by the beta value of the teams. The beta value of Southampton Football club and Portsmouth Football club is 1.5 and 0.76 respectively (Yahoo-finance.com, 2013). The cost of debt sa reflected by the financial results of 2012 are 8% and 13% for Portsmouth and Southampton footbal clubs respectively. The debt value and equity value of Southampton club is 380,166 and 113,032 for the year 2012. Similarly, the debt and equity values of Portsmouth club are 3991772 and 2671805 respectively for the latest financial results. Consequently, the debt and equity valuation of the two clubs are as computed below. Equity Value Calculation E(ri) =rf+ ?i[E(rm) -rf] Portsmouth E(ri) = 3.6% + 0.76* (0.8 – 3.6) = 3.6% - 2.128% = 1.472% Southampton E(ri) = 3.6% + 1.5*(0.8 – 3.6) = 0.6% Weighted Average Cost of Capital Value Calculation WACC = [D/ V * rdebt * (1-TC)] + [E/V *requity] Portsmouth WACC = [3991772/ 6663577* 8%* (1-28%)] + [2671805/ 6663577* 1.472% = 0.0345 + 0.0059 = 0.0404 or 4.04% Southampton WACC = [380166/ 493198* 13%* (1- 28%)] + [113,032/ 493198* 0.6%] = 0.0721 + 0.00138 = 0.0735 or 7.35% Investment decision and reasons One of the factors that have influenced the financial returns of the two clubs is the management skills of the managers in the last five years. The performance of Portsmouth Football Club in the last five years has been better compared to Southampton Football Club. This is due to the performance of the team and capital investment the club has undertaken in the last five years. Indeed, the Portsmouth Football Club has been performing better than Southampton Football Club in the two major titles in the English football completion namely the premier league and FA competitions (Hill, 2012). This has seen the Portsmouth Football Club enjoying an increase in the number of supporters compared to Southampton Football Club. Consequently, the consumption of the clubs products and stadium attendance revenue has been increasing exponentially in the last five years. This has increased the revenue collection of Portsmouth Football Club in higher margins compared to Southampton Football Club. Furthermore, the club has expanded its stadium (Fratton Park) attendance capacity from 12,000 people in 2008 to 21,900 people in 2013 (Portsmouth.com, 2013). In contrast, the stadium capacity of Southampton Football Club has not changed in the last five years. In addition, the two clubs have made significant decisions in signing new players and disposing players in the last five years to improve their performance in the English soccer competition and European matches. This illustrates that the revenue collection from attendance fee has differed significantly due to capital investment decisions made by the management. Accordingly, the difference in the financial performance of the two clubs has been influenced by the management skills of the managers in the last five years. The managers significantly make the expansion investment and signing of new players in the English soccer teams. This implies the management skills of the managers in the two clubs influences the financial returns the clubs earn. Consequently, the financial performance of the two clubs reflect that the management skills of Portsmouth Club has been more efficient compared to Southampton Club. From the financial evaluation of the two clubs, the rational investment for an investor intending to invest in the football industry will be in Portsmouth compared to Southampton. This is due to the stable and safe operation of the club over the last five years. In addition, the equity return that an investor expects to earn for Portsmouth is higher to that of Southampton (Bragg, 2012). Furthermore, the capital cost of the two organizations reflects that Portsmouth is experiencing a lower cost compared to Southampton. This implies that investors of Portsmouth will earn higher return in future compared to Southampton. Estimation Comparatively, the two clubs would invest heavily in future for them to be among the top four clubs in English premier league. This is due to the current capital expenditure the top four clubs are experiencing in paying their players and technical personnel. Indeed, the financial results of the top four clubs namely the Manchester United, Chelsea, Manchester City and Arsenal, indicate that the highest financial is consumed on salaries. Furthermore, the salary expenditure of the top four clubs in English premier league is approximately 40% of the total salary expenditure of the league. This implies that lower ranking teams in the league have to spend significant amount of capital in procuring and paying top players. Accordingly, the financial strength of the two clubs is crucial in uplifting their current ranking in the premier league. Assuming that the two clubs intend to spend capital expenditure like Manchester United club that has been the most successful team in the latest seasons, the each of two clubs will spend 105.36 million pounds per year in paying its staff members and players. Consequently, Portsmouth Club will experience a salary expenditure rise of 8% from its current salary expenses. Similarly, Southampton will experience huge rise in its income statement expenses on salary for it to achieve the top four positions in the English premier league. Owing to the current expenditure the clubs are experiencing in rewarding their players, Portsmouth will experience lower expansion of its salary expenditure compared to Southampton. Recommendation and Conclusion The comparative financial analysis of the two football clubs reflects that an investor will earn different returns from the operations of the entities. This is due to the financial performances and positions of the two clubs as reflected by the financial result in the last five years. The financial performance and positions of the two clubs reveal that an investor will earn more in Portsmouth Club compared to Southampton. In addition, the financial position of Portsmouth in the last five years reflect that the operation of the club is more stable compared to Southampton. Owing to the performance of Portsmouth in the English premier league over the years, the returns of the entity have been better compared to Southampton. Even though the club has not been able to achieve top four positions in the premier league, the performance of the club in purchasing new players and expanding it stadium has seen it revenue grow compared to that Southampton. Consequently, a rational investor should invest in Portsmouth Club compared to Southampton. This is due to its promising future returns compared to Southampton football club. Indeed, the estimated expenditure expansion that Portsmouth would need to achieve the top four positions is lower to that of Southampton. This implies that earnings per share of Portsmouth will be higher compared to that Southampton when they are among the top four positions in the premier league. Thus, investing in Portsmouth club currently is better to investing in Southampton. Reference List Beaver, W., Correia, M. M., & McNichols, M. F. (2011). Financial Statement Analysis and the Prediction of Financial Distress. Hanover: Now Publishers Inc. Bragg, S. M. (2012). Financial Analysis: A Controller's Guide. London: Wiley. Drake, P. P., & Fabozzi, F. J. (2012). Analysis of Financial Statements. London: Oxford. Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. New Jersey: Wiley. Globalrates.com. (2012). US Dollar LIBOR rates 2012. Retrieved May 12, 2013, from http://www.global-rates.com/interest-rates/libor/american-dollar/2012.aspx Hacker-Young. (2012). Final Progress Report to CreditorsIn accordance with R2.47 and R2.110Insolvency Act 1986. Retrieved May 12, 2013, from http://www.uhy-uk.com/assets/media/download/portsmouth%20reports/Final%20progress%20report.pdf Hill, W. (2012, February). My Football Facts & Statistics. Retrieved May 12, 2013, from http://www.myfootballfacts.com/Premier_League_Managers.html Portsmouth.com. (2013). History. Retrieved May 12, 2013, from http://www.portsmouthfc.co.uk/club/history.aspx S&P-500. (2013). Historical prices. Retrieved May 12, 2013, from http://uk.finance.yahoo.com/q?s=^GSPC Southampton.com. (2013). A Brief History Of SFC. Retrieved May 12, 2013, from http://www.saintsfc.co.uk/club/history/ Southampton-FC. (2012). Financial reports. Retrieved May 12, 2013, from http://www.saintsfc.co.uk/documents/supporter-charter-new148-548871.pdf Stickney, C. P. ( 2010). Financial Reporting, Financial Statement Analysis, and Valuation. New York: Cengage. Yahoo-finance.com. (2013, May). Get Quotes. Retrieved May 12, 2013, from Key statistics: http://finance.yahoo.com/ Read More