Financial Performance of EMAP PLC - Case Study Example

Financial Performance of EMAP PLC Major Accounts Table shows the major accounts of EMAP PLC for the end of March 2004 and 2005. During 2005, the company was able to generate revenue from all its product lines of £1,068 million, a minimal increase from the £1,050 million recorded in the previous year. The company’s asset account shows resources amounting to £835 million, £317 million of which are classified as current assets. Total liabilities amount to £552 million, while the shares of stockholders is £283 million. There was a notable decline in net income as EMAP incurred a loss of £9 million, a steep 127.27% decline from the 2004 level. Table 1. Major Accounts of EMAP PLC (in million £, 2004-2005) Ratio Analysis Financial ratio analysis is a very essential tool in assessing the financial health of a business entity. Specifically, it enables a financial analyst to spot trends in a business and to compare it with the performance of similar business enterprises within the same industry. Financial ratios are grouped into three categories, each showing a different aspect of a company’s financial operations. These are profitability ratios, financial leverage ratios and liquidity/solvency ratios. Profitability Ratios Profitability ratios measure the ability of the company to generate income from its investments less the costs incurred. The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It tells us how much gross profit per peso of turnover our business is earning. Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. The computed operating profit margin, which is the ratio of operating income to sales measures as a percentage of sales, the excess revenue from sales over cost of normal operation excluding financing. Net profit margin, on the other hand, is the ratio of net income to sales. Unlike the operating profit margin, it takes into account the secondary or incidental gains aside from the company’s main business operation and all the costs incurred including financing. Return on assets and return on equity are variants of return on investment, which are more significant ratios than the margins. While return on assets measures the rate of return on the total investments of the company, the return on equity assesses the rate of return on the investments of common stockholders in the company (Analyzing Company Reports 2005). Logically, higher profitability ratios indicate a healthier financial condition. It can be seen that at the end of March 2005 the company does not perform well in terms of profitability. Gross profit margin is 21% of the total turnover while the company’s operating profit is 13% of its revenue. However, the company was not able to manage its costs to cover all its expenses outside of its major activities. Its operating income was squeezed leaving a loss of £9 million. This loss explains the negative returns on asset and equity as well as net profit margin. The negative return on equity implies that shareholder’s in the company earned a “negative return” on their investments. The company’s earning per share is 22% though this is attributable to the dividend declared and not on the net income generated (Table 2). Table 2. Profitability Ratios of EMAP PLC (2005) Financial Leverage Ratios Financial leverage ratios provide an indication of the long-term solvency of the firm. They indicate the extent of non-owner claims on the firm’s profits as well as the firm’s operating capability to meet its obligation. Four common ratios are utilized in assessing the leverage of a business entity. Debt to assets ratio is computed as the quotient of total debt and total assets. It measures the extent to which borrowed funds have been employed to finance the firms operations. Meanwhile, debt to equity ratio shows the relationship between the financing provided by creditors against the stockholders. Another measure is the long-term debt to equity ratio which assesses the balance between liabilities and equity in the firm’s long term resource structure. Another is the interest coverage ratio which measures the extent to which earnings cover the interest obligation of the company. It is computed by the ratio of Earnings Before Interest and Taxes (EBIT) to interest expense (Thomson 2002, p. C-6). A large portion of EMAP’s capital structure is financed by liabilities, implied by its 0.66 debt to assets ratio. More than half (66%) of the company’s resources is funded by creditors while stockholders hold the remaining 34%. This dominance of debt against stocks in the company’s capital structure is also seen in the more than one (1.95) debt to equity ratio. Every £1.00 held by shareholders is matched by £1.95 owned by creditors. The small difference between the long-term debt to equity and debt to equity ratios indicates the large percentage occupied by long term liabilities in the company’s pool of resources. Long term debt shares approximately 62% in the company’s capital. EMAP’s interest coverage ratio of 6.09 shows the company’s capability of covering its interest liabilities. The firm’s EBIT is more than enough to pay six times the company’s interest payable. Table 3. Financial Leverage Ratios of EMAP PLC (2005) Liquidity Ratios Liquidity or solvency ratios are used as measures of the company’s ability to finance its short-term obligations by its cash and near cash items. Included in these ratios are current, quick and cash ratios. Current ratio expresses the “working capital’ relationship of current assets available to meet the company’s current obligations. Cash ratio is an indicator of the extent to which a company can pay current liabilities without relying on the sale of inventory and without relying on the receipts of the accounts receivables (Horngren 2000, p.153). Higher ratios indicate more liquidity. Based on its current ratio of 2.26, EMAP can more than pay off all its current obligations by its current assets. The less liquid current assets of the company can be converted to more “solvent” ones to do this. However, it can be seen that most of the current assets of EMAP is tied up in less liquid form as there is a huge difference between the company’s current and cash ratios. The total cash account of the company can only cover 27% of the company’s current liabilities. Table 4. Liquidity Ratios of EMAP PLC (2005) Overall Financial Performance The company shows a poor profitability resulting from the losses it incurred during the fiscal year. The company has a relatively high gross margin and operating income. However, these are squeezed to cover financing and other expenses apart from operations. From this information, it can be deduced that the company is performing decently in it major operations but failed to efficiently allocate its income to cover other costs. The company is heavily leveraged with debt as 66% of its total resources are tied up in long-term debt. However, the company has enough EBIT to cover its interest expense, its liability to creditors. The company is quite insolvent as most of its current assets are tied up in less liquid forms. Bibliography Analyzing Company Reports [online]. ameritrade.com. Available from: http://www.ameritrade.com/educationv2/fhtml/learning/profratios.fhtml [Accessed 10/10/05] Annual Report 2005 [online]. EMAP.com. Available from: http://www.emap.com/nav?page=emap.home [Accessed 10/10/05] Arthur Thompson, Jr. and A.J. Strickland (2002). Strategic Management. 3rd ed. New York Mc Graw-Hill. Charles T. Horngren et. al..  (2000). Accounting. 4th ed.  New Jersey Prentice Hall. Read More