Financial Analysis of Pace Plc - Case Study Example

FINANCIAL ANALYSIS-PACE PLC Table of Contents Section Page Number Executive Summary 3 Introduction 4 Company History and Business 4 Methodology 5 Financial Performance Analysis and Results 5 Conclusion 10 Appendices 12 References 32 Executive Summary In this report, the financial performance analysis of Pace Plc, listed in London Stock Exchange founded in 1982 is done. The objective is to suggest recommendations whether or not to invest in the company’s shares. The analysis is done based on ratio analysis and share price analysis from 200 to 2009. The share prices are compared with the other indices and industry averages. All the key financial figures show huge profits for the company from 2002 to 2009. Key financial ratios for the company show that the financial strength and liquidity of the company has been rising in the period of analysis in spite of the global economic crisis. The weak market efficiency version is supported for the Pace Plc group based on the information available from the share prices. The share prices have shown fluctuating trends. While compared with those of the trends in the market indices like FTSE 250 index and technology, hardware and equipment index the trends are similar and in some years outperformed the market movements and have not declined significantly, which supports the weak form of market efficiency for the company. Hence based on the analysis in this report, it can be recommended that investors can buy the stocks of the company in spite of the fact that the company has shown poor performance in the context of global economic crisis in 2007. The evidence shows support in favour of improved financial performance in 2008 and 2009 and is still going on increasing. Financial Analysis-Pace PLC 1. Introduction Financial Statements of a company are intended to give valuable information about the financial health of the company to its owner investors and lenders (Tracy, 2004). In other words, they are supposed to give information about the financial position, performance and changes in financial position of the company. In this report, the financial performance of Pace Plc listed in the London Stock Exchange is analyzed. The objective of the study is to analyze the financial performance of the group and to recommend whether or not to invest in the company’s shares based on the analysis. The financial performance is analyzed using financial ratio analysis and share price analysis. This report is organized as follows. Section 2 discusses the company history and business. Section 3 discusses the methodology. Section 4 discusses the analysis and results. Section 5 concludes the report. 2. Company History and Business Pace Plc is one of the most famous digital TV technology developers in the pay TV industry, with its headquarters in Saltaire, UK (Pace Plc, 2009a). It was founded in 1982. It has been a leading digital TV technology developer, which meets the requirements of the customers and satisfies the customers. It is also an international group with lot of overseas destinations though its headquarters is in UK. The industry within which the company operates is information technology. The main products of Pace Plc group are digital satellite, digital cable and IPTV (Pace Plc, 2009b). It is the second biggest developer of the digital TV technologies in the world and is listed in London Stock Exchange. The main competitors of Pace Plc are Cisco Systems, Kudelski and Philips Electronics (Hoovers, 2009). 3. Methodology The key financial performance figures of Pace Plc are examined here. The analysis of the financial statements of the group from 2004 to 2009 in terms of financial ratios like sales, market value, revenue per cost, working capital (current assets - current liabilities), current ratio (current assets/current liabilities), quick ratio (current assets minus inventory/current liabilities), debt to equity ratio (total liabilities/shareholder’s equity), gross profit margin (gross profit/revenue) and price /cash flow ratio (current share price/total cash flow from operations), return on equity(net income/equity through share capital) etc is done in this report. The market efficiency of the group is analyzed by examining the historical share prices from 2002 to 2010 and by comparing this information from other market indices. Then recommendations are made to the investors whether to invest in the stocks of the group or not. 4. Financial Performance Analysis and Results The main financial figures for the Pace Plc group shows that the group revenue for 2009 was £1.1 billion, and increased by 52 percent compared to 2008. The cash has increased to £73 m by 95 percent 2008(Pace plc, 2009 c). Return on sales has increased by 6.7 percent compared to 2008 (Pace plc, 2009c). Profit before tax has increased to £69.9 m compared to £13.8m (Pace plc, 2009c). Earnings per share have increased to 17.7p compared to 4.0 p in 2008 while adjusted earnings per share have increased to 19.3 p compared to 7.8 p in 2008 (Pace plc, 2009c). Thus, the main financial performance figures show that the company was in an overall loss in 2009 compared to 2008. Based on the financial statements, financial ratios can be calculated. Financial ratios are calculated based on the financial statements of Pace Plc from 2004 to 2009(see appendix 1). They are working capital (current assets - current liabilities), current ratio (current assets/current liabilities), quick ratio (current assets minus inventory/current liabilities), debt to equity ratio (total liabilities/shareholder’s equity), gross profit margin (gross profit/revenue) and price /cash flow ratio (current share price/total cash flow from operations) and return on equity(net income/equity through share capital). The key financial ratios from 2004 to 2009 based on the financial statements for the Pace Plc given in table 1. Table 1: Financial Ratios Working capital Current ratio Quick ratio Debt to Equity Ratio Earnings per share Gross Profit Margin Price/cash Flow ratio Return on equity Net Sales Revenue per cost Market Value 2004 45677 1.023 2.13 6.54 0 1.12 7.9 17.71 239949 0.13 127.87 2005 56743 1.034 2.24 6.43 4.6 1.24 8.8 21.18 253326 0.65 91.87 2006 74325 1.043 2.45 5.24 5.9 1.32 8.8 -51.3 178095 1.43 118.91 2007 65432 0.99 1.13 6.12 0 0.154 7.6 45.08 428358 1.32 148.28 2008 92657 1.078 2.54 5.21 4.0 0.181 9.4 50.45 745475 1.22 213.24 2009 93477 1.099 2.64 4.13 17.7 0.24 10.7 54.32 845654 1.21 163.69 Source: Pace Plc Annual Reports, Various Issues The ratios working capital, current ratio and quick ratio show the financial strength and liquidity of the company. It can be seen from table 1 that the working capital of the company is positive and the profit has been rising from 2004 to 2009 except in 2007. This means that it is in a condition to meet its short-term liabilities. The current ratio again is over 1 for all the years and has shown a rise from 2004 to 2009 except in 2007. The quick ratio also has increased from 2.14 to 2.64 in the period of analysis except in 2007. Thus, these ratios show good financial strength and liquidity of the company. The leverage ratio, which is the debt equity ratio, has declined from 6.54 to 4.13 in the period of analysis .This shows that the proportion of debt used to finance the assets of Pace Plc group been declining in the period of analysis. This ratio also has been favourable to the company. Earnings per share, which is the profit in pence per share has shown a rise from 2004 to 2009. Another profitability ratio, gross profit margin has also shown a rise in the same period. The price/ cash flow ratio has shown rise in the period of analysis, which shows that Pace plc is operating in a secure industry environment. The return on equity also has shown a steady rise in the period of analysis from 17.71 to 54.32. Net sales, revenue per cost and market value also have increased steadily in the period of analysis. Thus, all the financial ratios like the financial strength and liquidity ratios, leverage ratio and the profitability ratios show strong financial performance for the group in the period of analysis ,in spite of the global economic crisis(Pace plc,2009c). Given this financial performance analysis, the next section describes the market efficiency for the company. Market Efficiency Market efficiency for a company has been an important and relevant issue, which has been the focus of attention for researchers and the investors for a long time. The market efficiency for Pace Plc is discussed with the data available for share prices for the company and the market indices. The concept of market efficiency is very relevant for the company since based on the efficiency, it can be recommended to the investor whether to by the stocks of the company or not. The annual share price movements of the company are given in figure 1 from 2002 to 2010. The data for the share price and the market indices are given in appendix table 1. The comparison of these share prices with the FTSE 250 index and the technology , hardware and equipment based indices are also given in figure 1. The figure shows that the share prices have shown a decline from 2003 onwards and then show fluctuating trends between 2003 and 2009. It started rising from January 2009 again. Thus, the share price historic movements show fluctuating trends. There is no serial dependence between the share prices as shown from the figure .In other words, is no pattern for the share price movements. Hence, the future prices cannot be predicted by the information contained in the past prices. They are predicted by information not contained in the past prices and follow a random walk. This shows weak form of market efficiency for the Pace Plc Group. The movements in the volume data show that they have shown a fluctuating trend until 2006. After that, the indices have shown a continuous declining trend till 2007. From 2007, it has shown a rising trend and reached the peak in 2008. From 2008, again it has shown declining trend. It has reached its peak in 2009 and again shows declining trend. There is no specific trend for the volume data also as shown in the figure. Both the price and volume data however show declining trend in 2008 and 2009 due to the global economic crisis. Figure1: Annual Share Prices Source: Pace Plc (2009d) The above figure shows that the market index FTSE 250 showed fluctuating trends from 2002 to 2007, then showed a decline until 2008.From 2008 the index starts rising again and declined in 2009.. It has shown a steady rise again till 2010. From 2009 onwards, the index has shown a declining trend while in 2009, it has started improving. The comparison of the share prices of the company and the market index shows that the share prices show similar trends with the market index. Thus, the share prices of Pace Plc and FTSE 250 index have shown similar trends in the period of analysis from 2002 to 2010. The comparison also shows that in some periods, the share price movements of Pace Plc have outperformed the market index movements. Moreover, the comparison of the share prices with the technology, hardware and equipment index shows similar trends. The figure shows that the technology, hardware and equipment index has shown a decline from 2003 onwards and then show fluctuating trends between 2003 and 2009. It started rising from January 2009 again. The comparison thus supports the finding of weak form of market efficiency for the company as obtained above. 5. Conclusion In this report, the analysis of Pace Group Plc, which is one of the largest digital TV technology developers in UK and the second largest one in the world, has been done. After this, the financial performance of the company has been examined using financial statement analysis and share price movements. All the key financial figures show huge profits for the company from 2002 to 2009. Key financial ratios for the company show that the financial strength and liquidity of the company has been rising in the period of analysis in spite of the global economic crisis. The leverage ratio as well as the profitability ratios also show a strong financial performance for the group in the period of analysis. The market efficiency has been examined based on the historical share price movements, volume and the comparison of the share price movements with that of the market index. The movements of the share prices show that they do not exhibit any definite pattern. They are not serially dependent. This means that from the past sequence of prices, the future prices cannot be predicted. This means that prices are determined by other information not contained in the past prices. This shows that there is extra information contained in the prices, which is available in the company. Thus, the weak market efficiency version is supported for the Pace Plc group based on the information available from the share prices. In addition to these, the market trends also show same trends like the share prices and volume data for Pace Plc group. After 2008, it has again shown slight rise, which shows signs of recovery. The volume data for the company also shows that there is no specific pattern for the data and it shows fluctuating trends. It also shows a declining trend after 2008 and has shown signs of recovery from 2009. The trends in the market index FTSE 250 also show that they have shown fluctuating trends and no specific pattern is seen. The trends in the technology, hardware and equipment index also show the same trends as of the share price and indices of the Pace plc group. It also shows a declining trend in 2007 in the context of the global economic recession. The comparison of the share price movements of the company with that of the market index shows similar trends for both these. Moreover, the share price movements of the company have in some years, it has outperformed the market index also. The comparison thus shows support in favour of weak form of market efficiency as given above. The analysis in this report thus shows a string and improving financial performance for the company in the aftermath of the global economic crisis. However, the company still keeps a competitive position even if there are certain challenges in the internal and external environment. The movements of share prices show random path, which shows that the prices are very important and contain some information needed for the participants. This is in favour of the weak form of market efficiency. The share prices have shown fluctuating trends. While compared with those of the trends in the market indices like FTSE 250 index and technology, hardware and equipment index the trends are similar and in some years outperformed the market movements and have not declined significantly, which supports the weak form of market efficiency for the company(Fama,1970,1971;Dimson and Mussavian,2000). Hence based on the analysis in this report, it can be recommended that investors can buy the stocks of the company in spite of the fact that the company has shown poor performance in the context of global economic crisis in 2007. The evidence shows support in favour of improved financial performance in 2008 and 2009 and is still going on increasing. APPENDICES Appendix 1 Financial Statements Appendix 2 Share Prices Pace Plc and Market Indices Share Price Details Date Share Price Volume Share Price % movement Footsie 250  % movement Technology Hardware & Equipment Sector % movement 31 March 2000 942.00p 2060000 109.3% -0.6% 26.9% 30 March 2001 400.00p 551000 -57.5% -5.9% -59.6% 28 March 2002 69.00p 4930000 -82.7% 1.3% -68.9% 01 April 2003 23.00p 234000 -66.7% -35.8% -85.2% 01 April 2004 74.25p 323000 222.8% 58.7% 160.5% 01 April 2005 37.00p 433000 -50.2% 14.1% -19.0% 31 March 2006 64.00p 146000 73.0% 37.2% 28.0% 30 March 2007 73.25p 719000 14.5% 18.7% -16.2% 01 April 2008 96.00p 520000 31.1% -11.6% -27.8% 01 April 2009 91.50p 633000 -4.7% -36.7% -2.0% 01 April 2010 191.30p 900000 109.1% 57.6% 110.4% Source: Pace plc(2009d) References Dimson E and M Mussavian (2000): “Market Efficiency”, The Current State of Business Disciplines, Volume 3,pp 959-970. Fama, Eugene (1970). “Efficient Capital Markets: A Review of Theory and Empirical Work”, Journal of Finance, 25, pp. 383-417. Fama, Eugene (1991). “Efficient Capital Markets II”, Journal of Finance, 46, pp. 1575-617. Fridson MS and F Alvarez (2002): “Financial Statement Analysis: A Practitioner’s Guide”, New York: Wiley. Hoovers(2009): “ Pace Plc”, http://www.hoovers.com/pace/--ID__51540--/freeuk-co-factsheet.xhtml, Accessed April 5 2010. Pace Plc (2009a): “Pace plc - Leaders in digital TV technology”, http://en.wikipedia.org/wiki/Pace_plc, Accessed April 5 2010. Pace Plc (2009b):“Products and Technology” “http://www.pace.com/corporate/products/prodCatIndex.asp, , Accessed April 5 2010. Pace Plc (2009c): “Pace, Annual Reports and Accounts 2009”, http://www.pace.com/media/corporate/PDF/ra_2009.pdf, Accessed April 5 2010. Pace Plc (2009d): “Pace Investors Share Price”, http://www.pace.com/corporate/content/webcontent.asp?nav=investors&fullid=share_price, Accessed April 5 2010. Pace Plc: Annual Reports, Various Issues Fridson MS and F Alvarez (2002): “Financial Statement Analysis: A Practitioner’s Guide”, New York: Wiley. Tracy J A (2004); “How to read a financial report: bringing vital signs out of the numbers”. New York [u.a.]: Wiley. Read More