The Financial Performance of Manchester City Football Club - Research Paper Example

The Financial Performance of Manchester City Football Сlub Table of Contents Executive Summary The financial performance of Manchester City Football club has been done using the financial ratios measuring its liquidity and profitability. This has then been compared with its competitor Nottingham Forest Football Club. An analysis of the club reports highlights the losses incurred over the years mainly due to the lower revenues and rising expenses. The club also failed to earn any positive return for its investors as is evident from the negative return on the shareholders fund. Only, in one of the last four years the club achieved a positive profit margin. Introduction Manchester City Football Club is a football club in Britain that plays in the stadium of City of Manchester. The most glorious years of the club were towards the end of 1960 and in the early part of 1970. During this period the club won FA Cup, League Cup, League Championship with players like Colin Bell, Francis Lee and Mike Summerbee. In this report the club has been compared with Nottingham Forest Football Club. This club is based in West Bridgford. This club was most successful during the period of 1975 to 1993. Findings The financial analysis of the reports of Manchester City Football club highlights the high leverage and the poor financial performance of the club. For analysing the club performance a set of ratios like current ratio, net profit margin, return on equity etc have been used. The net profit of the club has remained dismal over the last few years. In terms of turnover the club has not been able to achieve any substantial increase. Infact there was a drop in its turnover for the year 2007 when the turnover of the club fell from £61 million to £56 million. Figure- Turnover From the above graph it is clear that the turnover of the club has remained mostly same all throughout. It is only in the year 2008 that the club has been able to increase its turnover to £82.3 million marking an increase of 44.6%. It was mainly on account of Television deals. But this failed to impact the profits of the club which remained negative despite the rise in the revenue. Instead of a rise the club reported a net loss of £29 million in 2008. The financial performance of its competitor also reveals a similar picture. Both the clubs have failed to make any gains for their investors as is evident from the poor earnings performance. Manchester City Football club managed to achieve a positive return on its equity capital in just one out of last four years. This shows the inefficiency of the fund management of the club. Accounting Concepts and principles GAAP (generally accepted accounting principles) contains the rules relating to accounting. The main aim of presenting financial information is to provide useful information relating to lending and investment decisions. Entity Concept- An entity refers to a specific economic unit. In accounting, there are boundaries drawn around an entity so as not to mix its affairs with other entities. Reliability Principle- The information presented in accounting is verifiable as it is based on a reliable source. Cost Principle-As per this principle the assets must be recorded at their historical cost. Going Concern concept-This concept is based on the view that the entity will continue with its operations in the foreseeable future. Stable Monetary concept-The transactions are recorded in the currency that is acceptable as the medium of exchange in the country (Horngreen et al, 2005, P 8). UK GAAP and accounting standards and conventions- The UK GAAP specifies the rules and regulations regarding the maintenance of accounts in UK. This includes the company law prevailing in the country and the accounting standards. For maintaining uniformity in recording of accounts certain rules and principles are universally accepted. GAAP contains the guidelines for reporting and recording the transactions in the financial statements. Accounting standards provide the guideline and sets the benchmark for evaluation. There are various approaches of valuing an asset. Like a business values its inventory at the lower of cost or market price. This is referred as accounting convention. The accounting conventions facilitate the comparison of data of different businesses. Role of management accounting in evaluating business performance- Management accounting relates to the use of accounting information by the managers for making business decision that facilitates better control. The management accountants perform important functions like forecasting, analysing the variances monitoring of costs etc. They assist in carrying out important functions like determination of an organization’s strategy, formulating business plans, assessing the performance of the organization etc (Bendrey et al, 2003). Analysis Manchester City Football club has maintained its books of accounts as per the accounting standards under UK GAAP. Analysis of Financial Reports- In 2006, Manchester City Football Club was operating as a public limited company with a share capital of 9, 64,669 shares. The club was transformed into a private company limited by shares in 2007 with same amount of share capital. Immediately in the next year the share capital of the company was increased to 13, 44,984 shares. The club reported a profit of £13.21 million for the year 2006 as compared to a loss in the last financial year. This can be partly due to the higher operating expense of the club in 2005. In this year the club spent heavily on amortization of players which pushed up its costs significantly. It reported a turnover of £61.8 million for the same year with a nominal increase of only 1.54 percent. The turnover of the football club mainly comprised of gate receipts, commercial activities and other donations. For both the years the club has maintained approximately same level of debt and equity. There has been a marginal decrease in the amount of short term creditors of the club as compared to 2005 accompanied by a fall in the amount of long term creditors as well, at approximately 8 percent. The club was not able to retain its profitability in 2007. Its turnover dropped by nearly 8 percent to £56 million whereas there was a rise in the operating expenses of the club. The impact of this is also reflected in the profitability position of the company that plunged into the negative territory reporting a loss of £7.9 million as compared to the previous year’s profit of £13.2 million. The gain in 2006 was mainly boosted by the profit on disposal of players whereas the same in 2007 is nearly one-tenth of the previous year. Fixed asset investment of the club increased as compared to 2006. This is mainly due to the rise in the investment in tangible assets (Manchester Football Club Limited, 2007; Manchester Football Club Limited, 2006). The turnover of the club improved significantly in 2008 (Manchester Football Club Limited, 2008). But this failed to boost the profitability of the club. This was primarily due to the sharp rise in the operating costs of the club along with the high cost of amortization for the period. As a result the loss incurred nearly trebled in 2008. The club invested heavily in the intangible assets pushing it to £45.75 million which is a rise of nearly 5 times as compared to 2007. In the same period the short term creditors of the club increased from £79 million to £139 million, an increase of nearly 75 percent. As there has not been an increase in the equity position of the company the short term obligations may have been used for financing the increase in the intangible assets Comparative ratio analysis- The profitability of business activities can be measured with the help of profit margin. It is the net profit earned expressed as a percentage of sales (revenue) (Mukherjee & Hanif, 2005; Washington State University, n.d.). The net profit margin earned by the club is negative in three of the last four years. For the period of 2008, 2007, 2006, 2005 the club earned a profit margin of -36.04%, -13.97%, and 21.38% and -20.38% respectively. Figure- Profit margin of Manchester City Football club in the last four years- The above graph shows that the profit margin of the club has mostly remained negative in the previous years. This shows that the administrative and the operating expenses of the club exceed the revenue generated by the club. An analysis of its competitor Nottingham Forest Football Club reveals that the profit margin of its competitor has also remained mostly negative in the last four years. Figure- Profit margin of Nottingham Forest Football Club in the last four years The liquidity position of the company can be assessed with the help of current ratio, quick ratio etc. Current ratio is expressed as current assets/current liabilities (University of Notre Dame, n.d.). A high current ratio indicates that the business is capable of meeting its short term obligations whereas a low current ratio can lead to financial insolvency. The current ratio of Manchester City Football club has consistently been below 1 over the last four years. For the years 2008, 2007, 2006 and 2005 the current ratio of the club has been 0.16, 0.18, 0.24 and 0.19 respectively. Figure- Liquidity ratio of Manchester City Football club in the last four years- The liquidity position of Nottingham football club for the years 2008, 2007, 2006 and 2005 is 0.53, 0.31, 0.24 and 0.12 respectively. Figure- Liquidity ratio of Nottingham Forest Football Club in the last four years- The above graph shows that the liquidity position of Nottingham Forest Football Club has improved over the last four years. This shows that in terms of liquidity the club is better placed than Manchester City Football club. A comparison of the two graphs shows that the liquidity position of the latter has mostly deteriorated over the years whereas the liquidity position of its peer has consistently moved up in the last four years. Limitation of current ratio- The policies of the management are primarily aimed at an efficient utilization of the assets and secondarily on liquidity (Bernstein &Wild, 2000, P123). There are many businesses that do not maintain high levels of inventory and no debtors as they operate on a cash basis and hence have low current assets. Consequently, they have a low current ratio and this cannot be interpreted as the business has low liquidity The gearing ratio is a measurement of the percentage of debt and equity employed by the business in its capital structure. A high gearing ratio indicates that the business is relying heavily on the debt component whereas a low gearing ratio means that the business is dependent on the equity mode of financing (Webster University, n.d.). The gearing ratio of the club in the year 2005 was 3025.37%. This indicates that the club had a higher amount of debt in its capital base. However, there was a fall in this ratio over the next two years when the shareholders fund nearly trebled from £5.23 million to £18.44 million along with a fall in the long term creditors of the company. In the immediate next year the gearing ratio of the club increased to 1805.12% as the club increased its short term debts by nearly 75 times. Figure- Gearing ratio of Manchester City Football club in the last four years- The debt position of Nottingham football club is limited as compared to Manchester City Football club. There has been an increase in the debt as well as equity component of its peer over the last four years. For the year 2008 Nottingham Forest Football Club has a gearing ratio of 131 percent. This is much less as compared to Manchester City Football club. From the above interpretation, it can be inferred that Manchester is overexposed to debt. This highlights the high level of financial risk for the club (Nottingham Forest Football Club Limited, n.d.). The return generating potential of the business can be assessed using the return on shareholders fund; return on capital employed etc. This can be expressed as Net income/Shareholders equity. It indicates the amount of profit that the business is able to generate with the money invested by the shareholders. The high losses incurred by the company has resulted in a negative return in the last three years except for the year 2006 when the return on equity earned by the club was 71.62% (Investopedia, n.d.). Figure- Return on shareholders fund of Manchester City Football club in the last four years- From the above graph it is clear that the club has not been able to generate positive returns on the funds employed by the shareholders. The return on capital employed is another tool for analyzing the profitability position of the business. It measures the earnings generated on the capital contributed by the investors. This is compared by the prospective investors with the other sources of investment at the time of deciding the investment avenue (Washington State University, n.d.). Manchester City Football club has failed to achieve a positive ROCE in three out of the past four years. The ROCE earned by the club for the years 2008, 2007, 2006 and 2005 is -27.59%, -6.26%, 11.42% and -10.83% respectively. Figure- Return on capital employed (ROCE) of Manchester City Football club in the last four years- As is evident from the above graph the ROCE of the club has mostly remained negative except for the year 2006. This indicates that the club has not been able to make any gains on the capital of the investors. The ROCE for Nottingham Forest Football Club has been negative consistently over the entire four year period. It was at -9.21% in 2005 and consistently deteriorated over the years falling to -99.71% in 2008. This suggests that Manchester City Football Club along with Nottingham Forest Football Club have failed to deliver good returns for its investors. This is mainly due to the high level of expenses as compared to falling revenue (Fame, n.d.). Limitations of ratio analysis The main drawback of ratios is that it is based on historical figures and when these are implemented the situation in the organization may change significantly. Moreover the ratios can only be used for comparing firms in the same industry. It does not facilitate inter-industry comparison. There are varying definitions for a ratio being used which makes the comparison difficult (Gruen & Howarth, 2005, P170). Overview of financial performance- Prior to 2002, Manchester City Football Club was able to keep the salaries at relatively low levels. The turnover of the club was high as compared to other British clubs. For the second half of 2001 the club earned pre-tax profits of £30.9 million. During the same period the other clubs like Newcastle United and Leeds United reported a loss of £1.14 million and 13.8 million respectively. But it was feared that Manchester may not able to retain its profitability in the coming years on account of higher amounts being spent for top players. It indicated warning signs for the future balance sheets of the club. The club anticipated that the high wages will amount to nearly half its revenues (BBC News, 2002). For the year 2004, Manchester City Football club reported a slide in its pre-tax profits to £27.9 million as compared to £39.3 million in the last year. The poor field performance had a negative impact in the bottomline of the club as well. Due to this the shares of the club fell by 2.9 percent to 253.5p (BBC News, 2004). In the following years the club failed to sustain a significant growth in its turnover. This coupled with the rising operating and administrative costs put a pressure on the club financials. As a result of this the profits of the club dipped considerably in 2005, 2007 and 2008. Conclusion An analysis of the financial reports of the club reveals that the expenses of the club outweighed the revenues. There was a continuous increase in the operating as well as the administrative expenses of the club without any significant rise in the club revenue. Due to this the club reported losses for the previous years. Reference BBC News. 2004. Man Utd sees profits slide by 30%. Available at: http://news.bbc.co.uk/2/hi/business/3692642.stm [Accessed on January 12, 2010]. BBC News. 2002. Man Utd profits sound warning bell. Available at file:///C:/Documents%20and%20Settings/AP1/Desktop/bbc.htm [Accessed on January 12, 2010]. Bendrey, M. Hussey, R. Colston, W. 2003. Essentials of management accounting in business. Cengage Learning EMEA. Bernstein, A. L. & Wild, J. J. 2000. Analysis of financial statements. McGraw-Hill Professional. Gruen, R. & Howarth, A.2005. Financial Management in Health Services. McGraw-Hill International. Fame. No date. Manchester Football Club. Available at: www.fame.bvdep.com [Accessed on January 12, 2010]. Horngreen, T.C. Harrison, T.W. & Bamber, S.L. 2005. Accounting. Pearson-Prentice Hall. Investopedia. No date. Return On Equity – ROE. Available at: http://www.investopedia.com/terms/r/returnonequity.asp [Accessed on January 12, 2010]. Manchester Football Club Limited. 2008. Directors Report and Financial statements. Manchester Football Club Limited. 2007. Directors Report and Financial statements. Manchester Football Club Limited. 2006. Directors Report and Financial statements. Mukherjee, A. & Hanif, M. 2005. Corporate Accounting. Tata McGraw-Hill. Nottingham Forest Football Club Limited. No Date. Balance Sheet. Company Report. 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