Whether you Should Invest in ITV or WPP Company - Essay Example

A report to Mike on whether he should invest in ITV or WPP Company Companies Summary Introduction Independent Television (ITV) was one of the ancient business networks established in the United Kingdoms in 1995 with an aim of channelling news and eradicating monopoly business that was dominated by BBC during this period (ITV, 2012). The company consist of broadcasting Channels that include the following; City television, Itv1, Itv2, Itv3 and Itv4 (ITV, 2012). ITV Company sells formats and programs in the United Kingdom as well as in other parts of the world. The major sources ITV revenues emanates from sales and advertisement (Srivastava, 2002). Additionally the company provides online services to its clients through itv.com. Among the services being rendered by ITV include; online advertisement and online sponsorship (Schwalb, 2004). In above connection, the company conduct other operations through its ITV studios such as; entertainment, dramas, factual to name just but a few (Schwalb, 2004). In 1958, ITV directors issued 300,000 common stocks at four dollars each to the public through initial public offer (IPO).The company had been expanding across the world and has been portraying positive growth in the stock market (Srivastava,2002). On the other hand, Wire and Plastic Product (WPP) Company was established in 1958 with its headquarters based in Landon (Biagi, 2012). The company started as a manufacturer of wires baskets in 1971.During this period, the company dealt with wire and plastics operations only. But over the years, the company has been diversifying its operation in order to include other activities (Hoover, 1992). Currently, the company has emerged as one of the leading marketing and communications services provider with operations in over 100 nation’s globally (Biagi, 2012). The company consist of subsidiaries such as Mindshare, Maxus, Media com, Group M, to name just but a few (Biagi, 2012). The company has a management division that deals with advertisement in all forms of media. The subsidiaries were established by WPP Company in order to extend its operations to incorporate other activities such as; trading, financing creation of contents and tracking sports proceedings (Biagi, 2012). Companies Strengths and Weaknesses ITV Comprehensive income statement year ended 31st December 2011 indicated that, the company was able to attain a cost saving of twenty million pounds through its wastage and efficiency program (ITV, 2012). It was predicted that the company was going to attain another cost saving of twenty million pounds by the end of 2012 fiscal year (ITV, 2012). The report further indicated that, ITV was able to obtain net advertisement revenue of 1% by the end of 2011 fiscal year (ITV, 2012). During this year, ITV subsidiaries reported higher positive growth, for example, 1% growth was obtained from viewers followed by a 10% in digital growth (ITV, 2012). The report indicates that ITV was able to attain 21% growth through online revenues which translates to thirty four millions pounds as at 31st December 2012. Additionally, the company was able to achieve a 44% growth through distribution of its content (ITV, 2012). Connectively, revenue of thirty five million pounds was obtained from international production and another seven million pounds from investments (ITV, 2012). However, despite having a positive growth, the company has also been faced with some challenges. This is because, by the end of 2011, the company revenues from distribution business declined substantially by four million pounds (ITV, 2012). In above connection, another 5% decline in growth was reported by the end of 2011. Additionally, the company incurred a loss of thirty nine million pound; the loss was attributed to bond that were being purchased during this period (ITV, 2012). On the contrary, the financial statement of Wire and plastic product (WPP) reported operating profits of £14.0 millions by the end of 31st December 2011 while in the previous year; the company reported a £16.5 millions operating profits (WPP, 2012). This indicates that there was a £2.5 million decline in operating profits in the current year. Additionally, the company comprehensive income statement reported a taxation loss of £592.3 on ordinary activities (WPP, 2012). On the contrary, the company comprehensive income statement for the year ended 31st December reported a profit of £599.6 millions while in the previous year, the company had reported a profit of £757.3 millions. This indicated that there was a £157.7 decline in profits in 2011(WPP, 2012). Therefore, based on the above analysis it can be scrutinized that ITV company had better performance than WPP company as at 31st December 2011.In above connection, the following ratios were found to useful in evaluating performance of the two companies; current ratio, gearing ratio, profitability ratios, dividend payout ratio, and P/E ratio. Below is a list of ratios for the two companies as at 31st December 2011. ITV Company Ratios as at 31st December 2011 ITV Profitability Liquidity ratios Net profit margin=10.52% Current ratio=1.97% Return on assets=8.58% Quick ratio=1.59% Return on equity=30.24% Return on investment=11.60% Other Ratios Dividend pay out ratios=25% Net gearing ratio=44.88% P/E Ratio=16.17% EPS growth rate= -7.25% Dividend per share =1.60 Dividend yield=1.55% ITV Company Ratios as at 31st December 2011 WPP Profitability ratios Liquidity ratios Net profit margin=8.38% Current Ratio=0.98% Return on Assets =3.39% Quick ratio (Acid test) =0.96% Return on Investment=6.68% Return on Equity=12.61% Other Ratios P/E ratio=12.93 EPS growth rate= 42.32% Dividend per share=24.60 Dividend pay out ratios=36.39% Dividend yield=2.81% Net gearing ratio=63.04% Based on the above ratios it can be scrutinized that ITV Company had a higher current ratio and acid test ratios as compared to WPP Company. This indicates that ITV Company had a strong ability to meets its credit obligation than WPP Company. Additionally, profitability ratio indicates that ITV had higher profitability ratios relative to WPP Company for instance; ITV had a profit margin of 10.2% while WPP Company had a profit margin of 8.38%. This indicates that there was difference of 1.82% between the profits margins of the two companies. This means that ITV Company was incurring a lot of variable overheads and this leads the company to start making profits at a higher profit margin than WPP Company. Therefore, ITV Company should try to reduce its variable overheads by eliminating unnecessary overheads which may not have significant impact on the companies operations. Additionally, ITV Company should put in place necessary strategies for managing its fixed overheads so that the company can be able to make profits at a lower margin (Megginson and Smart, 2009). Connectively, profitability ratios above indicate that WPP Company was able to control its variable overheads and start making profit at a lower margin as compared to ITV. The return on asset ratio was used to determine which of the two companies was able to utilize its fixed assets more effectively to make wealth. It can be scrutinized that ITV Company had a return on asset ratio of 8.58% while WPP Company had a return on asset ratio of 3.39%. This indicates that ITV had a 5.19% higher return on asset than WPP Company and therefore, ITV was able to utilize its fixed assets more effectively to generate more wealth than WPP Company. In above connection, ITV company had 11.60% returns on investments while WPP company had a 6.68% returns on investments. This indicates that ITV Company was able to invest more prudently than WPP Company and therefore, VPP Company was able to obtain higher returns from its investments as compared to WPP. On the other hand, return on equity ratio was used to evaluate which of the two companies was in a good position to provide higher returns to its equity stock holders. It can be scrutinized that the return on equity for ITV Company was 30.24% while that of WPP Company was 12.61%. This indicates that equity share holders of VPP Company were in a position to obtain a return of 17.63% higher than those of WPP Company. This figure (17.63%) was obtained by finding the difference between returns on equity of the two companies. The net gearing ratio was used to asses the strength and weakness of the two companies in servicing their debts. It can be scrutinize that the net gearing ratio for VPP Company was 44.88% while that of WPP Company was 63.04%. This indicates that, WPP Company had a leverage of 18.16% higher than that of VPP. This figure was obtained by finding the difference between the net gearing ratios of the two companies. Therefore, the difference obtained indicates that WPP Company was at a higher risk of being liquidated than VPP Company because it was highly exposed to leverage risk as compared to ITV. Additionally, a higher leverage ratio indicates that the company strength for borrowing strength has been compromised (Megginson and Smart, 2009). Therefore, in this case WPP browning strength has been compromised as indicated by its gearing ratios. On the other hand, dividend payout ratio was utilized to determine the ability of the two companies to pay higher dividends to ordinary share holders (Megginson and Smart, 2009).Based on the above assessment, it can be scrutinized that WPP Company had a higher dividend payout ratio of 36.39% while ITV Company had a dividend pay out ratio of 25%. This means that WPP Company had great ability to pay higher dividends to its ordinary stock holders as compared to ITV Company. Therefore, based on this assessment, it is important to note that higher dividend pay out ratio is not a guarantee that a company is performing well. This is because some companies may declare higher dividend to encourage investors to invest in their stocks (Megginson and Smart, 2009). Security Market Lines (SML) for each of the two companies (1)ITV Company Stock Beta(β) Rate of Return (Ks) Risk free Rate(Krf) 0 1.97% Market premiums(Km) 1.00 11.60% ITV company 1.44 15.84% Retrieved :< www.Bloomberg.com> Ks=Krf+ (Km-Krf) β Ks=1.97% + (11.60%-1.97)1.44 Ks=15.84% Security market line (SLM) for ITV Rate of Returns SLM Km=15.84% 11.60% Risk Free Rate 0 Beta ((β)) Source: Author (2)WPP Company Security market line (SLM) for WPP Stock Beta(β) Rate of Return (Ks) Risk free Rate(Krf) 0 4.5% Market premiums(Km) 1 6.68% WPP company 1.46 7.6828% Retrieved :< www.Bloomberg.com> Ks=Krf+β (Km-Krf) Ks=4.5%+1.46(6.68-4.5%) Ks=7.6828% Security market line (SLM) for WPP Rate of Returns SLM Km=7.6828% 6.68% Risk Free Rate 0 Beta (β) Summary, Conclusions, and Recommendations Therefore, based on the above report on portfolio analysis, I would advice Mike to invest his savings in ITV company because the company has higher returns that Mike can obtain and retain the rest given the fact that he is a conservative investor. Additionally, the company has lower risk exposure as indicated by its gearing ratio. Therefore, if Mike invests his savings in ITV securities he is guaranteed security of his investments. Additionally, the security market lines above indicate that, ITV stocks have lower risk and higher rate of return unlike WPP Company which has lower risk premiums and higher risks exposure. In above connection, I would further recommend mike to consider not only the returns of a given portfolio but also the risk associated with each of the two portfolios prior any investment decion. Reference List Biagi, S. (2012). Media/impact: an introduction to mass media. Australia, Wadsworth Cengage Learning. Hoover, G. (1992). Hoovers handbook of world business. Austin, TX, Reference Press. Srivastava, H. O. (2002). Interactive TV technology and markets. Boston, Artech House. Schwalb, E. M. (2004). ITV Handbook: technologies and standards. Upper Saddle River, NJ, Prentice Hall. ITV, (2012) “What we do “ITVplc.Retrieved :< http://www.itvplc.com/about/what-we-do> on 5th December 2012. ITV, (2012) Investors Annual Financial Reporton5th December 2012. Megginson, W. L., and Smart, S. B. (2009). Introduction to corporate finance. Mason, Ohio, South-Western Cengage Learning. WPP, (2012).Annual Report & Accounts 2011.Retrievied: on 6th December 2012. Read More