Financial Statement Analysis in Michael Page Limited - Case Study Example

SHARE VALUE AD FINANCIAL MENT ANALYSIS IN MICHAEL PAGE LIMITED Contents Introduction 3 Michael Page and the Stock Market 3 Financial Performanceand Investor Values 4 Profitability Ratios and Operational Implications 4 Gearing Levels and Debt Funding 6 Investment Analysis & Limitations 6 Bibliography 8 Introduction The main purpose of creating financial statements is to provide important information about the financial position and performance of a firm for users (Kieso, et al., 2010; Ray & Chakraborty, 2014). The most popular users of financial statements are investors who seek to buy shares in these organisations. Such persons seek to ensure that their contributions to the capital base of an organisation are secured and their investment strategy is compatible with a firm (Burstein, 2013; Fraser-Sampson, 2011). The aim of this paper is to analyse and evaluate specific matters and issues of relevance in share investments in Michael Page, UK. This paper will be written in the context of advising a friend who seeks to take a decision on whether or not to invest in River Island. Michael Page and the Stock Market Michael Page is a public limited company and it is listed on the London Stock Exchange (LSE). “Stock exchanges are organised marketplaces, in which stocks, shares and other securities are traded.” (Gomez, 2009, p. 105). The stock exchange acts as some kind of intermediary through which firms can divide up their stocks, value them and make them available to people who seek to buy them (Poitras, 2012). Thus, Michael Page is able to divide up its shares and sell its shares on the LSE. The benefit Michael Page gains on the LSE is that they are able to provide their shares to people who might want to buy them and this will enable their shares to be valued and offered to clients on an objective pricing scale. This will culminate in a situation where the price of Michael Page shares can be evaluated and sold on the basis of the forces of demand and supply. The efficient market hypothesis asserts that information flow on the stock market is instant and people react to it instantly (Knuth, 2011). Therefore, it is apparent that the company’s share prices will shift and move up and down on the basis of the changes in performance targets and plans. This will enable the prices of shares to be changed and reviewed from time to time based on these natural situations. This will determine the level of guarantee of investments and the patterns in growth of the shares of the company. Financial Performance and Investor Values The financial performance of a firm like Michael Page has a direct relationship with the investor values, because investors define the worth of their shares on the basis of what the market prices of the shares are (Venanzi, 2011). This is because financial performance provides a catalyst and indicator that defines the future worth of a firm (Siesfield, 2010). Hence, in cases where the worth of a firm progressively increases, the value of the investments and/or shares is likely to increase in a corresponding manner (Rolfe, 2013). This is because the demand for the shares of such an organisation will increase and this means that the prices of the shares can also be increased correspondingly. Thus, the evaluation of the worth a firm’s shares in this direction have to do with the evaluation of the profitability ratios and other market capital indicators. Profitability Ratios and Operational Implications Table 1 below shows the kind of profitability ratios of Michael Page from 2009 to 2013. The profitability ratios show some degree of consistency in the gross profit margin of Michael Page. Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 TTM Revenue GBP Mil 717 832 1,019 990 1,006 1,014 Gross Margin % 49.1 53.1 54.3 53.2 51.1 50.8 Operating Income GBP Mil 20 89 86 57 66 69 Operating Margin % 2.8 10.7 8.4 5.8 6.5 6.8 Table 1: Profitability Ratios The Gross Profit margin shows the input-output relationship of the firm. It shows how much Michael Page put into its operations in relation to how much they made. The emphasis from the ratios above indicates that Michael Page has a capacity to make approximately 50% of profits on what they put in. This is a good indicator that the firm makes quite a substantial level of profit. Another aspect of the gross profit margin is that Michael Page is seen to be a consistent firm. This suggests that the firm has enough controls and a strong will to consistently maintain a performance level that is high enough to ensure return on investments. The operating profit margin on the other hand fluctuates significantly. This shows that there are some major decision-making processes that are not consistent and can affect the continuous attainment of the average of 51% Gross Profit Margin. This could include issues like the management of expenses, dealing with debts and other operational issues that changes significantly over relatively shorter periods of time. Return on Equity % 6.1 36.04 31.76 20 21.86 23.22 Return on Invested Capital % 5.64 36.2 30.99 19.57 21.98 23.01 The Return on Equity shows the level of returns that is retained and added to shareholder reserves (Damodaran, 2012). The return on equity in 2008 was extremely low. This could be attributed to the fact that the firm was affected by the global financial crisis. However, it increased significantly in 2009 and 2010, suggesting some kind of artificial injections. However, it returned to a relatively more consistent form in 2011, 2012 and 2013. This shows that the firm has a general return on equity of circa 21% but this could potentially fluctuate. The main elements of this indicate that Michael Page is a somewhat consistent firm. However, there are some vulnerabilities that the firm could face. It includes the operational decisions and choices which lead to major fluctuations in profitability and external factors like global volatilities. Thus, an investor ought to be sensitive to the kind of decisions being made by Michael Page and the impact of world market prices. This will determine the worth of his investors if he chooses to buy Michael Page shares. Gearing Levels and Debt Funding Gearing ratios are about the dichotomy between the borrowed funds used to run a business and the injection of capital into the running of the firm (Wood, 2010). Other Short-Term Liabilities 38.87 35.39 39.78 25.86 22.39 24.06 Total Stockholders Equity 56.53 55.22 51.78 52.46 57.72 54.76 From the financial statements of Michael Page, it is apparent that they have a total equity base of around 53% over the past five years. This means that 53% of the capital used to trade is attributable to shareholders. The rest is attributable to external parties that fund them with various kinds of loans. In 2008 to 2010, the use of short-term external liabilities to aid in trading was high, around 37% on the average. This shows that the external liabilities were high and these liabilities come at a higher cost of interest than long-term liabilities. This could be said to be a part of the reason why the firm declared a low profit in these years. However, short-term liabilities fell between 2011 and 2013. This indicates they have a better method of raising funds now. The implication is that there is promise of higher profitability to shareholders who invest because the company will be less concerned with expensive debt funding in the coming years and hence, they will pay less in interest. Investment Analysis & Limitations Basically, I will advice my friend to invest in Michael Page if he wants a conservative but steady stream of profits. This is because Michael Page seem to be consistent and this consistency is often based on the use of steady tools and approaches. If my friend wants quick profits and quick returns on investment, Michael Page might not be the best option, since it is an already established entity that focuses on consistency rather than quick growth. However, evidence suggests that Michael Page is limited by international volatilities like the global financial crisis and the reliance on external short-term debt financing. These are issues that Michael Page might not be positioned to handle convincingly in the short-run. This analysis is based on historical financial accounting information. The ratio analysis and related predictions are based on what happened in the past. Hence, there is the risk that variables in the operation of Michael Page might change significantly in the coming year. And this includes issues like force majeure that might mean that major aspects of Michael Page’s operations might fold up or become redundant. In such a case, any conclusion drawn on the basis of this analysis will be inaccurate. Another element is that the ratio analysis could be prone to certain significant factors that might not be clear. This is because financial statements are a sum or constitution of different parts. Some parts might be significant, but they will be disguised in the aggregation process. Hence, it will be impossible to get the true picture of a firm without conducting more thorough investigations and follow ups to check the actual meaning and worth of financial information. A typical case in point is the case of Enron which presented accurate and acceptable financial statements. However critical reviews showed that some of the information from some critical units of operations was misleading. Bibliography Burstein, G., 2013. Macro Trading and Investment Strategies: Macroeconomic Arbitrage. 4th ed. Hoboken, NJ: John Wiley and Sons. Damodaran, A., 2012. Investment Valuation. 2nd ed. New Delhi: Prentice Hall. Fraser-Sampson, G., 2011. Multi Asset Class Investment Strategy. 3rd ed. Hoboken, NJ: John Wiley. Gomez, C., 2009. Financial Markets, Institution and Financial Services. 1st ed. New Delhi: PHI. Kieso, D. E., Weygandt, J. J. & Warfield, T. D., 2010. Intermediate Accounting - IFRS Edition. 2nd ed. Hoboken, NJ: John Wiley and Sons. Knuth, E., 2011. Trading between the Lines: Pattern Recognition and Visualization of Markets. 2nd ed. Hoboken, NJ: John Wiley and Sons. Poitras, G., 2012. Handbook of Research on Stock Market Globalization. 2nd ed. Surrey: Edward Elgar. Ray, N. & Chakraborty, K., 2014. Handbook of Research on Strategic Business Infrastructure Development. 2nd ed. New York: IGI. Rolfe, T., 2013. Financial Accounting and Tax Princples. 3rd ed. London: Elsevier. Siesfield, T., 2010. The Economic Impact of Knowledge. London: Routledge. Venanzi, D., 2011. Financial Performance Measures and Value Creation: the State of the Art. 2nd ed. London: Springer. Wood, A., 2010. A Theory of Profits. 12th ed. Cambridge: Cambridge University Press. Read More