Stadium Group Ratio Analysis - Case Study Example

Name: ......................................................................................................xxxxx Institution: ...............................................................................................xxxxx Title: ............................................................................ A report on Stadium Group PLC Course: .....................................................................................................xxxxx Tutor: .........................................................................................................xxxxx @2011 Executive summary Ratio analysis is very important in determining the financial position and financial performance of any company. In this research paper, ratio analysis will be conducted from Stadium Group plc where the company’s annual reports will be used to obtain the figures. The report will contain the aims and objectives, research methodology, introduction and history, business aims, ratio analysis for Stadium Group plc and cash flow analysis will be discussed. A report on Stadium Group PLC Aims and Objectives The main aim of this research is to analyze the annual reports of Stadium Group PLC so as to gain an insight on the company’s financial position. To ease this, a thorough analysis of the company’s cash flow statement, background of the company, balance sheet and income statements so as to obtain the company’s financial ratios. The report will also be aimed at determining the company’s financial performance. We believe this, along with looking at a bit of background to the company, would help draw up an accurate picture of where the company is financially at present. We will also then make some conclusions and recommendations for the improvement of Stadium Group PLC in the future. Research Methodology In this research, details of the company will be obtained from its website which is www.stadium-plc.com. From this website, information like the company’s accounts and the purpose of the company were found. In the company’s annual reports, information like Chairman’s annual statement, director’s report and the company’s financial statements like balance sheet, cash flow statements, income statements among others were found. With the help of secondary information about financial ratios, what they measure and their implications, we were able to collect and analyze the financial ratios in greater details. Our Financial Reporting 2 module handbook helped us also, as there was more information into the ratio analysis and easier understanding, such as where we would get figures for the ratio analysis from, with worked examples. Introduction and History Stadium Group PLC was founded in 1911 with its headquarters in Hartlepool in the United Kingdom. Stadium Group plc is a leading provider of manufacturing and design services to a broad range of markets worldwide. The company is also involved in the manufacture of plastic injection molded products for the baby care market. Stadium Group PLC is also involved in the provision of broad portfolio of power supply solutions like standard and custom switch mode power supplies, inverters, battery chargers, DC-DC and AC-DC converters as well as programmable power supplies. The company delivers quality and cost effective solutions through a partnership approach. The company’s goal is to achieve a sustained growth through market development, strategic acquisitions and technology investment. The company has over 1,300 employees globally and it has manufacturing facilities in China and UK. The manufacturing sites are supported by offshore commercial offices in Hong Kong and the USA together with a network of sales agents in the key markets. Stadium Group Plc has experienced a strong second half performance in trading results and cash flow. This positive outcome has carried momentum into 2010. Business Aims The company aims at improving sales densities and its wholesale business aim at increasing sales with existing customers as well as recruiting new ones. By careful control of stock levels, margins and overheads, Stadium Group plc aims at improving their net operating margin. The company also aims at generating a steady growth in earning. The company is optimistic that an increase in UK manufacturing footprint and enhanced market profile represents a significant advantage to future growth prospects. Electronic solutions emanating from new and emerging market sectors will continue to offer opportunities for organic growth, further investment or acquisitions. Off shore manufacture remains strong for lower cost base and products mature in the product life cycle. Ratio Analysis for Stadium Group plc Ratio analysis is a very important analytical tool used in the accounting world. The ratios show the profitability, efficiency, liquidity, solvency and investment risks among others. These ratios are also very important as they enable one to monitor the financial position and the financial performance of the organization. Ratio analysis is a vital sources of information many stakeholders of the concerned company. 1. Profitability ratios They show the profitability of a company as well as the level of returns of that company. a. Gross profit margin This margin basically measures a firm’s profitability on its core activities. This ratio shows the relationship between the sales of a company and the cost of sales for that company. Gross Profit Margin = Gross Profit x 100 Turnover Gross Profit Margin 2009 2008 10,192 *100 36,385 =28.01% 10,769 *100 36,842 =29.2% The gross profit margin for Stadium Group plc reduced from 29.2% in 2008 to 28.01% in 2009. This is attributed to the reduced gross profit which the company experienced in 2009. The results from the above ratio show how the company experienced reduced profits in 2009. b. Net Profit Margin Though similar to gross profit margin, this ratio uses the net profit. This therefore means that it takes off all other costs the business has incurred. The net profit used here is the amount left to pay interest, dividends and tax. This ratio measures the effectiveness of the management of a company. Net Profit Margin = Net Profit Before Interest and Tax *100 Turnover Net Profit Margin 2009 2008 2,288 *100 36,385 =6.28% 2,782 *100 36,842 =7.6% The Net Profit Margin for Stadium Group plc reduced from 7.6% in 2008 to 6.28% in 2009 which is attributable to the reduced gross profit experienced by the company in the same financial year. This means that Stadium Group plc is in line with the rest of the companies in the industry. Also the NPM is one of the best ratios for comparing a company to its rivals, so this is a good ratio to be around the average for the industry. 2. Liquidity ratios These show the liquidity position of a firm. This is the ability of a company to meet its short term debt obligations. Assets are described as liquid if they are cash or can quickly be turned into cash. a. Current Ratio This ratio shows how well equipped a company is to be able to meet is short-term debts. It shows how well a company can pay off its short term liabilities with its short term assets. The higher the ratio more liquid a company is. The most desirable ratio for this is 2:1. If a company has a ratio of less than 1 it means it doesn’t have enough to meet its short term liability obligations. Current Ratio = Current Assets : 1 Current Liabilities Current Ratio 2009 2008 18,671 11,075 =1.69: 1 16,571 9,738 =1.7: 1 The company’s current ratio for 2008 was 1.7 while the ratio for 2009 was 1.69. The ratio remained almost the same over the two financial periods. With this level of ratios, Stadium Group plc seems to have had enough assets which it can turn into cash if it needed to cover short term debts. This is because the ratios are above the low point of 1:1 and are almost near to the ideal ratio of 2:1. b. Acid Test Ratio This is very similar to the current ratio. However, unlike the current ratio, it takes into account a company’s inventory, which is taken away from the current assets figure. This therefore means that this ratio shows how well a company is equipped to deal with its short term obligations without taking stock that could be turned into cash into account. This is done because it makes for a more realistic ratio as a company might struggle to turn its inventory into cash when they really needed to. Current Ratio = Current Assets - Inventory: 1 Current Liabilities Acid Test Ratio 2009 2008 18,671 -5,737 11,075 =1.17:1 16,571 -5,547 9,738 =1.13:1 This ratio for Stadium Group plc does not take inventory into account when evaluating the company’s liquidity position. The acid test ratio rose from 1.13:1 in 2008 to 1.17:1 in 2009. 1:1 is the ideal ratio for acid test which indicates the ability of a company to cover its short term debts. Stadium Group plc has high acid test and this is a clear indication that the company is well equipped to cater for its short term obligations without taking stock that could be turned into cash into account. 3. Gearing Ratios Gearing ratios are a measure of the degree to which a company’s activities are funded by owner’s funds compared to how much they are funded by creditor’s funds, (i.e. borrowed money, a company’s liabilities.) a. Return on Capital Employed This is an important ratio. This ratio indicates the efficiency and profitability of a company’s capital investment. It shows how much return the company makes on the capital the company has employed. Therefore it shows how much profit a company makes on the amount that has been invested in it. ROCE = Profit before Interest and Tax Total Assets – Current Liabilities ROCE 2009 2008 2,288 30,714 -11,075=19,639 =11.7% 2,782 29,007-9,738=19,269 =14.4% The ratio decreased by a small percentage from 14.4% in 2008 to 11.7% in 2009. This is an indication that Stadium Groups investments were more profitable in 2008 than in 2009. Again this is another pointer to the management of Stadium Group PLC that they are facing tough times and need to start to implement changes in order to help re-grow the business. 4. Investor ratios These are useful for people who may be potential investors of Stadium Group PLC. They help potential investors to assess the performance of the company as an investment. It will help them to decide whether Stadium Group plc is a good company to invest in. Earnings per Share We didn’t need to do any calculations as this was already calculated in French Connection’s statements. However here is the formula anyway and below the actual ratio answers for the last two years: Earnings per Share = Profit for the year available to ordinary shareholders Number of issued ordinary shares Earnings per share 2009 2008 Basic earnings per share 6.3p 7.6p Diluted earnings per share 6.2p 7.6p These figures for earnings per share may be so appealing to potential investors. This is because it shows they will generate very little profit on each share they have. This means that Stadium Group plc isn’t as desirable to invest in and also that there’s risk investors could possibly lose money. Many investors will not want to invest in a company that is under going de-growth and hard times. This is also bad for Stadium Group plc as it means that they may not generate as much cash through investment, and therefore may start to struggle even more with cash flows. Price Earnings per Share This is an extremely important ratio for investors and potential investors of a company. This ratio gives an indication of the confidence investors have in the future of the business. A ratio of one is bad and shows the market doesn’t value the company much at all, and the larger the ratio gets the better. P/E Per Share = Current Market Share Price Earnings per Share Price Earnings per share 2009 2008 88 6.3 =13.97 88 7.6 =11.58 As you can see Stadium Group plc has a high price earning per share. It also shows there has been a large increase from 2007 to 2008. A higher ratio means there is a large amount of confidence in the future prosperity of a company. However it’s not always necessarily good that it’s larger. In Stadium Group plc case I believe it is good as it means there is increasing investor confidence which shows that Stadium Group plc has the potential backing to get back on their feet. Limitations of ratio analysis As we have already seen ratio analysis is one of the most important analytical techniques in the accounting world. One of the first and biggest limitations of financial ratio analysis is that the ratios are no good on their own and cannot be analyzed in isolation. Also companies accounts are often months out of date and therefore this means that once the ratios are drawn up they are already out of date and that means they may not be accurate for analysis. Another limitation is that it is nearly impossible to get a true and fair reflection over long periods of times. This is due to things such as inflation, which change the position of a company over time. Also ratios on their own aren’t that helpful as management decisions can influence the ratios. For example, management could purposely have a high liquidity position for some reason or something similar to that. In addition, another limitation is that ratios are calculated at a set period and time, and therefore don’t take into account seasonal variations. This might therefore mean that the ratios don’t give a true and fair view for the company the whole year around. However, ratio analysis is still an extremely important analytical tool as long as the analysis is carried out in the correct way and in comparison with other companies in the same industry. They are useful to a vast range of stakeholders, from investors to the government, and they are extremely important to companies themselves. Cash Flow Cash Flow Statement Cash flow is essential to a company. It gives information about liquidity and adaptability, it shows the user of the accounts how the cash has changed over the accounting period. Cash is important because without cash a firm will not be able to buy inventory, pay taxes, dividends, trade payables or the wages of its workers. Even if a company is making a profit, if it has no cash, then it is impossible to pay any expenses due and could result in bankruptcy. Advantages of Cash Flows Indicates quality of the profit. Understandable to a non-accountant When used with the balance sheet, it will indicate liquidity, viability and adaptability. Analysts rely on cash and profit. A guide to a company’s ability to fulfill their payables. Disadvantages of Cash Flows Historical statement, not a forecast. The layout is not easy to understand. Direct and indirect methods show different information, which means not all data is comparable. By the time they are published they may not be relevant to decisions. Companies in the retail market will not usually have problems with cash flow as they sell their goods in the shop for instant cash. In some cases there may be goods sold on credit, but the majority in retail is cash. Also any goods sold on credit will be paid back relatively quick compared to other industries where repayments may be made over a 12 month period. The cash flow statement is made up of 3 main sections: Cash Flows from Operating Activities: This refers to the net cash inflow or outflow from ordinary trading activities. Stadium Group plc will spend money on buying inventory and receive money from sales. Cash Flows from Investing Activities: These are the cash flows that relate to the purchase or selling of non-current assets. For example, Stadium Group plc may decide to buy another shop or factory. Cash Flows from Financing Activities: Any cash received from or paid to providers of capital. Stadium Group plc may decide to issue more shares in order to raise more cash. Stadium Group plc cash flow Stadium Group plc had a net cash flow from operating activities of £2,842 in 2008 which was followed by an increase to £3,316 in 2009. This may be attributed to the increase in sales of the company products. Cash and cash equivalents at the end of the financial period increased from £1,738 in 2008 to £3,468 in 2009. Cash and cash equivalents at the start of the period increased from £461 in 2008 to £1,738. Conclusions What now for Stadium Group plc? We have now looked at many different aspects of Stadium Group plc business dealings. We have also applied a varying amount of analytical processes to these in order to see how well they are conducting their business practice at present. In addition to this our group also looked at how well Stadium Group plc have done in previous years and also a look at their competitors in the retailing market. Conclusions Drawn From Ratio Analysis We looked at many different ratios in relation with Stadium Group plc. We looked at a wide range of ratios that showed us many different aspects of the company’s performance. We looked at ratios that showed the firms position on profitability, liquidity, efficiency, gearing and investors. These ratios weren’t very helpful on their own, but when we looked at them all together with other factors they give us a useful view of company activities and performance. The first thing we noticed, which is quite a major point, is that nearly all the ratios we looked at were better for the year ending 2008 than for the latest year. This is bad for Stadium Group plc as this indicates to us that the company is in a period of de-growth, this means that it is less popular with consumers. Although the ratios seem to indicate a decline in all areas for Stadium Group plc in their latest year of trading, none of the ratios place Stadium Group plc in a seriously worrying position. For example, they still have a good gross profit margin and also they have a net profit margin still inline with the industry average. This shows they have still got a good profitability position and won’t be in a position yet to make losses. Overall our impression is that Stadium Group plc ratio analysis highlights a position that they need to start thinking about improving or they may soon find themselves in a worrying position. Reference Stadium Group plc, www.stadium-plc.com accessed on 26th March 2011 Read More