Profitability Ratios - Ascential Company - Case Study Example

ASCENTIAL (ASCL) Introduction In order to run a financially successful business, effective planning and financial management are vital. In this regard, financial ratio analysis is important in helping the management understand the organization’s financial statements and be able to identify trends over time and help in measuring the overall financial health of the business. Financial ratio analysis of a business’ financial statements is also important for other stakeholders including lenders and potential investors since it gives an indication of the organization’s financial health and thus be able to make informed lending and investing decisions. This report is aimed at giving an analysis of the company’s financial performance over a four years period between 2012 and 2015 (since this is the only publicly available information). The company’s performance is also compared to that of its close competitor (YouGov) as well as the industry before giving a recommendation on what the company needs to do to improve performance. Section 1: Who we are, What we do, Where we do it: Ascential (ASCL) is an international business to business media company dealing with a focused portfolio of essential, market leading products that connect and inform business professionals in over 150 countries across the globe. The company has its headquarters in London and has offices in 14 countries with its main operational locations being in the US, UK and UAE. Ascential mainly serves its customers in the over 150 countries through its market leading exhibitions, information services and festivals. The company has 32 product lines with 23 of them being number one in their respective markets. The company operates in two segments that are based on operational expertise including exhibitions and festivals as well as information services. The exhibition and festival segment mainly involves organizing large scale exhibitions, festivals and congresses that enable customers to come together and form business relationships that enable them transact. The products in this category include Cannes lions, spring and autumn fair as well as Money 2020. On the other hand, the information services segment involves provision of high quality industry specific business intelligence and forecasting through digital subscription products (Londonstockexchange.com, 2016). Customers are also able to purchase print subscriptions, attend award ceremonies and conferences while also promoting their services. Products under the segment include WGSN as well as Groundsure. The company’s history dates back in 2008 when the company (then Emap) was acquired by funds advised by Apax Partners and Guardian Media Group after selling its consumer media and radio assets to Bauer Media. Since then, the company has grown in size to become what it is today. The company’s key values and strengths that have enabled it offer exceptional services to its customers and hence become what it is today are numerous. The strengths include its focused portfolio of market-leading products where 23 out of its 32 products lead their markets. The company also has self-reinforcing models while being at the heart of the customers’ needs. The company’s other strength include disciplined operational approach and portfolio management as well as a strong track record of growth. Analysis of the profitability ratios Return on capital employed The company’s return on capital employed has been improving from 2012 when it was 0.15% to 2015 when it was 5.02% (Londonstockexchange.com). The increase in returns on capital employed could be attributed to the gradual increase in the company’s operating income from 1 million GPB in 2015 to the 2015 level of 32 million GPB. At the same time, the capital employed did decline from 683 million GPB in 2012 to the 2015 level of 632 million GPB thus causing an improvement in the company’s returns on capital employed. Gross profit margin The company has had different performance as far as its gross profit margin is concerned over the four years under review. The gross profit increased to 66.13% in 2014 from its 2012 level of 65.87% before declining to 64.89% in 2015. The mixed performance is attributed to varying amounts of sales and cost of sales and hence the company’s gross profits over the four years. Operating profit margin The company’s operating margin has gradually increased from its 2012 level of 0.40% to the 2015 level of 10.03%. This improvement is attributed to the gradual increase in the company’s operating profit from its 2012 level of 1 million GPB to its 2015 level of 32 million (Ascential.com, 2016). This is an indication that the company has been able to improve in its management of expenses thus leading to increased profitability. Conclusion on what has happened about the company’s profitability As can be derived from the above analysis of the various profitability ratios for the company, it can be seen that the company’s return on capital employed and operating profit margin increased over the years with the highest levels being registered in 2015. This is despite the company registering mixed performance as far as the gross profit margin is concerned. It can thus be concluded that the company’s profitability has been improving over the four years under review. The improvement in the company’s profitability could be attributed to the increase in its sales levels thus resulting in greater profitability. This means that the related expenses for the company increased at a lesser rate compared to the increase in sales thus resulting in improved profitability. This is good for the shareholders since they can expect greater returns from their investment in the company. Analysis of the efficiency ratios Stock turnover The company’s stock turnover significantly improved from its 2012 level of 6.62 times to 7.86 times in 2014. This indicated increasing efficiency of turning over stock into sales. However, the stock turnover greatly declined in 2015 to 6.79 times indicating declining efficiency of turning over stock into sales. The decline is attributed to increasing stock and hence the company needs to improve its sales efforts so as to avoid holding too much stock. Trade receivables turnover The company’s trade receivables turnover gradually increased from 6.15 times in 2012 to 7.11 in 2014 indicating improving efficiency as far as collecting the company’s receivables is concerned. However, the efficiency declined in 2015 to 6.58 times. This decline is however attributed to increasing receivables for the company in 2015 compared to the increase in sales thus resulting in the decline. Thus, the company needs to put in measures to improve collection of receivables in a bid to make the cash available for the company’s operations. Trade payable turnover The company’s trade payables turnover improved from the 2012 level of 9.56 times to 11.16 times in 2014 indicating improved efficiency with which the company pays its payables. However, the situation changed in 2015 when the trade payables turnover declined to 9.33 times thus indicating a declining efficiency. The decline is attributed to the increase in the company’s accounts payables compared to the cost of sales. Thus, the company needs to put in measures to improve its credit payments so as to avert the risk of its payables falling due. Sales per employee There was a significant increase in sales per employee for the company from 168,000 GPB in 2012 to 212,733.33 in 2015. The increase is mainly attributed to the increase in the company’s sales in 2012 compared to 2015. This is an indication of improving efficiency for the company. Expenses per employee The company’s expenses per employee significantly improved from 110,000 GPB in 2015 to116466.67 in 2015. The increase is attributed to the decline in employee related expenses in 2015 compared to 2015 and is an indication of increasing efficiency for the company. However, these expenses seem to be too high given that it has the effect of reducing the company’s net profit. As such, the company’s management ought to put in place measures to reduce the expenses. Alternatively, the company can increase employees’ efficiency thus increasing sales per employee and thus increasing the company’s profits. Conclusion on what happened about the company’s efficiency There was mixed reaction over the four years period as far as the company’s efficiency is concerned. Though there was significant improvement in the company’s efficiency between 2012 and 2014, there was a noted decline in the efficiency in 2015 especially as far as stock turnover, trade receivables turnover and trade payables turnover are concerned (Jared, 2013). It should thus be noted that the company’s efficiency is generally wanting and steps need to be taken to improve all the aspects of the company’s efficiency so that its performance and hence profitability can improve. Review of the company’s liquidity Current ratio Though there was a significant improvement in the company’s current ratio from 0.44 in 2014 to 0.63 in 2015, it should be noted that the 2015 level is a great decline from the 2012 level of 1.21. The current level of current ratio is very low and hence the company is still exposed to high levels of liquidity risk and policies need to be put in place to avert this situation. Acid ratio The company’s acid ratio declined from 1.13 in 2012 to 0.54 in 2015. This is attributed to the great decline in the company’s current assets over the four years under review. The acid ratio are too low for the company meaning that the company might be exposed to a huge liquidity risk. What happened to the company’s liquidity? Though the company’s liquidity is noted to be improving especially between 2014 and 2015, the liquidity is still very low compared to the 2012 levels. It is worth noting that despite the improvement, the company’s liquidity remains low meaning that the company might be exposed to very high levels of liquidity risk and hence much needs to be done to avert the risk that might affect the company’s operations. Section 5: Analysis of a competitor- YouGov PLC Comparison of Ascential profitability with that of YouGov PLC-its competitor There is a great difference between the two companies profitability although a similar trend is noted. YouGov PLC’s profitability same to that of Ascential is at its lowest in 2012 before rising to the maximum levels in 2015. It is however worth noting that Ascential appears to be more profitable than its competitor throughout the period under review. The exception is gross profit margin where YouGov is better off during the entire period. This implies that its cost of sales portion is smaller than that of Ascential but Ascential is better in controlling its operating expenses leading to more operating profit compared to its competitor. As such, Ascential can still improve its profitability by bringing down its cost of sales. The company’s efficiency Comparison of the two companies’ efficiency A comparison of the two companies’ efficiency ratios shows Ascential to be the more efficient company in all aspects. The company’s efficiency ratios are very low compared to those of Ascential as can be seen from the table in the appendix. However, a similar trend is noted where the companies efficiency seems to have declined in 2015 despite having been increasing in the other years. This could be associated to environmental problems that affect companies across the industry. However, the comparison gives an indication that Ascential still has room for improvement especially as far as improving its payables efficiency is concerned. Liquidity ratios Difference between the two companies There is a great difference between the two company’s liquidity over the four years with YouGov PLC being the better company (Morningstar.com, 2016). Although a similar trend is noted for the two companies where liquidity seems to have declined over the years in comparison with the 2012 levels, it is clear that YouGov fairs better as far as liquidity is concerned meaning that it is more able to meet its short term financial obligations without having to affect its operations. For instance, its current ratio and acid ratio over the four years has been greater than 1 which is far much high in comparison to Ascential’s ratios. As such, Ascential should consider making changes that will improve its liquidity so as to reduce the risk that might come with not being able to meet its short term financial obligations. Section 6: Industry comparison The industry ratios are arrived at by averaging the ratios for the two companies. Profitability Comparison with industry profitability From the above analysis, it is clear that Essential’s profitability is higher/ better than that of the industry. The company’s return on capital employed and operating profit margin are far much better than the industry average (Tracy, 2014). However, the industry gross margin is far much higher than Ascential’s gross margin over the four years. However, it is worth noting that though Ascential’s profitability is higher than that of the industry, the industry ratios have been arrived at by averaging Ascential’s profitability with that of its competitor implying that given that its competitor operated at a lower profit, these figures would have been different would a more profitable competitor been chosen. Efficiency Comparison of Ascential’s efficiency with that of the industry The comparison of the company’s performance with that of the industry reveals that the company is more efficient in all the aspects compared over the four years. As such, it can be concluded that although the company’s efficiency is seen to improve over the two years and is even better than that of the industry in some aspects, the company still has a bigger room for improvement so as to become more efficient and hence be able to compete better in the market and hence give better returns to its shareholders. Liquidity Comparison of the company’s liquidity with that of the industry A comparison of the company’s liquidity with that of the industry as calculated above indicate that the company is fairing badly when compared with the industry (Tracy, 2014). For instance, the company’s current ratio in 2014 and 2015 was o.44 and 0.63 respectively compared with the industry average of 0.94 and 1.03 in 2014 and 2015 respectively. On the other hand, the company had an acid ratio of 0.38 and 0.54 in 2014 and 2015 respectively compared to 0.69 and 0.81 in 2014 and 2015 respectively for the industry. This means that the company is exposed to a relatively larger liquidity risk that might affect its operations in future should its current obligations fall due and it is unable to pay when compared to its industry pears. As such, the management needs to put in place policies that will help it address its weak liquidity position so as to bring it close or equal to the industry average. Possible solutions to problems and issues identified Various issues regarding the company’s financial performance have been identified as a result of the above analysis. For instance, the analysis reveals that although the company’s profitability is greater than that of its competitors as well as that of industry, the company’s gross profit is lower in comparison. As such, the company’s management should intimate measures that will reduce the cost of revenue so as to increase gross profit and hence the company’s net profit. It is also worth noting that the company’s operating profit margin is very low compared to its gross profit margin. This means that its operating expenses are too high and hence the company should institute measures to reduce the operating expenses thus resulting in higher net profit and hence greater returns for the company’s investors and shareholders. Another issue identified regards the company’s efficiency. Although the company has been noted to be more efficient than its competitor and the industry as well, it has been noted that its efficiency has generally declined in 2015. The company should thus institute measures to rectify this situation. For instance, the company should review its credit terms with its customers in a bid to ensure that the amount of receivables is reduced. This will in turn release more cash for the business operations while availing more cash for the company to repay its debts to suppliers. This will reduce the risks associated with too high payables (Jared, 2013). Furthermore, the sales efforts should be enhanced in a bid to ensure that as much stock is converted into sales which will imply improved profitability and hence greater returns for investors while availing more cash to finance operations. It has also been noted that the company is exposed to very high liquidity risk. This is because the company’s liquidity ratio has been noted to be very low over the four years reviewed and when compared to its competitors and the industry as a whole. The company has been noted to hold far more current liabilities than its current assets. If these liabilities were to fall due at the same time, the company might not be able to meet them and hence its normal operations might be negatively affected. As such, the management should put in measures that will improve the company’s liquidity and hence the reduce the associated risk. Conclusion This paper has compared the financial performance of Ascential over different years (2012 to 2015) before comparing it with that of its competitor (YouGov PLC) before finally comparing it to its industry peers. The comparison has revealed that the company is performing better than the industry in various aspects especially as far as its profitability is concerned. The company is also performing better compared to its competitors and industry average as far as some aspects of its efficiency are concerned. However, the management needs to put in place measures that will help the company improve its financial performance in the areas identified such as liquidity and accounts payable turnover. Furthermore, the company’s performance has been noted to have generally improved over the two years. However, much still needs to be done to bring its performance ahead of its competitors as well as industry peers. References: Londonstockexchange.com, 2016, ASCL Ascential PLC ORD 1P, Retrieved on 14th December 2016, from; http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.ht ml?fourWayKey=GB00BYM8GJ06GBGBXSTMM Ascential.com, 2016, Reports and presentations, Retrieved on 14th December 2016, from; http://www.ascential.com/investors/reports-and-presentations/2016 Morningstar.com,2016, YouGov PLC Financials, Retrieved on 15th December 2016, from; http://financials.morningstar.com/incomestatement/is.html?t=YUGVF®ion=usa&cult ure=en-US Tracy, A2014, Ratio analysis fundamentals, London, Rutledge. Jared, B2013, Advanced financial accounting, New York, John Willey & Sons. Appendix: A: Ascential’s profitability ratios Ratio Formula 2015 2014 2013 2012 Return on Capital employed =EBIT/Capital employed(Total assets-current liabilities =32/(837-200) =(32/632)*100% = 5.02% =23/(828-217) =(23/611)*100% =3.76% =18/(781-198) =(18/583)*100% =3.09% =1/(861-178) =(1/683)*100% =0.15% Gross profit margin =Gross profit/revenue =(207/319)*100% =64.89% =(207/313)*100% =66.13% =(178/271)*100% =65.68% =(166/252)*100% =65.87% Operating profit margin =operating profit/revenue =(32/319)*100% =10.03% =(23/313)*100% =7.34% =(18/271)*100% =6.64% =(1/252)*100% =0.40% B: Ascential’s efficiency ratios Ratio Formula 2015 2014 2013 2012 Stock turnover =Cost of sales/average inventory =112/(18+15)/2 =112/16.5 =6.79 times =106/(15+12)/2 =106/13.5 =7.86 times =93/(12+13)/2 =93/12.5 =7.44 times =86/(13) =6.62 times Trade receivable turnover =Credit sales/average receivables =319/(53+44)/2 =319/48.5 =6.58 times =365/6.58 =55.47 days =313/(44+44)/2 =313/44 =7.11times =365/7.11 =51.34 days =271/(44+41)/2 =271/42.5 =6.38times =365/6.38 =57.21 days =252/41 =6.15times =365/6.15 =59.35 days Trade payable turnover =cost of sales/average payables =112/(13+11)/2 =112/12 =9.33times =365/9.33 =39.12 days =106/(11+8)/2 =106/9.5 =11.16times =365/11.16 =32.71 days =93/(8+9)/2 =93/8.5 =10.94times =365/10.94 =33.36 days =86/9 =9.56times =365/9.56 =38.18days Sales per employee Sales/number of employees =319,000,000/1500 =$212666.67 per employee =313,000,000/1500 =$208,666.67 per employee =271,000,000/1500 =$180,666.67 per employee =252,000,000/1500 =$168,000 per employee Expenses per employee =employee expenses/number of employees =175000000/1500 =116,666.67 per employee =184000000/1500 =122,666.67 per employee =161000000/1500 =107,333.33 per employee =165000000/1500 =110000 per employee C: Ascential’s Liquidity ratios Ratio Formula 2015 2014 2013 2012 Current ratio =current assets/current liabilities =126/200 =0.63 =96/217 =0.44 =92/198 =0.46 =215/178 =1.21 Acid ratio =(Current assets-Inventory)/current liabilities =(126-18)/200 =0.54 =(96-15)/217 =0.37 =(92-12)/198 =0.40 =(215-13)/178 =1.13 D: YouGov Profitability Ratios Ratio Formula 2015 2014 2013 2012 Return on capital employed = EBIT/ Capital employed (total assets-Current liabilities) =3/(87-23) =4.69% =1/(82-21) =1.64% =1/(84-20) =1.56% =0/(77-17) =0% Gross profit margin = gross profit/revenue =59/76 =77.63% =52/67 =77.61% =47/63 =74.6% =45/58 =77.59% Operating profit margin =operating profit/revenue =3/76 =3.95% =1/67 =1.49% =1/63 =1.59% =0/58 =0% E: YouGov’s efficiency Ratios Ratio formula 2015 2014 2013 2012 Stock turnover Cost of goods sold/ average inventory The company does not have inventory - - - Trade receivables turnover =credit sales/average receivables =76/(14+13)/2 =5.63 times =76/(13+13)/2 =5.85 times =63/(13+19)/2 =3.94 times =58/(19) =3.05 times Trade payables turnover =cost of sales /average payables =17/(2+3)/2 =17/2.5 =6.8 =16/(3+2)/2 =16/2.5 =6.4 =15/(2+12)/2 =15/7 =2.14 =13/12 =1.08 Sales per employee =76,000,000/500 =152,000 =67,000,000/5000 =134,000 =63000000/500 =126,000 =58000000/500 =116,000 Expenses per employee =56000000/500 =112,000 =51000000/500 =102,000 =46000000/500 =92,000 =44000000/500 =88,000 F: YouGov’s Liquidity ratios Ratio Formula 2015 2014 2013 2012 Current ratio =Current assets/Current liabilities =33/23 =1.43 =30/21 =1.43 =31/20 =1.55 =27/17 =1.59 Acid ratio =1.08 1.00 1.11 1.58 G: Industry Profitability Ratios Ratio Formula 2015 2014 2013 2012 Return on capital employed =(5.02+4.69)/2 =4.86% =(3.76+1.64)/2 =2.7% =(3.09+1.56)/2 =2.33% =(0.15+0)/2 =0.075% Gross profit margin Gross profit margin = gross profit/revenue =(64.89+77.63)/2 =71.26% =(66.13+77.61)/2 =71.87% =(65.68+74.6)/2 =70.14% =(65.87+77.59)/2 =71.73% Operating profit margin Operating profit margin = Operating profit/Revenue =(10.03+3.95)/2 =6.99% =(7.34+1.49)/2 =4.42% =(6.64+1.59)/2 =4.12% =(0.40+0)/2 =0.20% H: Industry Efficiency Ratios Ratio Formula 2015 2014 2013 2012 Stock turnover =Cost of sales/average inventory - - - - Trade receivable turnover =Credit sales/average receivables =(6.58 +5.63)/2 =6.11 times =(7.11+5.85)/2 =6.48 times =(6.38+3.94)/2 =5.16 times =(6.15 +3.05)/2 =4.06 times Trade payable turnover =cost of sales/average payables =(9.33+6.8)/2 =8.07 times =(11.16+6.4)/2 =8.78 times =(10.94+2.14)/2 =6.54times =(9.56+1.08)/2 =5.32times Sales per employee = =(212666.67+152000)/2 =182,333.33 per employee =($208,666.67+134000)/2 =171,333.34 per employee =(180,666.67+126000)/2 =153,333.33 per employee =(168,000+116,000)/2 =142,000 per employee Expenses per employee =(116,666.67+112000)/2 =114333.33 per employee =(122,666.67+1020000)/2 =107,333.33 per employee =(107,333.33+92000)/2 =99,666.66 per employee =(110,000+88000)/2 =99,000 per employee I: Industry Liquidity Ratios Ratio Formula 2015 2014 2013 2012 Current ratio =current assets/current liabilities =(0.63+1.43)/2 =1.03 =(0.44+1.43)/2 =0.94 =(0.46+1.55)/2 =1.01 =(1.21+1.59)/2 =1.4 Acid ratio =(Current assets-Inventory)/current liabilities =(0.54+1.08)/2 =0.81 =(0.37+1.00)/2 =0.69 =(0.40+1.11)/2 =0.76 =(1.13+1.58)/2 =1.34 Read More