Evaluation of William Hill Plc - Case Study Example

DECISION MAKING FOR MANAGERS Name: Course: Professor: Institution: City & State: Date: A. Evaluation of William Hill Plc. Profitability ratios Profitability ratios are used to measure the level of earning of the company relative to expenses and other relevant cost incurred during a certain period. Higher profitability ratio in comparison with the previous period indicates that the business is doing well (Loren, Nikolai, Bazley, and Jones, 2009). The following profitability ratios have been analyzed: Gross profit ratio Gross profit has been maintained at more than 0.8 since 2007, a figure which shows that the company has been doing very well. This means that the profit margin has been maintained at over 80% while expenses comprises of less than 20% of the revenue. More encouraging is the fact that the company has maintained a constant improvement all through. It has improved from 0.82 in 2007 to 0.86 in 2010. “The gross profit earned should be adequate enough to recover all the fixed operating expenses and create enough reserves after paying all the fixed interests charges and dividends.” (Loren, Nikolai, Bazley, and Jones, 2009, p. 43). Over 80% gross profit is not badly off; and is relatively adequate to allow for slight reduction of selling price without incurring losses-this can be used as a promotional strategy. The light increase in gross profit ratio can be attributed increase in selling without considerable increase in cost of sales or reduction in cost of goods sold without resultant reduction in selling price. Net profit ratio Net profit ratio compares the revenue with the after tax profits. The ratio dropped from 0.17 in 2007 to 0.24 in 2008 and 0.08 in 2009. Signs of recovery are currently being experienced with an increase from 0.08 in 2009 to 0.15 in 2010. This means that for every $1 sales, the net margin after deducting all the expenses and tax amount to 0.15 pence. It is very important that the managers pay attention to this ratio because if the profits are not sufficient, the firm may not be in a position to realize acceptable returns on investments. Net profit ration also reflects the organization’s ability to face difficult economic environment such as low demand and price competition. Apparently, the higher the ratio the better is the profitability. However, the managers should recognize the relationship between the performance of the profits and investments or capital of the firm and not only relative to sales. The net profit seems to be very turbulent since 2007, with 2008 recording the highest figure at 0.24 and the lowest being 0.08 in 2009. Since the net profit margin provides a sign of how well managers are controlling the company’s costs, the recent improvement is encouraging. A high net profit margin shows effectiveness at translating sales into real profit. Higher net margins can offer the company a considerable competitive edge as it pursues operational expansion; and hence the managers should continue striving to improve the ratio. Low measure should be avoided at all costs because it can put the company in to trouble during trying economic times, as the only option left will be taking more debt to finance its costs which can reduce its returns. ROSF ROSF is the relationship between the profit after tax and interests and the share holders’ funds. This ratio determines the profitability of the company from the shareholders viewpoint. ROSF appears to decline drastically between 2007 and 2009, but starts to pick in 2010 at 22.9%. This means that the returns on the shareholders fund is 22.9 cents per dollar. As the ratio reveals how best the resources of the company are being utilized to generate income, the recent increase is encouraging. It give the shareholders confidence that the managers are suing their funds efficiently. The management should maintain good strategies to avoid reverting back to the past where the drastic decline was experienced. Ratios: Ratio 2010 2009 2008 2007 Profitability: Gross Profit Ratio 0.861 0.84 0.83 0.82 Net Profit Ratio 0.15 0.08 0.24 0.17 ROSF 22.9% 16.24% 84.25% 125% ROCE 17.0% 15.3% 16.7% 14.46% Liquidity: Current Ratio 0.72 0.32 0.62 0.70 Quick Ratio 0.7 0.32 0.72 0.62 Efficiency: Age of Inventory 270 253 469 400 Age of Receivables 14.6 20.4 12.6 11.97 Age of payables 365 194 240 252 Gearing: Gearing ratio 46.6% 41.7% 85% 78.5% Debt Ratio 53.22% 59.1% 80.5% 86.3% Times interest earned 2.1 1.34 3.3 3.3 Investment: Earnings per share 0.185 0.087 0.662 0.446 Dividend payout ratio 40.5 28.73 34.44 51.3 Price earnings ratio 7.9 11.1 3.3 9.3 ROCE Return on capital employed is used to measure the extent to which the company is using the capital employed to generate returns. The company has maintained a relatively constant ratio, though it has slightly improved overtime, and only fell in 2009. The good performance shows that the management has properly utilized the investments provided by the owners and the creditors. Overall, the company shows encouraging results especially considering that it is recording improvements and maintaining reasonable profitability even during economic down turns. Liquidity ratios Liquidity ratios express the ability of the company to pay its short term obligations. This is achieved through comparison of assets that can easily be converted to cash with the current liabilities. The greater the coverage of current assets to short-term liabilities the better as it shows that the company is capable of financing the short-term liabilities and still funds its ongoing operations (Richard, Joel, Stinson, & Everette, 1989). Current and quick ratio These ratios measure the company ability to use the current assets to pay the current liabilities (Richard, Joel, Stinson, & Everette, 1989). Both the current and the quick ratios have been maintained at a level below 1, but this should not be a major cause of concern since the nature of the inventory could be the reason. The company doesn’t seem to maintain high level of inventory since it is a service company. Efficiency ratios Efficiency ratios are used to evaluate the quality of the receivable and to establish how efficient the managers of a business have been in controlling and using the assets of the business. Efficiency ratios can also be used to establish how effectiveness of the company in paying the suppliers and whether the company is overtrading or under trading on the funds borrowed (Schwartz, 1974). Age of inventory This ratio shows the number of days the inventory is held before it is sold. The age of inventory has declined significantly which is very encouraging because it shows that the company has increased its ability to sell its products. The ratio should however not go very low as it may indicate underinvestment in the inventory. Age of receivables Age of receivables expresses the time needed to covert receivables into cash. The ratios have been maintained at between 11 days and 20 days. This is health as it shows that the company is not exposed to the danger of bad debts, but the management should evaluate the possibility of the reduced receivable age affecting the sales adversely. Age of payables Age of payables shows the time that it takes for the company to repay its payable accounts. The age has been maintained at between 252 to 365 days which is somewhat too high. The high rate may however benefit the business by improving its cash flows but can expose the company to the risk of bankruptcy. Overall, the company does not maintain a lot of inventory which means that the account payable is not very significant and hence no reason to worry about the risk of bankruptcy. As such, main reason for abnormal efficiency ratios is because Williams is a service company and hence does not hold a lot of inventory. Gearing Gearing ratios compares the owners’ capital with the borrowed capital. It demonstrates extent to which the company’s capital is funded by the owners against the creditors. I high level of gearing is considered risky because the company must continue servicing the debts regardless of the economic situation. Whether the company is making profits or not, interests on debts must be paid as opposed to payment of dividends which depends on the company’s profitability. Again, too low gearing may portly loss of investment opportunism (Horrigan, 1965). Gearing ratio The company seems to have reduced the high leverage that was experienced in 2007 and 2008 at 78.5% and 85% respectively to the less than 50% for the last two years. This action is encouraging because it reduces the risk of high leverage. Debt ratio Debt ratio measure the proportion of total liabilities over the total assets. It measures the general leverage position of a company. Just like the gearing ratio, the debt ratio shows that the company has opted to reduce its risk by reduced its debt ratio to slightly higher than 50% for the last two years. Times interests earned This ratio shows the ability of the company to pay its interest obligations using the pretax income. At 3.3 for year 2007 and 2008, the company was standing at a higher chance of bankruptcy; a risk that has been reduced particularly by reducing the company’s leverage position. The increase from 1.32 in year 2009 to 2.1 in 2010 is as a result of increased leverage. Overall, the company seems to have taken action to reduce the risks associated with high leverage position in the recent years. The composition of equity and borrowed capital seems to be well balanced. Investment Investment ratios help the investors to evaluate and decide whether certain stocks meet their criteria (Bird and McHugh, 1977). The following ratios can be used for that purpose: Earnings per share This ratio shows how profits were generated on the basis of per share. The figure shows that the earnings have reduced significantly since 2008. The investor however need not worry because there is a considerable improvement from 0.087 in 2009 to 0.185 in 2010. If the improvement trend does not continue in future, the management needs to investigate the cause and take an appropriate course of action to avoid scaring away investors. Dividend payout ratio Dividend payout ratio shows the fraction of the net income that the company pays out as dividends to its shareholders. The part that is not paid as dividends is set aside for growth of the company. The company seems to pay a considerably high rate of dividend which can attract investors who focuses on current income. Long–term investors may however not prefer the policy. The decrease from 2007 to 2009 may reflect the company’s commitment to expanding the business, but may be a cause of concern if it resulted from reduced income. Price earnings ratio Price earning is the price paid to shares relative to net annual income. A higher PE ratio means that the investors are paying more for each unit of income and hence the stock is highly priced. Higher PE also shows that the company shares are highly demanded. The PE of the company has fluctuated significantly overtime, with year 2008 recording the lowest at 3.3. Later in 2009, the demand for the shares rose to11.1 only to decline to7.9 in the current year. All in all, the investors do not need to worry as the improved general performance is likely to improve the demand of company’s shares. B. Critically discuss how management accounting can assist a service providing business like William Hill. Management accounting is a central part of the management process and particularly adds value by endlessly inquiring whether resources are effectively utilized by organizations and people - in generating value for shareholders and customers among other stakeholders. As such, resources are not only financial but also all other resources related to financial expenditures. Thus, knowledge, work processes information, systems, trained personnel, innovative capacities, morale and even committed customers may be considered as resources - along with special perspectives of resources that may be recognized as strategic capabilities, intellectual capital, or core competencies (Modell, 1996). . William Hill can use management accounting to promote its competitive decision making process through processing, collecting and communicating information that helps the management to control, evaluate and plan company strategy and business process (Bescos and Mendoza, 2000). In other words, management accounting involves creation and use of quality, cost and time based information to ensure effective decision making in the company. Management accounting can be practiced by a variety of professionals within the organization to achieve these objectives, including the operational managers, marketing managers, finance professional, technologists, and top level executives (Ax and Bjornenak, 2000). For example, professionals in the audit department can ensure compliance of controls and efficiency of operations. Financial accountants should provide relevant reports to the decision makers while preparing information to the outsiders. System professional are required to process information in a manner that is useful for decision making by the managers. As tax department professional ensure that the organization acts in compliance with the tax laws and pays the appropriate tax liability, they must engage themselves in planning, evaluation and control of the decision making and process that can expose the company to tax expense in future. Cost accounting also plays a crucial in tracking and reporting all the relevant service costs. Generally, the controller gathers together all this information which is used for controlling planning, evaluating and decision making process within the organization (Khawaja, 1996). With the emergence of JIT together with intensified global market completion competition, companies like William Hill will need to compete on aspects of timeliness, quality and cost. Computerized systems have allowed these companies to track any kind of information. The management accountants of these organizations are required to organize the voluminous data is useful in decision making while at the same time ensuring that they do not make information overloads to the managers and the decision makers. This requires them to understand how to utilize most of the current technology (Sundem, 2000). The best way for a firm to prosper and survive in the long-term is to think and plan for what is important for long-term success and viability (Neely, Adams, & Kennerley, 2002). The basic reason why management accounting should not be wished away is because it helps an organization achieve its long-term objectives. Attainment of these objectives satisfies not only the needs of the shareholders but also other stakeholders. Overlooking management accounting for the reason that the firm is making profits is tantamount to overlooking the interests of most of the company’s stakeholders which can affect the firm’s long-term survival (Bell and Ansari, 2011). Management accounting can be used to undertake a broader, forward looking and can be very useful in developing a sustainable and a lasting competitive advantage. Managers use management accounting to communicate, use and implement strategies (Kaplan, 1998). “A new set of management accounting logic is emerging, directing attention toward a greater strategic role for management accountants” (Sharman, 2003, p.42). To achieve strategic objectives of costs, managers use information sourced from measuring resources used by activities carried out in a period; reports on resources consumed by the products produced during a particular period; analyzing profitability of products; analyzing suppliers’ cost structures; analyzing factors that influence costs to be incurred and benchmarking cost against competitors’ costs (Bell and Ansari, 2011). Shields (1997) predict that evolving environment and organizations will significantly change the roles of management accountants. Management accountants will be fewer but playing more key roles. They will rank at the senior most positions in the organization. They will be involved in decision making roles in their companies along with other teams. They will be acting as internal consultants and will be motivating others to change. The internal consultants will add a lot of value in their companies particularly by helping their companies to remain profitable and stay ahead of competition. There will be an increasing need for financial management and people who can understand financial data and present the results as strategic information will be in high demand. Management accounting has shifted from the traditional role of analyzing the past to strategic thinking about the future. Management accounting is becoming more analytical with high level of work product rather than detailed record keeping. In service companies with access to software which manage cost and budgets, management accountants are going up the ladder as they are given the responsibility of advising the managers on information stored in their software. The management accountants are becoming responsible for the system and the process rather than the final report. The impact of information technology means that fewer management accountants will be needed, but the role of the few is very critical. Their roles involve creating strategies to guide management decision rather than tracking the past performance (Kaplan & Atkinson, 1998). They shall remain very close to their C.E.O s to monitor the company resources, innovations, ideas, and people and ensure that the company is focused on its mission and that it remains on its track. Management accountants possess a broad view of their organization and are capable of using case studies to solve problems. Such are some of the attributes that companies will be putting premium in the future. Management accountants are used by the companies for example to use case studies to show how make the company more profitable through viable investment and through reduction of costs (Cropper and Drury, 1996). With the recent tread where many companies have taken on downsizing and preference on leaner staff, management accountants are key players as companies’ depends on people who can propose new ideas and suggest risk taking ventures (Kaplan & Atkinson, 1998). The skills and discipline which is possessed by management accountants makes them ideal members of a decision making team. They can act as team players and are essential part of the decision making and operations (Tricker, 1989). Management accountants have to be around the table when strategic decision is being formulated for their business acumen and skill is crucial. Being an essential decision making team members requires one to have an all round knowledge regarding the company. Management accountants today have broad perspective of the business. They possess knowledge about performance management and process improvement among many other skills (Langfield-Smith, 2007). Management is required to apply new theories about management, such as the strategic cost management which requires new ways of thinking. This is very critical because service companies are focused on controlling costs and remaining on their track-remaining competitive. Through electronic data exchange, it has become possible to send data online for every manager to see. This has increased demand for instant information while at the same time requiring the management accountants to produce more financial analysis rather than just masses of data. The analyzed data is used by the managers to formulate strategies and make decisions which require precise information (Akinyewre, 1998). The cost and other market characteristics of a particular company are entangled by that of the competitors. This means that the management accountants cannot restrict their information to the products of the company, but they must incorporate strategic information in their report; to make them more useful. This provides some of the reasons why management accountants must involve themselves with strategic formulation and control (Armstrong, 1986). Stiff market competition requires that the management accountants extend their analysis beyond the firm to capture the cost structure of the competitors. To achieve this, the management accountants evaluate the relative benefits that a firm attains from economies of scale and the economies coming from other portfolio of products. They also estimates entry barrier due to fixed costs and sunk costs. This is used to help the management make appropriate decisions especially on how to counter the strategies of the rival companies (Shepherd, 1984). The essence of this role is to maintain cost advantage relative to the rival so as to ensure sustainable strategy (Abrahammson and Helin, 2000). The expansion of management accountants’ role to incorporate cost advantage gives management accounting a new direction of what Porter (1985) referred to as three generic strategies to ensure sustainable competitive advantage. Management accountants are also actively involved in estimation of the firms’ product lifecycle costing. This requires that the management accountant to calculate the present value of the firm and its components, and approve and monitor the changes overtime (Kaplan, 1983). Conclusion Management accounting plays a critical role in service organizations today. Since it helps decision making process within the organization, all the decision makers within the organization are required to understand how to use and create good quality management accounting information. In addition, Management accounting is considerably being affected by remarkable improvements in computer technology. Today’s technology makes it possible for the management to follow performance information that surpasses the cost-based information of historic general ledger systems (Kaplan, 1983). Management accounting is a value adding process that should not be wished away by any organizations that aims at attaining a sustainable existence and growth. More importantly, the roles of management have evolved to acquire more strategic and decision making perspective which are very critical in ensuring organizations competitiveness. The roles of management accounting are become even more crucial with the emerging information technology. Indeed, management accountants have adopted a new role as ‘internal consultants’. Any organization that overlooks the roles of management accountants tends to overlook its own future survival (Kaplan & Atkinson, 1998). References Abrahammson, G. and Helin, S., 2000. “Continuous Improvement-Work Under Ambiguity- the Role of Management Accounting Control”, a paper presented at the 23rd Annual Conference of the European Accounting Association, in Munich, Germany, March 29-31, 2000. Akinyewre, A., 1998. Management Information System: Concepts and Development. The accountant, 31(3) pp.14-18. Armstrong, P., 1986. Management control strategies and inter professional conflict: the case of accountancy and personnel management. London: Gower. Ashton, D., Hopper, T., & Scapens, R., 1995. The changing nature of issues in management accounting, pp. 1-20, in Ashton, D., Hopper, T. & Scapens, R. (eds.) Issues in Management accounting (2nd edition). Hertfordshire: Prentice Hall Europe, Baker, M. and Gosman, M. L., 1980. The Use of Financial Ratios in Credit Downgrade. New York: Levin. Bell, J. & Ansari, S., 2011. Strategy and Management Accounting. Texas: California state university. 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APPENDICES: Profitability ratios Gross profit ratio= (gross profit ÷ sales) x 100 2010 2009 2008 2007 923.1÷1071.8=0.861 839.7÷ 997.9=0.84 797.5÷963.7=0.83 763.2÷933.6=0.82 Net profit ratio= (Profit after tax÷ Turnover or sales) x 100 2010 2009 2008 2007 156÷1071.8=0.15 81.2÷ 997.9=0.08 234÷963.7=0.24 157÷933.6=0.17 ROSF= (profit before tax ÷ share holders funds) x 100 2010 2009 2008 2007 193.3/843.2X100=22.9% 120.9/744.1X100=16.24% 293.3/348.1X100=84.25% 292/233.1X100=125% ROCE = (profit before interest & tax÷ capital employed or TA-CL) X 100 2010 2009 2008 2007 272.7/1602.4X100=17.0% 198.8/1297.7=15.3% 240/1660.3=14.46% 259.1/1554.2=16.7% Liquidity Current ratio= (current assets ÷ current liabilities) 2010 2009 2008 2007 156.7/224.9=0.70 176/552.7=0.32 108.6/175.6=0.62 107.5/148.5=0.72 Quick ratio= (current assets-inventory) ÷ current liabilities 2010 2009 2008 2007 156.7-0.3/224.9=0.7 176-0.3/552.7=0.32 108.6-0.3/175.6=0.62 107.5-0.6/148.5=0.72 Efficiency Age of inventory= (Inventory÷ cost of sales) x365 2010 2009 2008 2007 0.3/148.7X365=270 0.3/158.2X365=253 0.5/166.2X365=400 0.6/170.4X365=469 Age of receivable= (trade receivable÷ credit sales) 365 2010 2009 2008 2007 47/1071.8x365=14.6 55.9/997.9x365=20.4 31.6/963.7x365=11.97 32.3/933.6x365=12.6 Age of payables= (trade payables ÷credit purchases) x365 2010 2009 2008 2007 148.9/148.7x365=365 109.2/158.2*365=252 109.2/166.2*365=240 90.8/170.4*365=194 Gearing Gearing ratio= [long term liabilities÷ (long term liabilities+ equity)] x 100 2010 2009 2008 2007 747.4/(747.4+854.7)x100 =46.6% 541.4(541.4+756.3)x100 41.7% 1302.7/(1302.7+357.6)x100 78.5% 1321.1/85(1321.1+233.1)x100 85% Debt ratio= (total liabilities÷ total assets) x 100 2010 2009 2008 2007 (972.6/1827.3)x100 =53.22% (1094.1/1850.4)x100 =59.1% (1478.3/1835.9)x100 =80.5% (1469/1702.7.)x100 86.3% Times interest earned=earnings before interests & tax ÷ interest 2010 2009 2008 2007 193.3/93.4 2.1 120.9/89.9 1.34 293.3/89.5 3.3 292/87.6 3.3 Investment Earnings per share= earnings available to share holders/ no. of shares issued 2010 2009 2008 2007 129.7/701.6=0.185 61.1/701.6=0.087 234/353.7=0.662 157.4/353=0.446 Dividends payout ratio= (divided per share/earnings per share) x 100 2010 2009 2008 2007 (0.075/0.185)100=40.5 (0.025/0.087)100=28.73 (0.228/0.662)100=34.44 (0.229/0.446)100=51.3 Price earnings ratio= market price per share/ earnings per share 2010 2009 2008 2007 7.9 9.3 3.3 11.1 Source: http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0031698896GBGBXSTMM Read More