Financial Statement Analysis: Yell Group PLC - Essay Example

Financial ment Analysis – Yell Group PLC Yell Group PLC is identified by the symbol YELL-LN(C000088901). The company is registered in Great Britain. The company belongs to the publishing industry. It provides classified directory advertising and associated products, and classified telephone directory advertising. Apart from advertising, the directories also contain local and community information and special interest guides. The Group features a web site containing maps, and a personal address book to keep a record of the regularly used businesses. The Group carries classified advertising in a range of media like printed directories, local and national newspapers, and online directories and also provides business and residential information on phone. The main areas of operation of the group are United Kingdom and United States of America. (Company Overview, Worldscope) In the year 2006, the company posted a total sales figure of ₤1621.30 million. The operating income was ₤449.30 million, and the net income was ₤212.30 million. The total assets of the company in 2006 amounted to ₤3592.60 million as against the total liabilities of ₤2486.80million. The EBITDA is ₤493.90million. The key fundamentals of the company the company are given as under: Forward P/E 14.27 Price to Book 3.82 Price to CF 14.06 1Yr Sales Growth 26.14 Market Cap Consol 3,740 Dividend Yield 2.63 1Yr Total Return (%) -6.62 Beta 1.21 1Yr EPS Growth 29.74 Ent Value 7,393 (Source: Thomson One Banker) A major competitor of the Yell group is Idearc Inc. In this analysis we compare the financial data of Yell Group with its major competitor. The analysis uses financial data from the year 2002 to 2005. Analysis of the Income Statement The sales of the company increased from 670.51 million pounds in 2002 to 1285.30 million pounds in 2005. From 2002 to 2003 there was a 66.14% increase in sales. This increase in sales stabilized to 6.54% in 2004 and then increased to 8.29% in 2005. From 2002 to 2005 the cost of goods sold increased from 226.10 million pounds to 470.70 million pounds. The first year saw an increase of about 72.05%. This increase also stabilized to 11.39% in 2004 and 8.63% in 2005. The cost of goods sold from 2002 to 2500 decreased consistently, while the rate of increase in sales dipped to 6.54% from a high of 66.14% in 2003. The gross income and the operating income have also increased consistently from 2003 onwards. The increases were the highest from 2002 to 2003, and all the increases were over 50% in all the above measures. At the same time, the company has been trying to reduce its general, admin, selling expenses and other expenses. These expenses were again very high from 2002 to 2003, but have steadily decreased since then. The earnings before interest and taxes increased by 59.46% in 2003 and decreased at the rate of 49.30% in 2004. It again showed a phenomenal increase of 161.15% in 2005. This trend of decrease and then increase was a result of an increase in the pretax extraordinary charge at the data 64.12% in 2004 and then a reduction of 75.42% in 2005. Profitability analysis This company shows positive growth on all of the profitability measures. The return on assets and return on invested capital showed a decrease in 2004 but show increases in 2003 and 2005. From 2002 to 2003, the return on assets was 8.47, which fell to 3.59 in 2004, and again increased to 6.36 in 2005. The company shows an improvement in the utilization and return on the money invested in its assets. The returns on invested capital is also at 7.22 in 2005 which is an increase from 3.96 in 2004. The company’s cash flow to sales ratio has increased from 8.14 in 2002 to 20.85 in 2005. This increase has mainly taken place from 2002 to 2003 and then from 2004 to 2005. The cost of goods sold to sales ratio has increased consistently from 33.72 in 2002 to 36.62 in 2005. This would be a direct result of inflation in the economy and also increase in the input prices. The gross profit margin and the operating profit margin have both increased at a proportionate rate from 2002 to 2005. The pretax margin showed a negative trend from 2002 to 2004. But it improved to 11.96 in 2005. This may be due to a jump in earnings before interest and taxes from about 94.20 million pounds in 2004 to 246.00 million pounds in 2005. The pretax income also increased from -44.10 million pounds to 153.70million pounds. The net margin has been in the negative in 2002, 2003 and 2004, but improved to 7.33 in 2005. This shows an increase in efficiency the operations of the company and increasing efforts on the part of the company to make it profitable. Yell Group’s major competitor is Idearc Inc. This company is twice the size of the Yell Group in terms of revenues. In 2005, the total revenues of Idearc Inc. were 3374.00 million pounds while that of the Yell Group were 1285.30 million pounds. Idearc Inc. also shows a positive growth on all of the profitability measures. There was a dip in return on assets and return on invested capital from 2002 to 2003. The year 2003 reflects negative growth on both these measures. The return on assets has shown a remarkable improvement since then. The ROA is 73.14 in 2004 and 82.78 in 2005. This shows an improvement in the utilization and return of the money invested in its assets. The ROIC also shows the same trend as ROA. It shows a negative profitability of -54.91 in 2003 but significant improvement to 358.01 in 2004 and 334.98 in 2005. This indicates that the company has invested well and is earning good profits in return. Both these ratios (ROA and ROIC) show the higher figure for Idearc Inc. This may be due to the larger size of Idearc Inc. The returns are more than ten times in the case of ROA and about 50 times in the case of ROIC. The cash flow to sales of the company also shows a consistent positive growth. But the cost of goods sold to sales shows the marginal increase from 16.14 in 2003 to 18.08 in 2005. This is also an affirmation of the inflation in the economy and, in particular, the publishing sector. The company has not totally passed off the increase in costs to the customers. This strategy has not cost the company dear as its sales have also increased at a fair rate. The gross profit margin has maintained a steady rate of growth. There is a marginal decrease in the gross profit margin measure from 81.80 in 2003 to 79.22 in 2005. The operating profit margin measure has, however, shown an increase from 2003 to 2005 from 40.19 in 2003 to 50.18 in 2005. This measure saw a dip from 46.91 in 2002 to 40.19 in 2003. This shows that the company recovered to show an increase of about five points in each year from 2003.The gross profit margin of Yell Group is 30 points lower than that of Idearc Inc. And the operating profit margin is half that of Idearc Inc. This indicates that Yell Group is comparatively less profitable in the industry. The pretax margin has shown a decrease from about 45.92 in 2004 to 29.37 in 2005. This shows a large increase in the tax charges. The net margin also simultaneously shows a decrease from about 27.67 in 2004. A large reduction was also seen from 2002 to 2003. The company recovered well in 2004. The net profit margin for Yell Group was in the negative in 2004 and became positive in 2005. The Idearc Inc., on the other hand, showed positive figure from 2004 onwards, although it showed a reduction from 2004 to 2005 as compared to an increase in Yell Group net margin during the same period. Overall both the companies show positive growth in all profitability measures. The Yell Group is less profitable as compared to its major competitor. Asset utilization analysis A perusal of the assets utilization by Yell group companies shows that the assets are being utilized effectively by a company management. The assets per employee figure has been decreasing from 491,633.11 pounds in 2002 to 273,249.65 pounds in 2005. Although there is a decrease in this figure but the figure is still relatively much better than its competitor Idearc Inc. In the case of Idearc the assets per employee stand at 182,957.75 pounds in 2005. This shows a proportionately higher number of employees in Idearc Inc. However, the asset turnover is consistently below one for Yell group in all year’s from 2002 to 2005. It was 0.31 in 2002, 0.45 in 2003, 0.50 in 2004, and 0.54 in 2005. the production in the company is only half the volume of imports from one cycle. This shows a very poor utilization of assets. In comparison the asset utilization by Idearc is very high. The company produces more than two and a half times the volume of inputs from one production cycle. The reason for better asset turnover may be a proportionately higher number of employees for the assets of the company. The inventory turnover Of Yell group is very good. It has been consistently near 3 from 2002 to 2005 and stands at 2.90 in 2005. The Capital Expend Pct total assets and sales is more than one for Yell Group. Fior Idearc The capital Expend Pct Total assets is 6.00 in 2005. This measure is again better in the case of Idearc Inc. Leverage analysis The leverage position of Yell group is quite sound. The total debt to equity and the long-term debt to equity ratios are more than 100 which is not very good. However, all the other figures, which include long-term debt to total capital, equity to total capital, total debt to total assets, common equity to total assets, total capital to total assets, are less than hundred in all years from 2002 to 2005. The figures have been decreasing from 2002 to 2005. This bodes well for the leverage position of the company. Company does not seem to be at risk of solvency. The dividend payout ratio is 75.48 in 2005 and the cash dividend coverage ratio has fallen from 7.22 in 2004 to 3.77 in 2005. But it shows that the company can provide three times cover for paying cash dividends. The working capital is about 13 from 2003 to 2005. This is also a very good indication of the leverage of the company. Idearc Shows the higher working capital to capital ratio than Yell group, but its cash dividend coverage ratio is near one, which is much less than that of Yell. Yell is comparatively on sound ground when it comes to leverage position of the company. Liquidity assessment Yell group has a very good liquidity position. The quick ratio and the current ratio are above one for all years, from 2000 to 2005. In 2005, the current ratio of the company is 1.57 and a quick ratio is 1.13. This indicates that the company can easily cover its current liabilities with its current assets. The company is in a good liquidity position. The cash ratio is also very high at 8.07 in 2005. The receivables pct assets is at a good 63.57 in 2005. This has increased from 56.02 in 2002. The accounts receivable days is 120.41 in 2005. This does not pose any threat to the company. Inventories days held is at 125.82 in 2005. The liquidity position is, thus, very sound of the company. Idearc inc. also shows a good liquidity figure. Thus, Yell Group is doing well in the industry in controlling its leverage position. Growth and Stock analysis Yell Group showed a high growth rate in sales in 2003 at 66.14%. This phenomenal growth was tempered in the later years and was still at the respective than 8.29 in 2005. The operating income also was growing at 76.81% in 2003 and slowed down to each 16.92 in 2005. The EPS has grown from -0.07 in 2002 will reach 0.13 in 2005. This reflects better earnings for the shareholders. It would increase the attractiveness of the shares of the company. 2. Projection of Income Statement Assumptions: Rate of Growth in Sales in 2006 (Average of 2002-03-04-05) = 26.99% Rate of growth in Cost of goods Sold in 2006 (Average) = 30.69% Depreciation, Depletion & Amortization (Average) = 18.46% Income Statement for 2006 (Forecast) 2006 Sales 1631.90 Cost Of Goods Sold 615.15 Depreciation, Depletion, Amortization 144.04 Gross Income 871.81 Selling, General, & Admin Expenses 496.96 Other Operating Expenses 0.00 Total Operating Expenses 1256.15 Operating Income 375.75 Extraordinary Credit – Pretax 0.00 Extraordinary Charge-Pretax 36.50 Non-Operating Interest Income 2.02 Reserves-Inc(Dec) 0.00 Pretax Equity Interest Earnings 0.00 Other Income/ Expense-Net 0.00 Earnings Bef Interest And Taxes 341.27 Interest Expense On Debt 98.79 ( -7.04%) Interest Capitalized 0.00 Pretax Income 242.48 Income Taxes 93.86 ( 38.71%) Minority Interest 0.00 Equity Interest Earnings 0.00 After Tax Other Income/ Expense 0.00 Discontinued Operations 0.00 Net Income Bef Extraordinary Items & Disc Ops 148.62 Preferred Dividends 0.00 Extraordinary Items & Gain(Loss) Sale Of Assets 0.00 Net Income Bef Preferred Dividends 148.62 Preferred Dividend Requirements 0.00 Net Income Available To Common 148.62 In the projection of the income statement for Yell Group for the year 2006, we assume that the items which were 0.00 for all previous years were again the same for 2006. When we compare it to the actual annual income statement for 2006, we find that the prediction for sales was very close to the actual sales in 2006. The predicted figure was arrived at by assuming, through the calculation of average rates of increase, an increase of 26.99% in sales from the previous year The actual figure was 1621.30 million pounds and the predicted figure is 1631.90 million pounds. The cost of goods sold was predicted to increase at 30.69% in 2006. The actual figure is 697.80 million pounds while the projected figure was 615.15 million pounds. The depreciation, depletion, and amortization were assumed to increase at the rate of 18.46% in 2006. The predicted figure is 144.04 million pounds, while the actual figure was 53.60 million pounds. The actual figure could not have been predicted correctly, since it depends on a whole lot of other factors and the average cannot be always correct. Hence, the wrong prediction. After calculation, the gross income comes to 871.81 million pounds, while the actual was 869.90 million pounds. The prediction could be called very close to correct. The selling, general, and admin expenses are assumed to increase at 20.68%, the average of previous years. The predicted figure comes to 496.96 million pounds, and the actual figure is 420.60 million pounds. The total operating expenses is derived by adding the cost of goods sold, depreciation, and selling, general, and admin expenses. We arrive at the figure of 1256.15 million pounds. The actual figure is 1172.00. The operating income is arrived at by deducting the total operating expenses from sales. The predicted operating income is 375.75 million pounds, while the actual operating income was 449.30 million pounds. This difference has come about mainly due to an overestimate of depreciation, depletion, and amortization expenses and the selling and other expenses. We assumed the extraordinary credit - pretax to remain at 0.00 in 2005 as in all the previous four years. But this item was actually at 5million pounds in 2006. We assumed the extraordinary charge – pretax to remain the same as that in the year 2005. This was because there was no other way to predict the extraordinary charge. The non operating interest income was taken as the average of all the other years. The predicted figure was 2.02 as against 2.40 in 2006. The pretax equity interest earnings were assumed to be at 0.00 as all the previous years. But it was -4.20million in 2006. Our predicted earnings before interest and taxes are 341.27 million pounds. The actual figure was 440.30 million pounds. This discrepancy is a result of the discrepancies earlier described. We assumed the interest expense on debt to remain the same as 2005. The pretax income thus predicted is 242.48 million while the actual figure was 317.4 million. The income taxes were calculated as a percentage of the pretax income. The tax rate comes to the 38.71% in 2005. Applying the same tax rate in 2006, we get the income taxes 93.86 million. The actual income tax was 105.10 million. The rate of tax was nearly the same as that applied on the predicted figures. The net income before extraordinary items and disc operations, thus, was predicted to be 148.62 million. The actual figure was 212.30 million. The net income available to common was finally calculated to be 148.62 million, while the actual net income available to common was 212.30 million. The difference is only due to certain assumptions which could not have been predicted clearly. Equity valuation: We may use the Price to earnings (P/E ratio) ratio to calculate the value of a stock. The formula is P/E ratio = Stock Price/ EPS For 2005, Stock price at close = 4.74 EPS = 0.13 P/E ratio = 4.74/ 0.13 = 36.46 Higher P/E ratio denotes better growth prospects and vice versa. This ratio would indicate good growth prospects of the company in comparison with other companies in the industry. References “Idearc Inc. Thomson Financial Full Company Report.” Thomson ONE Banker. “Idearc Inc. Thomson Financial Annual Financial Statement Review.” Thomson ONE Banker. “Yell Group PLC. Thomson Financial Annual Financial Statement Review.” Thomson ONE Banker. “Yell Group PLC. Company Overview.” Thomson ONE Banker. “Yell Group PLC. Worldscope Full Company Report.” Thomson ONE Banker. “Yell Group PLC. Thomson Financial Full Company Report.” Thomson ONE Banker. Read More