In order to produce a financial analysis of Hornby PLC and Games Workshop PLC, Ratio Analysis is conducted over the last two accounting periods to evaluate the current Financial Performance and Financial Position of the two companies.
Ratio is the comparison of one figure to another relevant figure or figures.
According to Myers, 'Ratio analysis of financial statements is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements.'
The Ratios on Profitability and Efficiency facilitate evaluation of Financial Performance and the Ratios on Liquidity and Gearing helps in assessing the Financial Position of the companies. Each of these 4 ratios is justified why it is chosen for analysis and is benchmarked against Time (to establish trends), Industry (to compare performance against competitor) and Expectations (to see if targets have been met) as follows:
A. PROFITABILITY
Profitability is the ability of a company to generate income higher than its expenses and other related costs in order to provide returns to its owners, investors and lenders.
Profitability ratio is expressed as the relation between profits made and other key figures from the financial statement and balance sheet of a company such as capital employed, sales, etc.
SL.NO.
PROFITABILITY RATIO
HORNBY PLC 2010
HORNBY PLC 2009
GAMES WORKSHOP PLC 2010
GAMES WORKSHOP PLC 2009
1.
Return on Capital Employed (ROCE) %
10.99
15.68
28.12
14.44
2.
Return on Shares (ROS) % or Net Profit Margin
8.06
9.94
12.74
5.99
3.
Asset Turnover
1.36
1.58
2.21
2.41
4.
Gross Profit Margin %
49.59
47.75
75.75
71.43
5.
Return on Share-holder's funds (ROSF) %
On PBT
14.24
19.3
29.15
19.84
On PAT
10.06
13.35
27.27
14.61
Table 1 - Table showing Ratios on Profitability of Hornby PLC and Games Workshop PLC for the period ending on 31st of March 2010 and 31st of March 2009:
The Profitability Ratios are calculated to find out whether the Profit made by the company is satisfactory or not. For which the following ratios are calculated:
1. Return on Capital Employed (ROCE)
The ROCE is the primary measure of Business Performance and it compares the profit made before deducting interest and tax (PBIT) with the overall capital used to produce that profit; which helps in assessing the effectiveness with which the funds have been organized.
ROCE = Profit before Interest and Tax x 100
Capital Employed
Comparing between the years 2009 and 2010, the ROCE for Hornby PLC has reduced by 4.69% and it currently is 10.99% whereas in Games Workshop PLC, it has increased by 13.68% and now stands at 28.12%. Between the two companies, the ROCE for Games Workshop PLC is higher than Hornby PLC by 17.13% indicating better returns on capital employed. The average returns in UK is expected to be around 10% of which the investor target or the bank deposit rate is 5% and the risk premium is 5%. Therefore, Games Workshop PLC has earned a very satisfactory returns compared to Hornby PLC which has gained a reasonably satisfactory returns this year.
2. Return on Sales (ROS) or Net Profit Margin
The ROS measures the Operational Performance and it relates the operating profit (PBIT) for the period to the sales incurred during that period which estimates the percentage of profit earned on every 1 pound of sales made.
ROS = Profit before Interest and Tax x 100
Sales
Benchmarking:
The net profit margin for Hornby PLC has gone down by 1.88% and is now 8.06%; in the case of Games Workshop PLC it has increased by 6.75% and at present it is 12.74%. From these figures, it is estimated that for every one pound of sales made, Games Workshop makes a profit that is 4.68% higher than what Hornby PLC is achieving.
3. Asset Turnover
The Asset Turnover ratio portrays how effectively the assets of a company are being used to generate sales.
Asset Turnover = Sales
Capital Employed
Benchmarking:
The above graph shows that in Hornby PLC, for every 1 pound of capital employed, GBP 1.36 worth of sales have been made in 2010 and likewise in Games Workshop PLC, it made GBP 2.21. Comparing results between 2009 and 2010, both companies show a non-significant decrease while Games Workshop continues to produce a higher asset turnover compared to Hornby PLC.
Relationship between ROCE, ROS and Asset Turnover Ratios:
ROCE = ROS X Asset Turnover
= PBIT x Sales = PBIT
Sales Capital Employed Capital Employed
Sl. No.
Company/Year
ROS x Asset Turnover =
ROCE/Result % (Approx)
1.
Hornby PLC 2009
9.94 x 1.58
15.70
2.
Hornby PLC 2010
8.06 x 1.36
10.96
3.
Games Workshop PLC 2009
5.99 x 2.41
14.44
4.
Games Workshop PLC 2010
12.74 x 2.21
28.15
The above table shows that although an insignificant decrease (from the year 2009 to 2010) is noticed in Asset Turnover of both companies, the primary reason for changes in ROCE is because of relative changes in ROS, i.e. since the ROS for Hornby PLC has decreased to 8.06% from 9.94%, its ROCE has decreased to 10.96% from 15.70%. But in Games Workshop PLC, the ROS has increased by 6.75% thereby leading to a significant increase of 13.71% in its ROCE and has hence produced very good returns of 28.15% at the year 2010 thus making a very fine profitability to the company. The other reason noticed is that the Asset Turnover in Games Workshop PLC is close to twice as much as in Hornby PLC.
4. Gross Profit Margin (GPM)
The GPM shows the proportion of revenue that resulted in a gross profit to the company
GPM = Gross Profit x 100
Revenue
Benchmarking:
In 2010, the GPM for Hornby PLC has increased by 1.84 % and in Games Workshop PLC it has increased by 4.32 %. Comparatively, Games Workshop has a GPM which is 26.16 % higher than Hornby PLC and has been relatively higher over the last 2 years.
5. Return on Share-holder's Funds (ROSF) or Return on Equity (ROE)
The ROSF or ROE gives an idea about how much profit a company has earned in comparison to the total amount of share-holder's equity. It is a narrower assessment of profitability compared to ROCE since the loan capital is not taken into account here. It can be computed in two ways:
a) Based on Profit before Tax (PBT)
b) Based on Profit after Tax (PAT) - After Tax and related expenses have been deducted from Profits made.
ROSF = PBT x 100 (OR) PAT X 100
(Share Capital + Reserves) (Share Capital + Reserves)
Benchmarking:
A high ROSF indicates that the company has more profit available for its shareholders. In reference to PBT and PAT, Hornby PLC in 2010 shows a decrease of 5.06% and 3.29% respectively whereas Games Workshop PLC shows an increase of 9.31% and 12.66% respectively. Comparing the two companies, Games Workshop PLC shows a steady increase over time and has achieved higher returns (29.15% & 27.27%) on shareholder's funds in 2010.
B. EFFICIENCY.
To analyse the efficiency of a company's performance, efficiency ratios otherwise known as activity ratios are calculated, and they are important for analysis because an improvement in the ratio leads to improved profitability in the company.
Efficiency Ratios measures the efficiency with which particular resources of the business have been utilised and analyses how well the company uses its assets and liabilities in order to calculate the turnover of inventory and receivables, stock period and debtor's period.
The Efficiency ratios are calculated to find out whether the stock and debtors of the company are too high.
Table 2 - Table showing Ratios on Efficiency of Hornby PLC and Games Workshop PLC for the period ending on 31st of March 2010 and 31st of March 2009:
SL.NO.
EFFICIENCY RATIO
HORNBY PLC 2010
HORNBY PLC 2009
GAMES WORKSHOP PLC 2010
GAMES WORKSHOP PLC 2009
1.
Stock/Inventory Turnover Ratio (Times/year)
2.65
2.24
3.03
3.36
2.
Stock Period (Days)
138
163
121
109
3.
Debtors/Trade/Accounts Receivables (Days)
75
78
29
29
1. Stock or Inventory Turnover Ratio: (STR)
The STR measures the efficiency of the business in managing and selling its stock. It is expressed as a ratio between the cost of goods sold (COGS) and the firm's stock. Usually it is expressed as inventory over stock but in this case it is substituted by COGS because sales are recorded at market value whereas inventory is recorded at cost. It also portrays the liquidity of stock and helps in determining how sales can be increased through stock management and control. The faster the inventory sells, the fewer funds are tied up within the company in the form of stock for which a high ratio should be maintained. However, a very high ratio can lead to stock outs.
Stock Turnover = Cost of Goods Sold (times per year)
Stock
Benchmarking:
Although Hornby PLC shows an increase in stock turnover ratio from 2.24 to 2.65 times/year in 2010, it is still lower than that of Games Workshop PLC which has reduced to 3.02 from 3.36 times/year. Hornby PLC shows that their stock turnover results twice (a little more than twice but not thrice) a year whereas Games Workshop PLC has a stock turnover that is three (a little more than three but less than four) times a year indicating better management of stock by selling 1 time more than its competitor and therefore reducing costs of stock keeping and warehousing and avoiding the risk of profits being locked aside in the form of stock.
2. Stock Period:
The Stock Period calculates the average time that stock is held within a firm. It can be measured in days or months. The higher the stock-turnover ratio, the lower the stock period will be. A low stock period enables faster movement of goods out of the firm in exchange for cash.
Stock Period = 365 Days
Stock Turnover
Benchmarking:
Hornby PLC shows a reduction of 25 days in the stock period for 2010 compared to 2009 whereas Games Workshop PLC shows an increase of 12 days in 2010. However, Games Workshop has been maintaining a low stock period compared to Hornby which proves their efficiency in stock management and provides possibilities to consider future demand, shortages, price rise, etc.
3. Debtors/Trade/Accounts Receivables:
Every firm is concerned about how long it will take for its customers to pay the amounts owed by them as it is directly related to the cash flow of the business. This period of waiting is known as Debtors period and is measured either in days or months, the faster this settlement is done, the easier it is for the firm to invest into other profitable purposes. The debtors' period is expressed as a ratio of debtors over sales and then converted into days.
Debtors Period = Debtors x 365 days
Sales
Benchmarking:
The debtors' period for Hornby PLC has decreased by 3 days in 2010 and is 75 days while Games Workshop PLC has managed to maintain it at 29 days for both accounting periods. The latter shows better performance by maintaining a lower period compared to Hornby PLC. On an average, a company will normally expect to earn its sales within 30 days; therefore, based on this fact, Games Workshop PLC seems to be on the safer side by maintaining its debtor's period below 30 days.
CASH OPERATING CYCLE:
This cycle is the addition of Stock period and Debtors Period which calculates the total time taken for stock to be converted into cash. This produces the status of liquidity for the two companies.
Efficiency Ratios
Company/Year
Games
Hornby
2009
2010
2009
2010
Stock Period
109
121
163
138
Debtors Period
29
29
78
75
Total in days
138
150
241
213
Indication of liquidity for the company (in months)
4.6
5
8.03
7.1
While Hornby PLC has managed to reduce the total period from 8 months to 7 months in 2010, Games Workshop PLC's period has actually increased by half a month (from 4.5 to 5) and but it still is lesser than the former.
C. LIQUIDITY
Liquidity Ratios measures the ability of a business to meet its short-term financial obligations by converting assets into cash quickly without any price discount in-order to pay back the debtors.
The Liquidity Ratio is calculated to find out whether the companies can meet their current liabilities.
Table 3 - Table showing Ratios on Liquidity of Hornby PLC and Games Workshop PLC for the period ending on 31st of March 2010 and 31st of March 2009:
SL.NO.
LIQUIDITY RATIO
HORNBY PLC 2010
HORNBY PLC 2009
GAMES WORKSHOP PLC 2010
GAMES WORKSHOP PLC 2009
1.
Current Ratio
2.11
1.48
2.04
1.74
2.
Liquidity/Acid Test/Quick
1.38
0.72
1.49
1.14
1. Current Ratio
This ratio indicates whether the company has sufficient current assets to pay its immediate liabilities within that given accounting period and is expressed as follows:
Current Ratio = Current Assets
Current Liabilities
The higher the ratio, the more liquid the business is considered to be. It is expressed as a factor and the ideal current ratio is suggested to be 2 times or 2:1 which means that whatever the company owns is 2 times greater than what it owes indicating the ability to pay its short-term liabilities at ease.
Benchmarking:
Hornby PLC has shown an increase in its current ratio from 1.48:1 to 2.11:1 and it is slightly higher compared to Games Workshop PLC which has increased from 1.74:1 to 2.04:1. Therefore both companies have the ability to pay its liabilities and have been increasingly stable over time and has thus met the standard expectation of 2:1.
2. Liquidity Ratio or Acid Test/ Quick Ratio:
For many businesses, Inventory cannot be quickly turned into cash, so it is excluded from the current assets for calculations. It is expressed as a factor and if the ratio falls below 1:1 then it signals that the company might be having some liquidity problems.
Liquidity Ratio = Current Assets - Inventory
Current Liabilities
Benchmarking:
Hornby PLC shows an increase in its quick ratio from 0.72:1 to 1.38:1 in 2010 whereas in Games Workshop PLC, it has increased from 1.14:1 to 1.49:1, which is slightly higher than in Hornby PLC at 2010. Since the ratios have not fallen below 1:1 as expected, both companies show stable liquidity positions over time although Hornby PLC might have faced some problems in liquidity in the year 2009.
D. GEARING
Gearing means borrowing and it measures how much percentage of the capital employed is actually borrowed from lenders or the bank. Usually there are Interest charges on capital repayments and if a company borrows heavily, it risks becoming insolvent. The advantage of gearing is to increase the returns to owners because the loan interest rates are relatively low compared with the returns that a business can earn.
Gearing is calculated to find out whether the company has the ability to repay its loans or debentures.
Table 4 - Table showing Ratios on Gearing of Hornby PLC and Games Workshop PLC for the period ending on 31st of March 2010 and 31st of March 2009:
SL.NO.
GEARING RATIO
HORNBY PLC 2010
HORNBY PLC 2009
GAMES WORKSHOP PLC 2010
GAMES WORKSHOP PLC 2009
1.
Capital Gearing
22.82
19.17
3.53
27.23
2.
Interest Cover
7.42
8.57
43.72
4.99
1. Capital Gearing:
This ratio measures the contribution of long-term borrowing to the capital employed and is expressed as follows:
Capital Gearing = Long-term Borrowings x 100
Capital Employed
A low Capital Gearing is preferred.
Benchmarking:
The percentage of gearing for Hornby PLC has increased by 3.65% in 2010 and stands at 22.82% whereas in Games Workshop PLC it has greatly reduced to 3.53% in 2010 from 27.23% in 2009. Games Workshop PLC has a very low gearing ratio comparatively and thus its interest payments will also be low. On an average basis, a company is expected to have a gearing ratio of not more than 30%. Although both companies are in a good financial position, Games Workshop PLC is doing extremely well.
2. Interest Cover
This ratio measures the amount of profit available to cover the interest payable. The lower the interest cover the higher the risk of inability to repay the loan along with its interest charges. It is measured as the number of times that the interest could be paid out of the profit earned.
Interest Cover = Profit before Interest and tax (times/year)
Interest Payable
Benchmarking:
The interest Cover for Hornby PLC has reduced from 8.57 times to 7.42 times in 2010 because of the decline in its profitability and the slight increase in its borrowings; while in Games Workshop PLC, it has shot up to 43.72 times in 2010 from just 4.99 times in 2009. Games Workshop PLC has a very high Interest Cover and is in a very safe position in terms of loans and borrowings; this is because of its high profitability in financial performance in 2010, which has enabled the company to pay off most of its loans. On an average, a company is expected to have a minimum ratio of 3 times, between 3 and 5 times is a satisfactory cover and 7 times or greater is considered good. If the company is stable over time, the bank will accept lower covers, if it's volatile or unpredictable in terms of their profitability, the banks will expect standard or higher than normal interest covers. Therefore, 43.72 times in Games Workshop PLC shows that it is doing extremely well in terms of financial position.
PART -B: Industry Analysis of Hornby PLC and Games Workshop PLC.
Hornby PLC and Games Workshop PLC are UK based companies operating in the toys and games Industry which comes under the leisure goods or home improvement market. This market is highly diverse ranging from toys for infants to the different age group of children and also sophisticated toys and games for adulthood where there is no cut-off point for many board games.
http://www.benzinga.com/press-releases/10/10/b520373/research-and-markets-toys-games-market-report-plus-2010
"The UK market for traditional toys and games enjoyed year-on-year growth until a decline in revenues in 2008, followed by a deeper fall in 2009. The market comprises ten categories of products: action, activity, dolls, electronic, games/puzzles, infant/pre-school, outdoor and sports, plush, vehicles and other products.
The market has been affected by a number of factors. The number of children in the population has begun to increase as the impact of the rising birth rate since 2003 is beginning to be observed. The average age of mothers at the time of birth had also risen to 29.5 by 2005, up by a whole year from 1995. The toys and games market is benefiting from increased levels of spending per child, as a result of rising disposable income levels and the more advanced age of new parents.
Less positively, toys and games have to compete with an expanding range of other products which target spending in the children's market. This is led by PC- and console-based electronic games, but also includes laptops and computers, mobile phones and a large range of additional products. As children continue to be targeted by more adult products at a younger age this becomes a more significant challenge.
Sales in the market declined in 2009, reflecting the downturn in the wider UK and global economies. Retail competition has helped to keep prices lower, with the supermarkets offering toys as loss leaders and Internet operation comparisons bringing increasing transparency to the market.
Toys and games are an international business with global brands. Most of the major companies source and distribute internationally to benefit from economies of scale, not only in costs but also marketing. The two biggest toy companies are Mattel and Hasbro, both of which are US owned. Other major groups include Lego, Tomy, Mega Brands and Hornby.
The toys and games market is active, with suppliers constantly bringing new products to the market. Character merchandising, television link-ins and film ties continue to be key aspects of new product development (NPD). An increasing number of products are also utilising electronic aspects to increase playability. Responsive and interactive toys have seen strong investment, and interactivity with other media such as the Internet and television is set to increase.
The toys and games market is in line to recover from 2010; early company results for the first quarter indicate a more positive performance. The rise in the under-10s population and the eventual economic upturn will drive growth in sales."
http://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429662
There are too many positives for this not to be a strong and enduring market, most importantly the fun of toys, kids' urge to collect and parents' desire to give their children pleasure and help them learn, all reinforced with the major influence of licensed characters. Even so, the market faces challenges - most immediately from tougher economic conditions, and secondly from competitors for kids' time like console games and social networking. Manufacturers need to promise and deliver good lasting value as a priority in their product development and promotion. Real and soundly based growth over the longer term is still achievable despite this market's already large size if manufacturers focus on quality and innovation that is responsive to kids' wants. An over-reliance on licensed brands is not a stable base for product development or growth. More channels of distribution are opening - greater competition for the toyshops to be sure but also offering opportunities. Consumers have more opportunities to buy for instance online and through supermarkets and very importantly, the internet brings opportunities to small manufacturers and retailers to grow their sales. Its very convenience may also bring incremental growth to the market as a whole.
