Sports Direct International PLC (S.D) (formally known as Sports Soccer) a UK holding company, is the UKs current largest sports retailer with 387 stores. It also operates online with a strong presence under the name SportsDirect.com of which the stores are named after. The business started as a single London sports and ski shop in 1982. Sports Direct International also operates subsitite and (brands and store)
It was floated on the London Stock exchange in February 2007 and was founded by current deputy executive chairman Mike Ashly who currently owns 71% of the shares. It currently employs 10919 employees. JJB Sports PLC (J.J.B) operates 251 stores in the UK and was founded in 1971 by Dave Whelan , the company was floated in 1994 when it had 120 stores taking over its main competitor at the time - Sports Division. It owns substiartorys such as ...
Is important for investors as it gives a key perspective of company efficiently and profit.
Return on equity is considered one of the most important ratios for the investor as it gives a good measure of performance.
In 2010 S.Ds ROE is much greater than that of J.J.B because both firms increased their equity and PAT, this may show that the management of the firm have increased their efficiency.
S.Ds higher percentage implies the company is doing well and is seen profitable to the investor, this may in turn lead to higher stock prices as there is a higher return on equity.
J.J.B on the other hand has a negative percentage and although increasing their ROE by 50% from 2009 to 2010 the company is still showing signs of trouble and this will be one fundamental determinant for the investor as the firm might be seen as a 'profit eater'.
-45.07%Return on capital employed is a ratio which measures the return of companies' profits, formally found by taking the profit before tax dividend by capital employed. Two flaws with ROCE are that the capital employed doesn't account for depreciation and that it also ignores inflation.
S.Ds ROCE is higher than J.J.Bs in both 2009 and 2010 as can be expected as ROE is higher in both cases as well. This means that S.D is exploiting the assets that is owns.
S.D gross profit margin ratio in 2010 had fallen by 0.20% to 40.58% while J.J.Bs had fallen by 7.6% to 38.14%. This shows some of J.J.Bs and S.D operational efficiency and is an indication of how the companies' products have performed profit wise as it shows how much gross per pound(£) of turnover the company has made, extracting any overheads.
Net profit margin (NPM)
Sports Direct PLC Jan 31st 2010
10.27%
JJB Sports PLC 31st Jan 2010
-16.38%
Sports Direct PLC Jan 31st 2009
1.34%
JJB Sports PLC 25th Jan 2009
-23.77%S.D gross profit margin is 2.44% higher than J.J.Bs, this means that S.D is operating more efficiently than J.J.Bs, this could be for a number of reasons. S.D could have reduced its selling price without significant changes in costs or what is more likely to have happened is that S.D cost of sales have increased which without an increase in selling price would reduced the gross profit margin.
When compared to both companies net profit margins, it paints a broader picture of the situation. S.Ds NPM is positive and increased by 8.93% since 2009 which gives the impression that S.D is performing well and could well be a good investment, were as J.J.B had a similar gross profit margin but has a negative net profit margin meaning that J.J.B has made a loss for the last two years and may be struggling although in 2010 it increased its NPM to -16.38% it halved its operational activity to give an impression that the company is improving. This can be a major problem in financial statements as companies can hide important factors that may mislead investors, this make their annual reports look more appealing and causes key ratios to improve although the company may not be operating any differently it may look to improve in the short-term.
Asset turnover helps analyse companies' efficiency at using its assets by generating profit. In both periods S.D asset turnover is higher than J.J.Bs, more so in 2010. The higher the number the better as it indicates that the firm's assets are being used efficiently to increase sales. It also helps with a firms pricing strategy as assets with low profit margins have high asset turnover such as 'Tesco'.
Return on assets is a ratio which measures the operating efficiency and shows how good a company is at producing a return on its investments and assets. S.D has had a higher percentage of ROA in both periods, a lower percentage points towards a more asset reliant business. S.D is less asset intensive business compared with JJB here, this means JJB must reinvest more money than S.D to carry on producing earnings This is bad news for JJB as it must sell more products than S.D to make the around the same amount of profit.
Gearing
Interest Cover
Sports Direct PLC Jan 31st 2010
5.03
JJB Sports PLC 31st Jan 2010
-19.61
Sports Direct PLC Jan 31st 2009
2.38
JJB Sports PLC 25th Jan 2009
-8.497Gearing also know as leverage shows how much borrowing a company has to fund its proportion of assets invested. The debt/equity ratio shows that S.D has a higher ratio than J.J.B in 2009 and 2010 suggesting that S.D is a riskier investment. A company like JJB with a lower ratio 'should' be a preferred investment as it relies less on borrowings. When investors look at this ratio they must take care as interest rate sensitivity effects how expensive gearing could be for the company. Since 2008 interest rates have been at a record low and borrowing is cheap, this might explain why S.D net profit margin is so different from J.J.B though gearing lead investment. The debt/capital employed ratio is a less sensitive ratio of gearing and is similar debt/equity.
Interest cover ratio shows how many times over the firm can pay its interest payments. In this case the greater the number, the better. In 2010 S.D had an interest cover of 5.03 this would be a good indication to the investor that S.D was in a healthy state as it could afford to pay its interests five times over. However JJBs interest cover decreased from -8.5 to .19.6 in 2010. This would give the investor a strong warning that if all borrowings were recalled then J.J.B couldn't afford to pay them. The decrease could be blamed on a new loan however J.J.B has decreased its debts but has been making a PAT loss for two years.
The cash flow ratio is a measure to see the ability of a firm to pay back its debts. S.D in 2010 has more than doubled its CF since 2009, while J.J.B has kept its cash flow around level which seems funny as it has halved it total debt. There could be numerous reasons from this so we must take into account the repayment of loans, an increase in working capital and capital expenditure requirements.
Beaver failure ratio states that 'any firm with a value of less than 0.3 will fail within 5 year', well S.D ratio in 2010 is 0.5 which seems to suggest that the company is doing fine, but in 2009 it had a ratio of 0.2 which Beaver would suggest shows signs of struggle. JJB has keep the same ratio for both 2009 and 2010 which highlights trouble brewing and Beaver suggests that the company will fail within 5 years. However this ratio only works when the company has already failed so it is mere impossible to predict whether it will fail in the future.
The Altman Z-score is a formula which is used to predict if a firm will go bankrupt within two years. S.D has a Z-score of 2.169 and J.J.B 0.5, a score below 1.23 suggests that the firm is in distress and may go bankrupt in two years, S.D though is regarded in the grey zone as it is above 1.23 but below the safety of 2.9. The data we have compiled with these ratios fits nicely into the other factors which agree that J.J.B is having a much harsher time than S.D.
Internal Liquidity Ratios
These Liquidity ratios show Sports Direct International PLC and JJB Sports PLC's financial ability to meet there short-term liabilities.
The current ratio takes into account current assets and current liabilities. In 2010 Sports Directs.com had an extra 50 million Current Assets compared with JJB Sports, Since 2009 Sport Direct had decreased their Current Asset size by 8.6% while JJBs remained level, giving an impression that Sports Direct anticipated a fall in demand in late 2010 to 2011, whereas JJB has not, this could demonstrate speculating the impact of a double dip recession. On the Current Liabilities front both groups have reduced numbers significantly between 20% (S.D) - 24% (J.J.B) since 2009.
Both companies experienced an increase in their current ratios in 2010 shown by the bar chart. The current ratios in 2009 and 2010 have been below the recommended ratio of 2 which would imply that the company has twice its current assets than current liabilities. Although we do need to take into account that the retail industry current ratio will be lower as it works more with cash sales.
With S.D/J.J.B both current ratios are less than 1 in both periods, this could signal a strong warning sign to an investor that the companies cannot repay their short term debts which may also effect long-term growth, or in a different scenario it could signal that the companies are being very efficient. In terms of the companies S.D may be more efficient in both 2009 and 2010 but run the risk of making investors believe that their growth in the future looks bleak when the truth is they are being efficient, whereas J.J.B increased its current ratio which signals that its ability to pay back debt is increasing making the company more liquid. When compared to short/long-term debt J.JB has half the debt of S.D.
The Quick Ratio is similar to the Current Ratio, however it only includes current assets that can be turned into cash quickly. An investor might look at this ratio as its more stringent measure of company liquidity. J.J.B and S.D ratios are below 1 which is a worry for paying back debt, but when relating to the retail sector suggests that the company sells its goods before they pay for them. A low ratio could also indicate trouble in the future if an increasing overdraft is present this is not true in this case as both companies have reduced their total debt since 2009.
Inv Days 1
Inv Days 2
Pay Days 1
Pay Days 2
Inv/COS
Sports Direct PLC Jan 31st 2010
82.56960557
135.5714286
51.65313225
84.80952381
60.90%
JJB Sports PLC Jan
31st 2010
97.32397056
116.8912403
107
127.9688029
83.26%
Sports Direct PLC Jan 25th 2009
105.1234568
183.9092873
44.13580247
77.21382289
57.16%
JJB Sports PLC Jan
25th 2009
65.66852407
80.50673012
27.34215364
33.52028107
81.57%
S.D has reduced their inventory turnover in 2010 by 22% whereas J.J.Bs has increased by 33%. In 2009 J.J.Bs inventory turnover was half that of S.D. By looking at the inventory turnover it gives a good indication if the firm is being efficient, it also means that a firm with a lower inventory turnover is more than likely to have higher liquidity as it can sell its goods faster.
The inventory to cost of sales ratio (Inv/COS) for S.D is already high in 2009 at 82% but increased by 1% in 2010 this may suggest cash flow problems as a vast majority would have been used up in the inventory which is just under 4 times greater than J.J.B in 2010. Although the cash flow ratio states otherwise and shows that S.D has strong cash flow in 2010 more so than its 2009 figure.
Share holder Interests
One of the most important aspects when looking at financial statements analysis, are the shareholder interests.
S.Ds current share price is £1.285 while J.J.Bs is 5.5p this is a significant difference considering that back in 2008 before the credit crunch both companies share prices were trading around the £1.00 mark. This could be down to many reasons after ..
Dividend yield shows the investor the percentage return at current prices giving investors an idea of yield compared with interest rates. In this case both S.D and J.J.B have not paid out a dividend in 2009 and 2010. S.D made a net profit in 2010, but the board of directors choose not to issue a final dividend.
Basic earnings per share shows the earning on a single share at that point in time, with both companies this gives an idea of what the firm is worth to the investor and whether the share is undervalued or overvalued . J.J.Bs EPS was -£0.09 in 2010 and S.D EPS was £0.147, both are very different from one another from their 2010 and 2009 values. Why this has happened could be down to the fact that J.J.B had increased its number of shares in the market just under three times the amount since 2009 (242m -652m) while J.J.B had decreased its losses, it was still at -£61m. S.D had increased their EPS because they didn't issue new shares in 2010 and increased profit to £113m, pushing the EPS value up, this could be attractive to investors and may raise the share price.
Dividend cover shows how many times the dividend could be paid for by the firms' profit, It is a useful measure for investors as it indicates if a firm is more likely to pay dividends than other firms, the higher the number the better. In this case we cannot calculate it as both companies have not issued finial dividends for two years.
P.E ratio tells the investor how many years it would take to get back their original investment. The higher the number for instance S.D in 2010 (8.7) suggests that investors believe that the shares are going to grow so they are valued higher pushing the share price up. A negative number like J.J.B (2010,2009) and S.D (2009) may have been investors speculating no growth in the future, a negative number shows that the share value has made a loss. Earnings yield is the opposite of the P.E ratio.
Net assets per share (book value per share/ Tangible book value per share) is the value of each shares investment in net assets. S.D have kept their value around level in 2009/2010 but J.J.B have almost halved theirs to 0.343.
Cash flow per share is the weighted average shares divided by the firms' cash definition. S.D in 2010 have a positive number at 0.2304 and J.JB have a negative number at -0.06332 .
Conclusion:
J.J.B/ S.D financial statements are very useful in understanding the firms' current financial position and helps evaluate performance. It is also a useful tool for mangers of the firm as they can assess historic trends and ratios which may be a good indicator of the efficiency.
Financial statements alone cannot guarantee a correct estimation of J.J.Bs / S.D operations, profitability and future growth. By only using financial statements a firm limits itself in comparing results to other market variables, such as market factors and employee performance.
This puts 'you' the investor at a major disadvantage and may also be misleading to the firm managers as well. There may also be a degree of window dressing, this occurs when a firms financial statements mislead its financial position by hiding the 'actual' performance information of the firm at the end of the accounting period. Example of this may be that S.D has payables due but doesn't record them until after the annual report has been released and therefore its profits and cash flow will seem higher than they actually are, though the firm hasn't lied, it might have mislead the investor. Similarly J.J.B could increase its current ratio by replacing its stocks after its account period. -buy back shares
This can be good for the firm as it may increases growth, but it may mislead lead the investor to invest in the wrong company.
Although, financial ratios are a great asset for the investor as it can show risk ,profit and more so liquidity of a firm (not to mention many more), giving the investor a good sense of how the firm is doing in the market compared with comparative firms trading in the same industry. On this basis financial statements are very relevant and useful in understanding investment potential and the firm current position in the market relative to other substitute investments.
I therefore believe current financial statements are a great tool 'as described in the title page' for investors, however they should be used with caution as it may be misleading to just use firms' annual reports. Not to mention that it is very hard to predict market performance and economic conditions in the future.
Macroeconomic Data:
To analyse/predict company future share prices efficiently, economic factors should be considered. In 2010 interest rates were at record low (0.5%) making borrowing cheap, this makes JJB/S.D debt cheap. VAT increase in January 2011 to 20% will make the cost of goods to the consumer increase and reduce their disposal income. Economists speculate double dip recession which if happened could send J.J.B into administration (though this is very unlikely). Government debt is falling resulting in higher unemployment , therefore the need for luxury sports clothes will reduce harming J.J.B. Sports Direct might do better as it relies heavily on its 60%-70% promotions on cheap sportswear which may increase demand.
Investor Recommendation
I conclude after my report:
Sell J.J.B - J.J.Bs recovery after 2008 will not be easy or assured , it worsen its attractiveness to investors by rising its share capital in 2010 , taking into account the change in financials I suggest to hold back a year or so in investing in the firm, if you already have shares I recommend to sell.
Hold/buy S.D - S.D P.E ratio has increased 8 fold since 2009, investors already value the firms future growth, margins have increased and the firm is showing a strong online sales presence as well as shop front. This information in the report and company annual reports lead me to believe that S.D shares will rise in 2011.
businessman may avoid replenishing inventory during the period prior to closing the books so as to increase his current ratio. Temporary payment of a current debt just prior to the financial statement date will achieve the same result. Retained earnings can be appropriated for future inventory price decline and later reported as net profit. Often an analysis of a series of annual statements, rather than those of a single year, will highlight such methods. More extreme practices are generally avoided by firms that must answer to regulatory agencies to be quoted on the stock exchange.
Financial data in isolation is not meaningful. To say that JJB Sports made a pre-tax profit of almost £39 million in 2007 reveals little. By comparing data over time and by calculating financial ratios a management accountant would identify a different picture. The data shows that the company's financial position weakened in some respects in 2008. Although sales remained fairly constant, the income statements show that pre-tax profits fell from £38.5 million to £10.8 million. JJB Sports' return on capital employed also fell significantly. This is an important financial ratio, as it is a measure of how well the company is exploiting the assets at its disposal. It is calculated by expressing a company's net (pre-tax) profit as a percentage of the capital employed.
Read more: http://www.thetimes100.co.uk/case-study--improving-strategic-decision-making--114-365-4.php#ixzz16cJWcp3J
roblems with Financial Statement Analysis arise because there are no clear or universally accepted guidelines regarding the determination of optimal values for the ratios discussed above. Other potential difficulties that may arise in financial statement analysis include:
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Identification of comparable peer groups.
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Differences in accounting procedures.
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Differences in fiscal years for financial statements.
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Unusual events which have an impact on reported financial results. These problems, as well as differences in interpretation of the date, frequently result in differing opinions about a firm's future performance.
>1. 51% of retailers are offering promotions like buy one get one free, or 4 for 3, compared to 43% last year.
2. The current average discount offered is 31% compared to 25% in 2009.
3. In 2008 the height of the financial crisis, 62% of retailers were on promotion, and the average discount was 40%
>talk about 20% vat
Roe is not as helpful as you think. It is easy to raise ROE with little effects on the valuation of s stock. Consider Netflix, a company who has a current ROE of 36. The extremely high PE was achieved by increasing long term debt by 200 million dollars and using the money borrowed to buy back 100 million dollars worth of stocks. By buying back stocks, the company reduces shareholder's equity (the denominator), which ultimately increases the ROE. The current ratio will increase because of the extra 100 million dollars from the notes payable. The company seems stronger in the short term and more profitable when judged solely on return on equity. The bad news is that the company incurs a higher long term debt with more interest expense.
To be fair to netflix, the stock was bought around 40$ and is now close to $70. Management is praised as an efficient company, but a great extent of it is not due to actual net income but because of strategic accounting techniques
http://www.investopedia.com/articles/fundamental-analysis/financial-statement-manipulation.asp
