This study provides a financial analysis of Sports World Limited, one of the largest public corporations in the United Kingdom. It is intended for use by an investor seeking to acquire a controlling stake in the company.
Report on the Sports World's track record in terms of earnings growth and stability, as well as cash flow and operations.
The company's income statement indicates significant development from 2012 to 2016. In 2016, gross profit increased from $ 50,631 to $ 86, 236. Nevertheless, net earnings have increased from $ 6,299 million to $ 6,553 million in 2013. In 2014 it went down to $ 5,896 before it started to rise again. The reduction in net earnings is attributed to the operations activities that increased after these two years of 2012 and 2013. It shows the growth of the company and its capability to handle its operations.
The cash flow of the company has been steady throughout the years 2012 to 2016. This is due to higher sales the firm has been experiencing as well as increased operational activities. When there are more operating activities, the firm must have enough cash flow to take care of its operations. Therefore the steady increase of cash flow shows that the firm has been on a steady growth since its formation to 2016. An investor will have confidence as the firm has never shown any sign of decline in performance. This part of the report is good enough for making decisions as to purchase the share of the company or not. In this case, it shows a positive sign to purchase.
Report on financial ratios
Ratios are key indicators of performance, debt, profitability, liquidity and as well as productivity.
These rations can be calculated and analyzed as follows;
Current ratio
Current ratio = Total current assets/Total current liabilities
For 2012, this will be given by 31,157/11,002 = 2.833
2013 will be 35, 611/ 13,271 = 2.6
2014 will be 49, 872/22,067 = 2.3
2015 will be 56,264/ 20,432 = 2.8
2016 it will be 65,846/ 27,461 = 2.4
The firm has maintained a high current ratio from 2012 to 2016. It was stronger in 2012 than the rest of the other years. It is an indication that the firm is performing well financially.
An investor who wants to purchase a share from this company should have the confidence to do so because the firm does not have any liquidity problem. If the ratio was to be below one, then it could have given one reason to have fears in investing in the firm. This is not the case for Sports World Limited.
Quick ratio
Quick ratio = (Total current assets – Inventory)/Total current liabilities
Quick ratio for 2012 is (31, 157 – 17,901)/11,002 = 1.2048
2013 will be 1.135
2014 = 0.87
2015 = 0.95
2016 = 0.68
Quick ratio shows the ability of the firm to retire the current liabilities.
The firm has enough assets that it can use to cover its cash. This is good showing and should give an investor confidence in investing in the company.
Inventory turnover ratio
Inventory turnover = Cost of goods sold/Inventory
Inventory turnover is the measure of the number of times an inventory is used within a year. It shows the sales and how the good are moving.
Average inventory turnover is 40.03, 30.16, 40.33 and 25.00 for the years 2014, 2015 and 2016
The high inventory turnover shows that the firm has a higher ability to flip its goods and services for cash. Sports World has a higher inventory turnover making it a good company worth investing in. It also shows how productive the firm is.
Also analyzed is the average collection period of account receivable. This was computed for the year 2014 to 2016. This ratio showed that 2014, the average collection period was 23.2, 2015 was 19.9 and 2016 was 15.2
This shows a short collection period throughout these years. The firm tends to be managing its debtors well and ca better communication with the customers to pay their dues on time. For an investor, this is a positive feature to look for in the firm. It means the company will be able to pay their short terms debts faster because they are also receiving short payment periods from their customers and thus making their business to flow well.
Similarly total asset turnover is the ability of the company to generate some of its sales from its current assets. It is calculated by comparing the net sales with the average total assets. For Sports world, this ratio for the years 2014, 2015 and 2016 was 2.06, 2.02, and 2.26. This means that the firm can generate an average of 2 dollars for sales of every asset they have invested their money in. This is the higher amount, and it shows the firm is efficient when it comes to cash generation.
Consequently, the Debt-equity ratio measures the extent of debt that the firm is using to finance it's in regards to some shareholders equity. For Sports World, this was computed for the years between 214 and 2016. I show that the firm has a debt ratio of 1.0, 1.0, 1.1, and 2.7 in 2014, 2015, and 2016. This shows that on average, the creditors and the debtors of the firm have an equal stake in the assets of Sports World Limited. Also, it shows that the firm is more financially stable and will not be risky for investors and creditors to put their money in it.
Also, the debt-to-asset ratio shows the percentage of the assets that were funded by the creditors. It is found by dividing the total liability by the total assets. For Sports World Limited, this ratio was 0.5, 0.5, and 0.5 for 2014, 2015, and 2016. This means that this company has more assets than a liability. It has lower financial risks and high stability in the market. Such a company is worth investing in.
Moreover, the gross profit margin, which shows the firm’s financial health, it is found by dividing the gross profit by the company’s revenues. Sports World recorded a gross profit margin of 40%, 39.9%, and 40% for the years 2014, 2015, and 2016. It is an average of 40% for the last three years. It shows how profitable the product is and Sports World Limited has an average of 40% profit from its products. This is financially healthy.
Operating margin ratio was another factor used to evaluate the Sports World Limited. It shows the part of the company’s revenue that is left after they firm have taken care of its variable cost. For the last three years, 2014, 2015, and 2016, the firm had operating margin ratio of 8.9%, 7.7%, and 8%. This means that it used 91.1 cents on the average dollar was used to pay for the operating expense in 2014, 92.3 cents in every dollar in 2015, and 92 cents 2016. The remaining was used to pay for nonoperating expenses, which took the little part of every dollar. Now, this is a good sign for a company and gives an investor confidence to put their money in the company.
Net profit margin, which shows the percentage of profit is left after all the expenses have been deducted, was part of this analysis. It was 4.2%, 3.9%, and 4.4% for the period of 2014, 2015, and 2016. The net profit margin can be said to have maintained a percentage of 4 throughout the three year period showing how the business is stable.
Return on investment, measure the rate of return on the money invested. Sports World recorded 8.6%, 7.8%, and 9.9%. This was the rate of return the investors of the firm received in 2014, 2015, and 2016. It is an average of 8% for the entire three year period.
Return on equity reveals the amount of profit that company can generate with the money invested by shareholders. Sports World generated 17.0%, 15.6%, and 20.5 percent showing an average of 17% of its profit generated from the money invested by the shareholders. The company can therefore be said to be doing well in the market and with the money of investors.
How the financial statements look like in five years
Find attached Excel file
Net Sales
303813
392,026
480,239
568,452
656,665
744,878
Cost of goods sold (note A)
182, 293
235,222
288,151
341080
394,009
446,938
Gross Profit
121,520
156,804
192,088
227,372
262,656
297,940
Selling and Administrative expenses (Notes A & E)
64,429.20
83,136.40
101,843.60
120,550.80
139,258
157,965
Advertising
20,091.60
25,925
31,758.40
89441.8
147,125.20
204,808.60
Depreciation and Amortisation (Note A)
5,633
7,268
8,903
10,538
12,171
13,804
Repairs and maintenance
4,248.59
5,482
6,715.41
7948.82
9,182
10,415
Operating profit
27,116.29
34,989.58
42,862.87
50,736.16
58,609.45
66,482.74
Other Income (expense)
Interest income
594.66
768
941.34
1,114.68
1,288.02
1,461.34
Interest expense
3,642.65
4,700.30
5,757.95
6,815.60
7,873.25
8,930.90
Earnings before taxes
24,068
31056
38,044
45,032
52,020.00
59,008.00
Taxes (Notes A and D)
10,830
13,974
17,118
20,262
23,406
26,190
Net earnings
13,237.57
17,081.14
20,924.71
24,768.82
28,612.93
32,457.04
Basic earnings per commonn share (Note G)
2.80
3.64
4.40
5.16
5.92
6.68
Diluted earnings per common share (Note G)
2.70
3.45
4.20
4.95
5.70
6.45
The firm will be able to make profit in the next five years as its growth and financial stability has continuously showed a strong progress. This means there is high likelihood that the firm will make profits in the future.
