Games Workshop PLC (GAW) and Hornby PLC (HRN) are UK based companies operating in the Toys and Games Industry under the leisure market. HRN is a UK brand leader in the model railway hobby. Frank Hornby, the company’s founder, established ‘Meccano Ltd’ in 1907 which become the classic toys of all time. In 1920 it introduced the toy trains and thereafter, the innovations followed. In 1986 it became a public company and now it is just called ‘Hornby’ and rightly maintains the position as a leading model railway manufacturer for more than 20 years. GAW is the most successful and largest futuristic battle-games and tabletop fantasy company in the world. The business is about helping mighty armies to meet headlong on the field of battle. It produces the most successful table top fantasy, Citadel miniatures and futuristic battle games.
To evaluate the current Financial Performance and Financial Position of HRN and GAW, Ratio analysis is carried out over the last two accounting periods. 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 are distributed as: Financial Performance Financial Position Profitability Efficiency Liquidity Gearing 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).
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 relationship between profits made and other key figures from the income statement and balance sheet of a company such as capital employed, sales, etc.
SL.NO. PROFITABILITY RATIOS HRN 2010 HRN 2009 GAW 2010 GAW 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. 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 The Profitability Ratios are calculated to find out whether the Profit made by the company is satisfactory or not.
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. ROCE = Profit before Interest and Tax x 100 Capital Employed Comparing between the years 2009 and 2010, the ROCE for HRN has reduced by 4.69% and it currently is 10.99% whereas in GAW, it has increased by 13.68% and now stands at 28.12%. Between the two companies, the ROCE for GAW is higher than HRN by 17.13% indicating better returns on capital employed. This is because GAW has repaid most of its loans of 2009 from the profits made and has managed to raise a higher equity on their own which has increased it ROCE in 2010. 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, GAW has earned very good returns compared to HRN.
The ROS measures the Operational Performance and it relates the operating profit (PBIT) 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 In 2010, the ROS for HRN has gone down by 1.88% and is 8.06%; in GAW it has increased by 6.75% and is 12.74%. From these figures, it is estimated that for every one pound of sales made, GAW makes a profit that is 4.68p higher than what HRN is achieving. This is also because in 2010, the revenue and profit made by GAW is twice and thrice respectively as much as in HRN.
The ROSF or ROE shows 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 involved here. It is computed based on a) Profit before Tax (PBT) b) Profit after Tax (PAT) ROSF = PBT x 100 (OR) PAT X 100 (Share Capital + Reserves) (Share Capital + Reserves) A high ROSF indicates that the company has more profit available for its shareholders. In reference to PBT and PAT, HRN in 2010 shows a decrease of 5.06% and 3.29% respectively whereas GAW shows an increase of 9.31% and 12.66% respectively. GAW shows a steady increase over time and has achieved higher returns (29.15% & 27.27%) on shareholder’s funds in 2010.
Efficiency Ratios measures the efficiency with which particular resources of the business have been utilised. An improvement in this ratio will lead to improved profitability in the company. Efficiency ratios are calculated to find out whether the stock and debtors of the company are too high.
The STR measures the efficiency of the business in managing and selling its stock which also helps to increase sales. It is expressed as a ratio between the cost of goods sold (COGS) and stock. The faster the inventory sells, the fewer funds are tied up within the company. Stock Turnover = Cost of Goods Sold (times per year) Stock Although HRN shows an increase in stock turnover ratio from 2.24 to 2.65 times/year in 2010, it is still lower than that of GAW which has reduced from 3.36 to 3.02 times/year. HRN shows that their stock turnover is a little over twice a year whereas GAW has a better stock turnover that is three times a year.
The Stock Period calculates the average time that stock is held within a firm. The higher the stock-turnover ratio is; the lower the stock period will be. Stock Period = 365 Days Stock Turnover HRN shows a reduction of 25 days in 2010 whereas GAW shows an increase of 12 days. However, GAW has been maintaining a low stock period compared to HRN which proves their efficiency in stock management and provides possibilities to consider future demand, shortages, price rise, etc.
Every firm is concerned about how long it takes for its customers to pay the amounts owed by them as it is directly related to the cash flow of the business. This waiting period is known as Debtors period. Debtors Period = Debtors x 365 days Sales The debtors’ period for HRN has decreased by 3 days in 2010 and is 75 days while GAW maintains it at a lower period of 29 days for both years. A company will normally expect this period to be within 30 days; GAW exhibits better performance here.
This cycle is the addition of Stock period and Debtors Period which calculates the total time taken for stock to be converted into cash (Liquidity position). Efficiency Ratios Company/Year Games HRN 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 HRN has reduced the total period from 8 to 7 months in 2010; GAW’s period has increased by half a month (from 4.5 to 5) and it’s still better than HRN.
The Asset Turnover ratio portrays how effectively the assets of a company are being used to generate sales. Asset Turnover = Sales Capital Employed In HRN, for every 1 pound of capital employed, GBP 1.36 worth of sales has been made in 2010 and likewise in GAW, it made GBP 2.21. Both companies show a non-significant decrease while GAW continues to produce a higher asset turnover compared to HRN.
This relationship exhibits the overall returns on funds invested into a business and is determined by the profitability of sales and by efficiency in the use of capital expressed as follows:
= PBIT x Sales = PBIT Sales Capital Employed Capital Employed Sl. No. Company/Year ROS x Asset Turnover = ROCE/Result% (Approx) 1. HRN 2009 9.94 x 1.58 15.70 2. HRN 2010 8.06 x 1.36 10.96 3. GAW PLC 2009 5.99 x 2.41 14.44 4. GAW 2010 12.74 x 2.21 28.15 The Asset Turnover in GAW is close to twice as much as in HRN in 2010 and although an insignificant decrease is noticed in both companies, the primary reason for changes in ROCE is because of relative changes in ROS. Since the ROS for HRN has decreased to 8.06% from 9.94%, its ROCE has decreased to 10.96% from 15.70%. But in GAW, 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.
Liquidity Ratios finds out the ability of a business to meet its current liabilities by converting assets into cash quickly in-order to pay back the debtors.
SL.NO. LIQUIDITY RATIO HRN 2010 HRN 2009 GAW 2010 GAW 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
This ratio indicates whether the company has sufficient current assets to pay its immediate liabilities within the same accounting period. Current Ratio = Current Assets Current Liabilities The higher the ratio, the more liquid the business is considered to be. The ideal current ratio is suggested to be 2 times or 2:1. HRN has shown an increase in its current ratio from 1.48:1 to 2.11:1 and it is slightly higher compared to GAW 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 met the standard expectation of 2:1.
For many businesses, Inventory cannot be quickly turned into cash. So, it is excluded from the current assets for calculations. If the ratio falls below 1:1 then the company is having some liquidity problems. Liquidity Ratio = Current Assets – Inventory Current Liabilities HRN shows an increase from 0.72:1 to 1.38:1 in 2010 whereas in GAW, it has increased from 1.14:1 to 1.49:1, which is slightly higher than in HRN at 2010. This change is caused due to the difference in stock levels. Since the ratios have not fallen below 1:1 as expected, both companies show stable liquidity positions although HRN might have faced some problems in liquidity in the year 2009.
Gearing means borrowing and it measures how much percentage of the capital employed is borrowed from lenders or the bank. Interest is charged 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.
SL.NO. GEARING RATIO HRN 2010 HRN 2009 GAW 2010 GAW 2009 1. Capital Gearing 22.82 19.17 3.53 27.23 2. Interest Cover 7.42 8.57 43.72 4.99
This ratio measures the contribution of long-term borrowing to the capital employed. Capital Gearing = Long-term Borrowings x 100 Capital Employed A low Capital Gearing is preferred. Gearing in HRN has increased by 3.65% in 2010 and is 22.82% whereas in GAW it has greatly reduced to 3.53% in 2010 from 27.23% in 2009. GAW has a very low gearing ratio comparatively and thus its interest payments will also be low. A company is expected to have a gearing ratio of not more than 30%. Although both companies are in a good financial position, GAW is positioned extremely well.
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 The interest Cover for HRN has decreased from 8.57 times to 7.42 times in 2010 because of the decline in its profitability and the slight increase in its borrowings; in GAW, it has shot up to 43.72 times in 2010 from just 4.99 times in 2009. GAW has a very high Interest Cover and is in a safe position. This is because of the high profit it made, which has enabled the company to pay most of its loans. A company is expected to have a minimum cover of 3 times; 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 covers. Therefore, GAW shows that it is doing extremely well in terms of financial position. Thus, the above analysis made using ratios proves that GAW’s financial performance and position is better than HRN’s.
GAW and HRN operate in the toys and games (T&G) market which is divided into three primary sectors: games consoles, games software and traditional toys and games. The games consoles market consists of all console sales by Nintendo, Microsoft and Sony including handheld systems. The software sector covers all console and PC games. Traditional toys include action toys, activity toys, dolls, games/puzzles, infant/pre-school toys, ride-ons, vehicles and other miscellaneous toys and games.
“The UK market for T&G enjoyed year-on-year growth until a decline in revenues in 2008, followed by a deeper fall in 2009. 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. The T&G 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.” The market condition is driven by a number of factors: The trade has long been habituated to declining numbers in its target market, but will now benefit from a higher fertility rate. Tougher economic conditions are likely to mean lower volume sales, but could benefit sectors perceived to offer better value such as games and puzzles. https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429664?select_section=429665″&HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429664?select_section=429665″anchor=atom/display/id=429664?select_section=429665 The window of childhood may have shrunk as kids move onto adult interests faster, but the toys and games market has so far proved resilient, although that may not remain so. Old favourites are gaining new fans through nostalgia, as well as the belief that they have proven their worth and offer real quality and value. Christmas is still the big event, accounting for around half of sales, but the trade would benefit from building up sales across the rest of the year. https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429662?select_section=429664″&HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429662?select_section=429664″anchor=atom/display/id=429662?select_section=429664
Parents support many toys as a way to learn through play. Regular infusion of new products refreshes the market. Awareness of licensed products boosted by extra visibility in other formats (eg TV and film, books, comics, clothing).
Kids’ tastes can be highly unpredictable and sudden fads cause problems in meeting demand. But with no ‘must-have’ toy or game then sales can be sluggish. Competition growing from more forms of digital media. https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429666?select_section=429667″&HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429666?select_section=429667″anchor=atom/display/id=429666?select_section=429667
The trend of buying a toy for a new baby – increased from 13% in 2003 to 26% now. The more reasons to buy such as children’s parties or to appeal to the traditional image of a happy family all playing a game together directly translates into sales. In an already strong market these views suggest toy companies and retailers could benefit still further by stressing aspects such as the durability and adaptability of their products. https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429674?select_section=429675″&HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429674?select_section=429675″anchor=atom/display/id=429674?select_section=429675
Sports and hobbies are the other growth area for 7-10s, meaning sales opportunities for products such as craft materials, skateboards, train sets and models. All the major direct competitive sectors such as magazines, video games and books are doing well, showing kids have a great capacity for many forms of entertainment. https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429665?select_section=429666″&HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429665?select_section=429666″anchor=atom/display/id=429665?select_section=429666
In today’s unfavourable economic conditions, consumers will choose more carefully. They will be increasingly looking for games and toys they think deliver good value over time. In the longer term the market will continue to benefit from broader underlying factors as well, including children’s enjoyment of toys, their urge to collect, parental desire to give their children pleasure and help them learn, film and TV influence, and a growing child population. However, is real longer-term growth attainable? On balance yes. But manufacturers could do more to ensure sound growth and their own security by ensuring they keep in step with older children’s changing attitudes, by reducing their reliance on licensed product, and developing high-quality and innovative products whether for their own ranges or for licences. https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429666?select_section=429669″&HYPERLINK “https://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=280200&anchor=atom/display/id=429666?select_section=429669″anchor=atom/display/id=429666?select_section=429669
£m £m at 2008 prices m 2003 2,054 1,756 2,969 2004 2,081 1,850 3,067 2005 2,100 1,956 3,072 2006 2,142 2,045 3,142 2007 2,187 2,143 3,197 2008 (est) 2,078 2,078 2,826 2009 (fore) 2,023 2,055 2,710 2010 (fore) 2,073 2,143 2,819 2011 (fore) 2,123 2,239 2,887 2012 (fore) 2,158 2,347 2,934 2013 (fore) 2,201 2,493 2,993
Investor ratios are used to assess the investors’ returns on their investment. For this purpose, the Earnings per Share (EPS) and the Dividends per share (DPS) are used in calculation. EPS: It is the earnings generated by the business, available to its shareholder’s and compares profit after tax with number of shares in issue. DPS: This ratio compares a firm’s dividends with the number of shares receiving the dividend. Not all companies pay dividends. SL. NO RATIO HRN GAW 2010 2009 2008 2010 2009 2008 1. EPS (p) 9.75 11.2 16.2 48.4 17.82 2.4 2. DPS(p) 5 2.7 8.5 25 0 0 SL.NO. INVESTMENT RATIO HRN GAW 2010 2009 2008 2010 2009 2008 1. Dividend Payout% 51.3 24.11 52.63 51.65 0 0 2. Dividend Yield% 3.96 3.97 4.49 7.23 0 0 3. Price Earning (p) 12.91 6.07 11.7 7.15 11.73 72.5
It measures the proportion of profit that a company pays out to shareholders in the form of dividends. DP = (DPS/EPS) x 100 Over time, HRN has not been stable showing sharp decline and incline; GAW did not pay dividends for 2 years and started in 2010. The average DP in UK is 50%; both companies are paying reasonable dividends.
It measures the rate of return that an investor gets by comparing the DPS with the market share price. DY = (DPS/Share Price) x 100 The rise or fall in the DY is indirectly proportional to the share price. The DY for GAW is higher than HRN.
It relates the share price to the EPS and measures the market/investor’s confidence in the future of the company. PE = (Share Price/EPS) HRN shows better P/E than GAW which is because of the differences in share price; share price depends on the demands and supply levels in the market.
GAW- The effort put into streamlining the business is already reaping huge rewards, and with the focus shifting to sales improvement, operational gearing means further earnings progress is likely. On a forecast PE ratio of 10 and yielding nearly 6 per cent, the shares are a buy. (Reference: https://www.iconline.co.uk) Hornby have not been so lucky and are recovering from the recession and problems it encountered with its suppliers. However, HRN said it was seeing an early pickup in demand ahead of Christmas based on the hit film “Toy Story 3” and producing toys for the 2012 Olympic Games. HRN – Earnings are 1.2p higher at 11.9p – thereby producing a PE ratio of 12. The dividend is forecast to rise from 5p to 5.7p and to 7p in 2011-12. The shares remain good value backed by some famous toy brands and rising sales via supermarkets. (Reference: https://www.iconline.co.uk
31-May-11 128.85 17.20 39.80p 11.1 27.46p 6.2% 31-May-12 132.90 18.30 41.75p 10.6 29.96p 6.7% (Reference: https://www.digitallook.com)
31-Mar-11 68.30 6.40 11.90p 13.2 5.70p 3.5% 31-Mar-12 74.50 7.80 14.60p 10.8 7.00p 4.3% (Reference: https://www.digitallook.com) Market Data for GAW & HRN (table c) (Reference: https://www.digitallook.com)
Currency UK Pounds Share Price 437.50p 155.50p Change Today -5.00p -2.00p % Change -1.13% -1.27% 52 Week High 450.00 172.00 52 Week Low 246.50 113.00 Volume 3,050 23,281 Shares Issued 31.14m 37.99m Forecasts predict that investing in GAW will be better than in HRN.
In the event of choosing between GAW and HRN, we assume that Stephen will invest in the company that maintains higher profitability in the industry and earns better returns to its shareholder’s in spite of economic conditions that lead to changes in the share price regularly and also avoiding the risk of large borrowings which may lead to inability of repayment eventually resulting in lower returns and dividends or no dividends at all.
HRN has got good prospect for growth in the years to come. However, it is not as stable as GAW and comparatively has shown lower performance and position levels. It’s producing toys for the Olympics in 2012 will definitely boost its Revenue but what happens after that? Unless it increases its revenue by either increasing the selling price or reducing operating costs, etc, profits made at the moment will not earn returns greater than those in GAW. Therefore, based on the financial and industry analysis, it is strongly recommended that Steven should invest with GAW, considering his approach to risk. Over the last few years GAW has shown a steady and considerably good increase in the area of profitability and has proved itself as an efficient company. It was able to pay back almost all of its debts within a short duration and its liquidity position is three times a year. The company has shown stability over the years and this reflects good management, leadership and financial strength. Hence, Stephen should choose to invest in GAW rather than in HRN, considering the forecasts made on investments.
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