As a team of investment Analyst for Bresil Investment, We have been approached by one of our client, Stephen Curry to offer investment advice. Mr. Curry has two investment choices, either Games Workshop PLC or Hornby PLC. Our analysis will include ratio analysis of both the companies for current and previous years, as well as some industry specific analysis. Aim of this report is to provide Best investment advice for Mr. Curry.
“Financial Analysis exists to help decision Makers. It is concerned with the ways in which funds for a Business are raised and invested” (Theoh 2009:3 ). Financial analysis can also be referred as analysis and interpretation of financial statements to determine the current position and future scope of the firm using Balance sheet, Profit and loss account and other effective statistics. Financial Analysis uses the financial ratios for this purpose. Financial analysis gives a good idea about the profitability and financial soundness of the company so that investors can take right decision and invest in the Best Company.
Return on Capital Employed (ROCE )
The Return on Capital Employed Ratio is the fundamental measure of business performance. This ratio expresses the relationship between the operating profit generated during a period and the average long term capital invested in the business during that period. (McLancy & Atril 2008:229)
Ratio in percentage can calculated as follows:
ROCE= ((Operating Profit)/(Total asset – Current Liabilities)) * 100
The above graph shows the ROCE of both Games Workshop PLC and Hornby PLC for 2008,2009 and 2010.
ROCE of Games PLC has increased at constant rate from 2008 to 2010. That is 5.48%, 17.26% and 27.98% respectively. On the other hand ROCE of Hornby was better in 2008 (29.47%), however it has declined in 2009 and 2010 (i.e. 17.67% and 12.65% respectively). The reason behind the decline in the return of Hornby with realizing from the capital employed is that the company has invested lot of money in various fixed assets. Also the cost of production has increased in 2009 and 2010 as compared to 2008.
Games workshop PLC’s performance very well in 2010 and 2009 (27.98% and 17.26% respectively) as compared to the industry average in terms of ROCE. Also in 2008 the ROCE (5.48) was above the industry average. On the other hand for Hornby PLC also ROCE figures are higher for 2008, 2009 and 2010 (Fame 2010)
From the ROCE comparison of Games Work Shop PLC and Hornby PLC we can conclude that Games PLC is profitable as compared to Hornby.
Profit margin or Operating profit margin relates the operating profit for the period to the sales revenue during that period. (McLancy & Atril 2008:229).
Profit margin can be calculated as follows
Profit margin = (Operating profit/ Sales)* 100
The profit margin of Games PLC has increased at constant rate during the years 2008, 2009 and 2010. Reason behind for this rise is increase in Operating profit and also they become more efficient in their production. That means they have reduces the overheads. So the cost of sales remained almost constant and under control. Whereas for Hornby PLC the profit margin was higher during 2008 (16.85%) but it has decreased gradually during the years 2009 and 2010(i.e, 11.20% and 9.27% respectively).The ratio is decreasing that is clearly unsatisfactory. This is due to the decrease in the operating profit. That means the cost of sale is increased.
In 2010 and 2009 the profit margin of Games Workshop PLC are well head than industrial average, however in 2008 the profit margin is almost half of the industrial average. On the other hand profit margins on Hornby PLC for 3 years are more than the industrial average.
While considering the Profit margins of both the companies, we can conclude the profitability of Games Workshop PLC is very good.
Asset turnover ratio examines how efficiently the asset of the company is being used to generate revenue or ratio assesses the sale that a company can generate for each dollar assets it owns. In common a higher ratio is preferred to lower one. However a higher ratio may indicate that Company is overtrading its assets. Companies with higher asset turnover ratios can thrive even with low profit margin. (Biafore 2004:151) Asset turnover ratio can be calculated as follows:
Asset Turnover= Sales / Capital Employed
The above graph the comparison of Asset Turnover Ratios of Games PLC and Hornby PLC for three years.
It is clear from the graph the ratio is almost same for Games PLC during 2008 and 2009 and it is bit in a lower side during 2010 (2.207). Still the figures are satisfactory for Games PLC. This means that Games PLC is utilizing its assets at constant rate. On the other hand the ratios are decreasing for Hornby PLC. In 2008 it was better (1.749), however when we check the sales, the can conclude that the growth of sale is unsatisfactory as the Capital employed also increased also over these years.
While considering the Asset Turnovers of both the companies, we can conclude the profitability of Games Workshop PLC is better.
Stock turn over can defined as pace in which the stock are being sold out. It helps us to determine the duration of purchasing period. (Bose 2010:23) In another words it is the number of times the average inventory is sold out in a particular period.
It can be calculated as
Stock Turnover = (Cost of Sale/ Stock)
For Games PLC the Stock Turnover was better in 2009 (3.36 times).In 2008 it was bit on lower side, however in 2010 it has again decreased to 3.03 times. These figures are satisfactory. On the other hand for Hornby PLC the stock turnover is better in 2010 (2.66 times) and in 2008 and 2009 it remained almost constant (2.21 & 2.24 times).
In every business will want and target a higher Stock Turnover ratio. While considering the Stock Turnover ratios of both the companies, Games Workshop PLC seems to be in better condition.
It is also possible to express the ratio as a number of days, which is sometimes an easier way to understand it. To do this uses the following formula:
(Cost of goods sold/365)
Or = 365/stock turnover
As we can see from the graph, Hornby constantly has higher value of stock turnover than Games Workshop over the span of three consecutive years. But if we closely examine the scenario, Hornby has successfully decreased its stock days (from 160 days in 2008 to 137 days in 2010) while in the case of Games workshop, it is reversed (from 112 days in 2008 to 120 days in 2010)
The ratio gives us an idea about the number of days that on invested money is being held as inventories. A company is considered as working well when its stock turnover days are less. Hornby decreased its stock turnover days considerably, however if we compare it with that of Games PLC, its values are in higher. ie, While comparing the both companies in term of Stock Turnover days, Games Workshop PLC is better.
Debtor Period or Debtor collection period tells us how long the customers take to pay back the money. Good managed Debtor policies can keep the Debtor collection period as low as possible, without damaging the customer relation. (McLancy 2006:54)
Debtor period = (debtor * 365)/sales
From the graph it is clear that Games PLC has been successful in reducing Debtor collection period. That is, from 32.65 in 2008 to 28.97 in 2010. This is a satisfactory figure. In comparison with games workshop, Hornby had longer period of debtor. It had 71.11days in 2008 which has gone up to almost 78 days in 2009; however they tried to reduce it to almost 75 in 2010.
An increase in debtor collection period decrease company’s cash flow. That means it will increase the capital employed resulting in lower ROCE. So when comparing the Debtor collection Period of the both companies, Games PLC’s Performance is satisfactory.
1. Current Ratio
This is one of the most widely used ratios defined as
Current ratio = current assets/Current Liabilities
Current assets are expected to be turn into cash within approximately 12 months and the current liabilities are obligations that company owes that will require cash within in one year. This ratio is a measure of short term liquidity. An investor might expect this ratio at least 1. (Stickney, Weil, Schipper & Francis 2010: 266)
The graph illustrates continues higher value of current ratio of Hornby over games workshop except in 2009.For this three years Current ratios of both the companies are higher than 1. That means figures are satisfactory for both companies. One can understand that higher value indicates good sign for creditors.
This ratio gives idea that whether the company’s current assets can cover the current liabilities. From the above graph it is clear that both the companies have adequate number of current asset to cover the current liabilities.
Based on Turnover:
The graph above indicates that both Games work shop Plc & Hornby Plc are above the industry average in the year 2009. This means both companies can have a good future & investor can get good returns if he/ she invest money in either of them. Out of the two companies under our consideration, Games workshop group Plc is at a better position as compared with Hornby.
[Source:- https://fame2.bvdep.com/version-20101126/Report.serv?context=9ZR65YBIF4ZMOI4&_cid=2399 ]
We can see the huge dip in negative profit margin for more than 3 companies, which indicate the current market position due to competition. But here the profit margin of Hornby Plc is higher as compared to Games workshop Plc for the year 2009.
Even though the industry has weaknesses like every other industry has, the future lies to that industry which minimizes its weaknesses & maximizes the strengths. For this industry, since strengths are practically & psychologically strong but the industry must not forget that consumers will be choosing more carefully making the industry more challenging to do business into. In years to come market will enjoy factors like growing kid’s population, media influences, parent’s nature to give something that helps the child to learn by practically touching it & children love for toys & their collection urge.
Manufacturers can further improve it by depending less on licensed products, understanding changing tastes of children as they grow & launching more innovative & high quality products whether their own ranges or licensing.
Based on the above detailed analysis of Hornby Plc & Games workshop plc, we would positively recommend Mr. Curry, that if he is looking for long term investment then he should invest in Hornby Plc, but if he is looking for short term investment he should choose Games work shop Plc. The reasons to do so are provided below:-
Reasons to invest Long term in Hornby Plc:-
Looking at the Investment ratios, even though ROSF of Games is increasing & Hornby Plc is decreasing in past 3 years, but we should not ignore the past stability of Hornby which is strong & Total shareholder return is much better for Hornby Plc then Games workshop Plc.
Taking care & focusing only for better returns for Mr. Curry, after considering the Dividend Cover & Price earnings ratios, which reflects stock market confidence in Hornby Plc than Games work shop Plc.
The performance of Games work shop Plc has drastically moved upwards in a very short term, that is why we are not sure whether or not the company can give good returns to their shareholders in long term, this condition is prospective for Hornby Plc.
Looking at the graphs provided in the Industrial analysis of this report, where both companies are above industry average but on carefully examining we can make out that even though turnover of Games work shop Plc is higher but profit margin of Hornby Plc is better.
Reasons to invest short term in Games workshop Plc:-
Looking at the profitability ratios, efficiency ratios, Liquidity ratios & Solvency ratios, we can make out that Games work shop Plc is better than Hornby Plc. That means rapid growth is expected in near future after looking at the past 3 year’s performance.
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