Financial Analysis And Decision Making At Bresil Investment Finance Essay

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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.

2.Financial Analysis

"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.

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3. Interpretation of Ratio analysis

3.1. Profitability Ratios

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.

Time Analysis

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.

Industrial Benchmarking

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

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

Time Analysis

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.

Industrial Benchmarking

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.

3.2. Efficiency Ratios

1. Asset Turnover

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.

Time Analysis

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.

2.Stock Turnover

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)

Time Analysis

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.

3.Stock Days

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:

STOCK TURNOVER RATIO (in days) = Average Stocks

(Cost of goods sold/365)

Or = 365/stock turnover

Time Analysis

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.

4.Debtor Period:

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

Time Analysis

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.

3.3. Liquidity Ratios

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)

Time Analysis

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.

2. Acid Test Ratio

Acid Test Ratio or Quick Ratio is more severe test of business solvency than Current ratio. It excludes inventory(Stock) which is the current ratio includes and limit the Current asset to cash and items which can be quickly convert to cash. Investors and lenders are more interested in Acid Test ration.(Tracy 2008:287)

It can be calculated as follows:

Acid Test Ratio = (Current assets- Stock)/ Current liabilities.

Time Analysis

From the graph we can see a steady increase in Quick ratio of Games PLC. Ie, from 0.904 in 2008 it has increased up to 1.49 in 2010. However on the other hand for Hornby we can see the ratio is fluctuating. That means, in 2008 it was 0.94 but in 2009 it came down to 0.72 and then in 2010 it shot up to 1.38.

Industrial Benchmarking

While we compare the Acid test ratios of Games PLC and Hornby PLC for each year, we can see that, the liquidity of Hornby is less than 1 in 2008 and 2009. That means Companies Current assets are not sufficient for covering current liabilities. In the mean time value for Game PLC remained almost same in 2008, which was a matter of concern. However Games liquidity has been increased during 2009 and 2010 and the figures are satisfactory. And in 2010 the liquidity of Hornby has improved to a satisfactory level.


While comparing the liquidity of both the companies, Games Workshop PLC is in better position.

3.4. Solvency Ratios

1. Capital Gearing

Capital Gearing tries to measure the risk to the equity shareholders arising from company’s capital structure. It is the mathematical relation between the borrowed capital and capital employed. (Elliot & Elliot 2006:146)

It can be calculated as follows:

Capital Gearing Ratio: Long term Borrowing / Capital employed

Time Analysis

In 2008 Capital Gearing of Games PLC was better (36.6%), however in 2009 and 2010 the value dropped (27.23% & 3.53%). And this is not satisfactory. On the other hand Capital Gearing of Hornby PLC was very low in 2008 (1.21%). In 2009 the value has gone up to 19.17% and it reached a maximum of 22.82%.


When we compare both the companies in terms of capital gearing ratio, we can conclude that Games PLC is in a better position.

2. Interest Cover Ratio

Interest cover Ratio ensures that the borrower has adequate amount of cash to pay interest on its out- standing debt. (Wight, Cooke & Gray 2009:302). It can be calculated as follows:

Interest Cover = PBIT/ Interest payable.


Time Analysis

In 2008 the interest cover ratio was very low for Games (1.33), however in 2009 it showed a good sign of improvement (4.98) and in 2010 the ratio is at its best, ie. 43.17. On the other hand the situation was better for Hornby in 2008 (25.1), however it started dropping in 2009 and reached to the minimum value of 7.42

Industrial Benchmarking

As per Watson and Head in their Text book "An interest cover of more than seven times is usually regarded as safe and more than three times is acceptable". When we compare the interest cover ratio of Games PLC in 2008 with that of Hornby PLC, its value is very low and it is unsatisfactory and its value in 2009 is acceptable. In 2010 Games PLC’s position is very safe. While considering the interest cover Ratio of Hornby, even if its value dropped from 25.1 to 7.42, company’s position is safe in all these year.


When we compare the solvency of both the companies, their current positions are safe. However the Game PLC is more solvent than Hornby PLC.

3.5. Investment Ratios

1.Return on Shareholder’s Funds (ROSF)

The Return on Shareholder’s Funds compares the amount of profit for the period available to the owner, with owners the average stake in the business during that same time. This ratio also represented in percentage. (McLancy & Atril 2008:229)

ROSF can be calculated as follows:

ROSF= ((Profit After tax/ (Share Capital + Reserves)) * 100


ROSF= ((Profit After tax/ (Equity)) * 100

Time Analysis

From the above graph it is evident that ROSF of Game PLC has increased consistently every year. That is 1.51%, 14.3% and 27.27. On the other hand ROCE of Hornby was better during 2008 (19.31%) but it has decreased in 2009 and 2010 (13.30% and 10.06% respectively). Reason behind in this drop, as explained above the cost of production has increased in 2009 and 2010 as compared to 2008.

Industry Benchmarking

Both Games PLC and Hornby are performed well as compared to industrial average in 2008, 2009 and 2010. (Fame 2010). When comparing Games PLC with Hornby the ROSF of Games PLC in 2009 and 2010 are satisfactory.

2. Total Shareholder Return

Shareholders will be interested to know total return earned on their investment. This will be relative to general price rises, a peer group of firms or may be the market as a whole. TSR includes the dividend returns and share price changes over a particular period.(Arnold 2008:701)


[Dividend+ (Share price at the end of period- Initial Share price)]x100 / Initial share price

Time Analysis

In 2008, the investment was not good for shareholders for both the companies. That means 38% loss for Games PLC and 33% loss for Hornby. In 2009 there was a profit of 20% in return for Games and in 2010 the profit in return again increased to 77.5%. For Hornby, on the other hand, the investors got good return from their investment. Ie, 62.6% in 2009 and 92.7% in 2010

Industrial Benchmarking

When we compare the Total shareholder return for both companies, we can see that Hornby has achieved better return for their shareholders. And the condition of Games PLC is not that bad in 2009 and 2010. Their return also is better than industrial average.


We can see both the investors of Games PLC and Hornby PLC experienced loss due to fall in price share. However in 2009 and 2010 the investors got good profit.

3. Earnings per Share

Earnings per share measure company’s growth. EPS takes what company has earned and divides it with number of stock share outstanding. (Jackson Kelly 1998)

EPS= Profit after tax/ Number of Shares

Time Analysis

From the graph we can see that the earning per share of Games PLC has increased steadily. The growth, we can say, is consistent. In 2010 it achieved a maximum earning of 48.9 pence. On the other hand for Games PLC Earnings per share was higher in 2008(15.1p) and it has come down to 11p in 2010. Still we can’t say that it is a big drop. Hornby Earnings per Share is also satisfactory.

Industry Benchmarking

Earnings per Share of Games PLC have been good for over 3 years. It has achieved a maximum of 48.4p in 2010. On the other hand for Hornby, the company performing well in 2008 but in 2009 and in 2010 the Value has dropped. Still the company’s values are much above the industrial average.

4.Dividend Per Share

Dividend per Share or DPS is the dividend paid to the shareholders on a per share basis. DPS is the better than EPS as the former shows what exactly is received by owners.(Khan & Jain 2007:24)

It can be calculated as follows:

DPS= Net dividend / Number of ordinary share in issue

Time Analysis

It is clear from the graph that Games PLC has not given any dividend during 2008 and 2009. However in 2010 they have given in a very good dividend of 25p per share. On the other hand Hornby PLC has given dividend every year. Even if the Dividend varied each year, the company managed to give dividend to shareholder. This is a satisfactory.

5.Dividend Cover

Dividend cover is the ratio attributable to normal shareholders to dividend. It shows the affordability of the current level of dividends. (Arnold 2004:191)

It can be calculated as follows:

Dividend Cover= Profit after tax / net dividend


Dividend Cover = EPS/ DPS.

Time Analysis

In the graph we can see that previously for Games Plc, the dividend cover was zero in year 2008 & 2009 and in 2010 it suddenly became 0.39. Whereas for the Hornby Plc Dividend cover was 1.88 in year 2008, then in fall down to 1.94 in year 2010, after touching highest 4.11 in year 2009.

Industry Benchmarking

For Games Plc the dividend cover of the year 2010 is a good sign but Dividend cover of Hornby Plc cannot be under estimated because it has always remain at a higher end in the last 3 years much above 0.39 level of the Games Plc only in the year 2010.


On deeply analyzing the ratios of both companies in the graph, Hornby Plc is having greater value.

6.Price Earnings Ratio

Price Earnings Ratio shows the association between market price of a share of common stock and Earnings per share.It can be calculated as follows:

Price Earnings Ratio= Market Price per share / EPS

Time Analysis

Price Earnings Ratio of Games PLC was very low during 2008 (-72.5), however in 2009 it has improved to a good figure of 11.74. Again in 2010 it has gone down to 7.15. It is not satisfactory. For Hornby PLC, on the other hand, the ratio was better in 2008 (12.52) and in 2009 price earnings ratio was bit low. However in 2010 the value has gone up to 11.45. This is a good sign and it is satisfactory.

Industrial Benchmarking

A high PE ratio forecast that the future returns or earning in the company are expected to grow significantly. It is a sign of Market confidence. While we compare the PE ratios of Games PLC and Hornby , we can see that Hornby’s performance is more promising.

4. Industry Specific Analysis

The Toys Manufacturing industry was targeting £ 2.2 Billion in 2007, with respect to year 2003 its grew 22% up in that period, it can grow at a better pace as economic scenario improves further. But this Industry is facing challenges from new technology, such as children are getting more attracted toward Internet online games. Due to this traditional toys may suffer & could impact sales. But there is a lot of scope for improvement that the industry players can do, like, they can educate parents & children about the benefits of toys & traditional games as compared to internet online games. Extending the appeal to buy toys in above age categories like grownups & adults. But this is not the only end to the problems faced by this industry. Moreover, the stiff competition is making the market more competitive due to price wars which have commoditized the market.

Hornby PLC

Hornby Plc is a U.K based manufacturing industry specially deals in games & toys design, sourcing, distribution of hobby & interactive home entertainment products. The Hornby Plc company develops and supplies Hobby and Toy products . The main customers of this industry are the growing children. The brand name are the Hornby, Scalextric, Electrotren, SuperSlot, Lima, Jouef, Rivarossi and MKD. On September 2006, the company acquired Heico Modell, a German company.(Fame 2010)

Games Workshop PLC

Games Workshop Group Plc is the largest and the most successful tabletop fantasy war games company that is based in U.K. They also designs, manufactures and markets a hobby based upon collecting, modeling, painting and tabletop gaming with model soldiers. The company’s major brands are Warhammer and Warhammer 40,000. The company’s products are sold through its own chain of more than 300 Hobby centres and by more than 4,000 independent toy and hobby shops around the world.(Fame 2010)

The important players of industry are Hornby Plc, Games work shop Plc, Vivid Imaginations Limited, Flair Leisure Products PLC, Vivid TOY Group Limited, Ethos International Ltd, Record RSS Limited, Hardy & Greys Limited, Rockstar North Limited, Datel electronics limited etc.

Strengths of Industry

Once initial appeal is established then attraction of collecting can ensure repeat sales.

The major plus point of Industry is that it is made for kids & their appeal cannot be ignored by anyone because they never compromise like adults, for buying their favorite toy or game.

Teachers & parents support toys because they help in learning process of children.

Infusion of new toys often makes it fresh again.

Licensed products can be charged at high prices & can be promoted through TV, Film, book comics etc.

Toys & games could be good gift from grandparents – here is what I bought for you when I went to London.

Once a toy is broken, it has to be replaced by a new one without delay, which means high sales.

Weakness of this Industry

Kids mood is highly unpredictable specially driven by their peer group, about toys.

Competition is high from digital media.

Due to the desire of kids to possess adult size commodities & lifestyles, they may give less importance to toys.

New entrants can face higher barrier to entry due to crowded & heavily branded industry.

High price sensitive toys are mostly pocket sized.

Performance of the key players of this Industry

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.

Based On Profit Margin

[Source:- ]

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.

5. Future prospect of Industry

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.

6. Recommendation

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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