Decision Making Between Games Workshop And Hornby Finance Essay - Free Essay Example

Your group is a team of investment analysts for Bresil Investments. Your role is to provide investment advice to high wealth individuals. Stephen has been a client of your bank for many years and has approached your manager for investment advice. Stephen has a large portfolio of shares and has recently inherited a large sum of money which he also wishes to invest in shares. Stephen has a broad portfolio of shares but he does not have very much exposure to the games retailing sector. One of his friends has recommended the following two companies Games Workshop PLC and Hornby PLC. His file has been passed to you by your manager and he has asked you to prepare report for him. You have carried out some preliminary and obtained summary financial, share prices and dividends of the organizations for the last two accounting periods. Required: Carry out a financial analysis of both companies. This analysis should include: A justification of the tools and the ratios that you have chosen. Based on the financial analysis and ratios you have computed, an evaluation of the financial performance and current financial position of both companies. All computations should be included in an appendix. Identify the industry in which these two companies are operating and perform an industry specific analysis to discuss their prospects for investment. Based on your assumption of Stephens attitude to risk which should be clearly stated and supported by the results in (a) and (b) above, advise Stephen on how he should proceed with his investment decision. ASSIGNMENT INTRODUCTION In this course work, we have been asked to assume that we are a group of investment analysts for Bresil Investments and provide investment advisory service for Stephen Curry, a client who has a large portfolio of shares and is wishing to invest in retailing sector. Since he has got not much experience in this sector, he is seeking our help. The companies, Stephen has opted for making investment are Games Workshop PLC and Hornby PLC. For this purpose, we have carried out a financial analysis of both the companies, after careful scrutinization of their income statement and balance sheet for the years 2008, 2009, 2010. We have compared each ratios against suitable benchmarks. The three bases taken for comparison where Time, Industry averages and Expectations which can b referred to as TIE benchmarking. INTRODUCTION Games Workshop is one of the most successful tabletop fantasy and futuristic battle-games company in the world. Games Workshop Group PLC has been in business for about 30 years. Games Workshop deals with designing, manufacturing, distributing and marketing of a hobby based upon collecting, modelling, painting and tabletop gaming with model soldiers (the Hobby). The business of Games Workshop is about helping armies in the field of battle. The main brands of them are Warhammer and dark future Warhammer 40,000 game system. The companys headquarter is situated in Nottingham, in the UK. It has got direct sales operations in the UK, the US, Spain, Italy, Canada, Japan, France, Germany and Australia.The majority of the sales and profits of the Group is being contributed by the Games Workshop. It was quoted in the London Stock Exchange and listed in the year 1994. Along with this, Games Workshop PLC has got other companies like BL publishing which is basically publisher of novels, backgroun d books etc. Hornby is the UKs one of the leading model railway manufacturer brand and it is a household . The founder of this company was Frank Hornby who applied for a patent in 1901 and after getting the patent, he started the production under the name Mechanics Made Easy which in 1907, led to the establishment of Meccano Ltd. The company had good time in their journey later on. They started with the production of classic toys to toy trains in 1920 and electric train in 1925. Later on, they introduced lot of innovative toy product items down their way. The company, which is at present known as Hornby Hobbies Ltd, became an independent company and it was floated on the Unlisted Securities Market, on 29 OctoberÂÂ  1986. Now the company is simply called as Hornby and has become successful in establishing a firm reputation as a benchmark for the industries as far as quality is concerned which became possible for them, through the quality service they offer to their wide portfolio customers. E ven now, Hornby is maintaining a firm position in the market , after having more than 50 years experience in this sector and is standing out as Britains leading railway manufacturers.. FINANCIAL STATEMENTS Hornby PLC Consolidated Income Statement 2010 000 2009 000 2008 000 Revenue 64,736 61,569 55,692 Cost of sales (32,636) (32,168) (26,297) Gross Profit 32,100 29,401 29,395 Distribution costs (2,702) (2,454) (2,138) Selling and marketing costs (13,602) (13,641) (11,551) Administrative expenses (8,243) (7,976) (6,268) Other operating (expenses)/income (1,549) 1,569 (52) Operating Profit 6,004 6,899 9,386 Finance income 20 27 5 Finance costs (809) (805) (374) Profit before taxation 5,215 6,121 9,017 Taxation (1,530) (1,909) (2,940) Profit for the year after taxation 3,685 4,212 6,077 Other comprehensive income Cash flow hedges, net of tax 848 (813) Currency translation differences 19 (336) Other comprehensive income for the year, net of tax 867 (1,149) Total comprehensive income for the year 4,552 3,063 Earnings per ordinary share Basic 9.76p 11.17p 16.15p Diluted 9.60p 10.98p 15.62p Consolidated Balance Sheet 2010 000 2009 000 2008 000 Assets Non Current Assets Goodwill 13,416 13,624 9,925 Intangible Assets 5,227 5,689 2,404 Property, plant and equipment 10,020 10,523 8,360 Investments Deferred tax assets 140 67 123 28,803 29,903 20,812 Current Assets Inventories 12,273 14,368 11,890 Trade and other receivables 13,291 13,119 10,699 Derivative financial investments 750 Current tax assets 175 124 152 Cash and cash equivalents 8,998 427 940 35,487 28,038 23,681 Liabilities Current Liabilities Borrowings (1,718) (5,138) (2,220) Derivative financial instruments (3,342) (3,960) (1,350) Trade and other payables (10,363) (8,270) (6,851) Provisions (391) (538) (500) Current tax liabilities (1,020) (999) (1,723) (16,834) (18,905) (12,644) Net current assets/(liabilities) 18,653 9,133 11,037 Non current liabilities Borrowings (10,547) (7,181) (41) Deferred tax liabilities (281) (301) (346) (10,828) (7,482) (387) Net assets 36,628 31,554 31,462 Equity attributable to owners of the parent Share capital 380 380 380 Share premium 5,340 5,278 5,278 Capital redemption reserve 55 55 55 Translation reserve (514) (533) (197) Hedging reserve 168 (680) 133 Other reserves 1,688 1,688 1,688 Retained earnings 29,511 25,366 24,125 Total equity 36,628 31,554 31,462 4.2 Games Workshop PLC Group Income Statement 2010 000 2009 000 2008 000 Continuing operations Revenue 126,511 125,706 110,345 Cost of sales (30,683) (35,919) (33,731) Gross profit 95,828 89,787 76,614 Operating expenses (82,839) (84,325) (75,798) Other operating income-royalties receivable 3,056 3,471 1,736 Operating profit 16,045 8,933 2,552 Finance income 442 333 425 Finance costs (367) (1,808) (1,918) Profit before taxation 16,120 7,458 1,059 Income tax expense (1,040) (2,107) (613) Profit for the year from continuing operations 15,080 5,351 446 Discontinued operations Profit/(loss) for the year from discontinued operations 118 1,186 Profit attributable to equity shareholders 15,080 5,469 (740) Group Balance Sheet 2010 000 2009 000 2008 000 Non- current assets Goodwill 1,433 1,433 1,433 Other intangible assets 5,889 5,811 6,059 Property, plant and equipment 23,264 25,380 26,422 Trade and other receivables 1,678 1,570 1,234 Financial assets-derivative financial instruments 14 Deferred tax assets 5,917 4,704 3,005 38,181 38,898 38,167 Current assets Inventories 10,138 10,678 10,392 Trade and other receivables 10,043 9,959 9,870 Assets held for sale 464 Current tax assets 301 32 854 Financial assets derivative financial instruments 210 17 Cash and cash equivalents 17,089 10,355 7,723 37,571 31,234 29,320 Total assets 75,752 70,132 67,487 Current liabilities Financial liabilities borrowings (2) (2,791) Financial liabilities derivative financial instruments (550) (1,401) Trade and other payables (15,550) (14,092) (15,351) Current tax liabilities (1,027) (2,233) (222) Provisions (1,848) (1,046) (1,155) (18,425) (17,923) (20,920) Net current assets 19,146 13,311 8,400 Non-current liabilities Financial liabilities-borrowings (12,000) (15,001) Other non-current liabilities (582) (632) (723) Provisions (1,442) (1,586) (1,317) (2,024) (14,218) (17,041) Net assets 55,303 37,991 29,526 Capital and reserves Called up share capital 1,557 1,556 1,556 Share premium account 7,837 7,822 7,822 Other reserves 3,722 1,837 (321) Retained earnings 42,187 26,776 20,469 Total shareholders equity 55,303 37,991 29,526 RATIO ANALYSIS 5.1 Profitability Ratios (i) Ratio on Capital Employed In any business, the main aim of investing in any business is to acquire sufficient benefit on capital invested. The term used to measure the success of a business is Return on capital employed. Return on capital employed is a ratio that implies the success and profitability of a companys capital investments. This ratio is expressed as Profit Before Interest and Tax (PBIT) over the long term investment made in the business. ROCE = PBIT / [share capital + reserves + long term loans] x 100 Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 12.65% 27.99% 2009 17.67% 17..11% 2008 29.47% 5.48% (ii) Net Profit Margin A profitability ratio computed as profit before interest and tax over sales. It shows the companys ability to produceÂÂ  at a appropriateÂÂ  salesÂÂ  level. Net Profit Margin = PBIT / Sales x 100 Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 9.27% 12.68% 2009 11.21% 7.11% 2008 16.85% 2.31% Asset Turnover ratio TheÂÂ  asset turnover ratio is a measure of the amount of sales that a company generates using the assets available. It is calculated as sales over capital employed. Asset Turnover = Sales / Capital Employed x 100 Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 1.36% 2.21% 2009 1.58% 2.41% 2008 1.75% 2.37% Comparative analysis ROCE of Hornby decreased drastically from 29.47% to 17.67% to 12.65% where as that of Games Workshop increased slightly from 5.48% to 7.11% to 12.68%. This fall in ROCE for Hornby can be attributed to the rise in borrowings during the three years. This fall can also be accounted for the rise in share capital and reserves. This fall can also be linked to the decrease in the operating profit by 63.96% from 2008 to 2010. The profit after tax for Hornby has increased. Both the companies have shown an increase in revenue. The net profit margin figure of Hornby has fallen from 16.85% to 11.21% to 9.27%, where as that of Games Workshop has risen from 2.31% to 7.11% to 12.68%. Games Workshop is maintaining a higher net profit margin than Hornby. Since the Roce of Games Workshop has been increased and its net profit margin has also risen, asset turnover ratio remains almost constant from 2.37 in 2008 to 2.21 in 2009. This shows the relation between ROCE, NP margin and Asset Turnover ratios. 5.2 Efficiency ratios (i) Stock Turnover period Stock turnover period indicates a particular time period, during which the companys stock is restored many times. The ratio is calculated as stock divided by cost of goods sold during the time period. Stock Turnover Period = Stock x 365 / Cost of sale Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 137 121 2009 163 109 2008 165 112 (ii)Debtor Collection Period The duration of time, on average, taken by the customers to pay for the goods sold.This ratio is also expressed as Trade Debtors over Credit sales. Debtor Collection Period = Trade Debtors / Credit Sales x 100 Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 75 29 2009 78 29 2008 70 33 Comparative analysis In the last three years, the stock turnover period of Hornby has decreased from 165 days to 163 days to 137 days, where as that of Games Workshop has increased from 112 to 109 to 121 days. When comparing both the companies, Games Workshop has a lesser stock turnover period. This means that the movement of stock is faster than in Hornby. This indicates that Games Workshop is maintaining its stock more efficiently than Hornby. There is a fall in the debtor collection period for both the companies in the last three years. It decreased from 70 to 78 to 75 days for Hornby and 33 days in 2008 to 29 days, which remained constant both in 2009 and 2010 for Games Workshop. Hornby can actually reduce the debtor collection period much further. Comparing both the companies, Games Workshop has higher efficiency. 5.3 Liquidity Ratios (i) Current Ratio The current ratio is an explanation of the companys capability to meet short-term liabilities. It shows the amount of current assets the company has to cover its current liabilities. The ratio is calculated as current assets over current liabilities. Current Ratio = Current assets / Current liabilities Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 2.11 2.04 2009 1.48 1.74 2008 1.87 1.40 (ii) Liquid Ratio The liquid ratioÂÂ  measuresÂÂ  a companysÂÂ  ability to cover up its short-term liabilitiesÂÂ  using its liquid assets. Liquid ratio, also known as quick ratio, is calculated as currents assets less stock over current liabilities. LiquidRatio = Current assets Stock / Current liabilities Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 1.38 1.49 2009 0.72 1.15 2008 0.93 0.90 Comparative analysis For Hornby the current ratio is 1.87 in 2008 and 1.48 in 2009 and 2.11 in 2010. For Tesco the current ratio is 1.40 in 2008 and 1.74 in 2009 and 2.04 in 2010. Both the companies have shown improvement in the current ratio. Hornby is in a good position to clear its short term liabilities than Games Workshop. The standard current ratio is considered to be 2:1, since it is a bit higher, Hornby is not efficiently using its current assets. Quick ratio for Hornby increased from 0.93 in 2008 to 0.72 in 2009 to 1.38 in 2010 . The ratio for Games Workshop increased from 0.90 in 2008 to 1.15 in 2009 to 1.49 in 2010. As a result the quick ratio of the company increased very well and On comparing both the figures, Games Workshop has higher liquid ratio and so, is in a better financial position to cover its short term liabilities. 5.4 Gearing Ratio (i) Gearing Ratio A financialÂÂ  ratioÂÂ  thatÂÂ  comparesÂÂ  companys capital employed to borrowedÂÂ  funds. It relates to the amount of debt a company has. It is calculated as long term borrowings over capital employed. Gearing Ratio = Long Term Borrowings / Capital Employed x 100 Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 22.22% 0% 2009 18.40% 22.98% 2008 0.13% 32.21% (ii) Interest Cover Ratio TheÂÂ  interest coverage ratio is used to measure how efficiently the company is able to pay the interest on its outstanding debt. It is calculated as companysÂÂ  profit before interest and taxesÂÂ  (PBIT) over interest payable for the same duration of time. Interest Cover Ratio = PBIT / Interest Payable Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 7.42 50.94 2009 8.57 7.10 2008 25.10 1.52 Comparative Analysis The gearing ratio of Hornby has increased largely from 0.13% to 18.40% to 22.22% while that of Games Workshop decreased drastically from 32.21% to 22.98% to 0%. Games Workshop has a much lesser gearing ratio, when compared to Hornby. This means that Games Workshop has not taken much debt, whereas Hornby has to decrease its gearing ratio or else it will have to pay a high interest. The interest cover ratio for Hornby has decreased from 25.10 in 2008 to 8.57 in 2009 to 7.42 in 2010, while that of Games Workshop has increased from 1.52 in 2008 to 7.1o in 2009 to 50.94 in 2010. The low interest cover ratio of Hornby indicates the large amount of borrowings it has made to finance the business. 5.5 Investment Ratios (i) Return on Shareholders Funds (ROSF) ROSF is a ratio which measures the return to the shareholders from the companys profit, in relation to the investments made. It is calculated as profit after tax over ordinary share capital and reserves. ROSF = Profit after Tax / Ordinary Share Capital + Reserves Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 10% 32.33% 2009 13% 16.44% 2008 19% 3.59% (Ii) Dividend Payout Ratio It indicates the money that is paid out in the form of dividends by the company to its shareholders. It is calculated as net dividend over profit after tax. Dividend Payout Ratio = Net Dividend / Profit After Tax Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 51% 51.65% 2009 24.1% 0% 2008 52.5% 0% (ii) Dividend Cover It is a measure of the amount of profit generated by the company, in order to manage the level of dividend paid out. It is calculated as profit after tax over net dividend. Dividend Cover = Profit after Tax / Net Dividend Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 1.96 1.93 2009 4.15 0 2008 1.9 0 (iii) Dividend Yield It is a ratio that interprets how much an investor may get as dividend, depending on the investment made in a company, in relation to the price per share. It is calculated as dividend per share over market price per share. Dividend Yield = Dividend per Share / Market Price per Share Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 3.97% 7.2% 2009 3.97% 0% 2008 4.49% 0% (iii) Price-Earnings Ratio It is a valuation ratio of a companys market price per share over earnings per share. It is an important tool for making investment ratio. In order to take a decision, we cannot depend on a single P/E ratio, but a better analysis can be done by comparing P/E ratios of different companies in same industry. P/E Ratio = Market Price per Share / Earnings per Share Using the above formula, the figures for Hornby and Games Workshop was obtained as follows:- YEAR HORNBY GAMES WORKSHOP 2010 12.85 7.14 2009 6.07 11.88 2008 22.23 72.5 Comparative Analysis Return on Shareholders Funds (ROSF) for Hornby decreased from 19% in 2008 to 10% in 2010. It increased from 3.59% in 2008 to 32.33% in 2010. Dividend Payout Ratio for Hornby has increased from 52.5% in 2008 to 24.1% in 2009 and then shot up to 51% in 2010, and increased from 0% in 2009 to 51.65% in 2010 for Games Workshop . This indicates that the proportion of earnings Games Workshop pays out to its shareholders as dividends is more than what Hornby pays to its shareholders. Dividend Cover ratio shows how much of profits are generated to cover the dividends. Dividend Cover for Hornby has increased from 1.9 in 2008 to 4.15 in 2009, and then decreased to 1.96 in 2010. The ratio for Games Workshop increased from 0 to 1.93 in 2010. This means for the year 2010 the profit generated by Hornby can cover its dividends by 1.96 times and profits earned by Games Workshop can cover its dividends by 1.93 times. Hornby is having more dividend cover than Games Workshop. Dividend Yield of Hornby decreased from 4.49 % in 2008 to 3.997% in 2009 and 2010, where as it increased from 0% to 7.2% in 2010. Games Workshop has a higher dividend yield than Hornby. While looking at the scenario from an investors point of view, he would prefer to invest in Games Workshop. . Price Earnings (P/E) ratio has decreased from 22.23 in 2008 to 6.07 in 2009, and later on rised to 12.85 in 2010 for Hornby. It has decreased from 72.5 in 2008 to 11.88 in 2009 to 7.14 in 2010 for Tesco. Price earnings ratio is directly proportional to the expectation of the investors concerning future growth. Hornby has higher P/E ratio than Games Workshop for the year 2010. INDUSTRY ANALYSIS Hasbro, Inc is a company which performs in the same business as Hornby and Games Workshop. We can analyze the performance of Hornby and Games Workshop by comparing with the competitor i.e. Hasbro. The ROCE of Hasbro was 23.53% in 2008 and 21.58% in 2009, where as for Hornby, the ratio was 29.47% in 2008 and 17.81% in 2009. Form this we can understand that there is a decreasing trend in ROCE for Hornby. So the profit will decrease in the coming years. The current ratio of Hasbro increased from 2.142% in 2008 to 2.5% in 2009, whereas that of Hornby decreased from 1.87% to 1.48% in 2009. In the year 2010, the current ratio for Hornby rose to 2.11%. so the financial position of Hornby to meet current liabilities is increasing. The gearing ratio of Hasbro increased from 0.337% in 2008 to 0.415% in 2009, whereas that of Hornby increased from 0.13% to 18.40% in 2009. So when we consider Hornby, gearing ratio is increasing, which will be a loss for the company. The ROCE of Games Workshop increased from 5.48% in 2008 to 17.11% in 2009. On comparing ROCE of Games Workshop with Hasbro, there is an increasing trend, and so the profit will increase. The current ratio of Games Workshop increased from 1.40% to 1.74% in 2009. This ratio on comparing with that of Hasbro, indicates that the financial position of Games Workshop is increasing. The gearing ratio of Games Workshop decreased from 32.21% to 22.98% in 2009. The ratio further decreased to 0% in 2010. This will not be a loss for the company. FUTURE PROSPECTUS In the present technology driven world, you would hardly find people who are not familiar with the companies like Games Workshop PLC, Hornby PLC, Hasbro etc. Hobby enthusiasts who go crazy for technology, music, model toys, games etc are giving sheer push and great support to Hornby and Games Workshop. These industries have successfully made a mark on their respective wider industry. But they had to face many competitions within the competitors in the same field like Hasbro, Wizards of Coast etc . When the competition started going up, it automatically led to the diversification of the product lines like consumer products, mail orders, non-store retail, catalog, television sales etc.. The demand of games and toy industry ll shoot up in the near future due to the increase in demand for entertainment. All kinds of toys has been a demand among children of age grouped 12 and below. But the main threat for the toy industry is the hiking competition from other source of entertainment like internet, television etc. There has been a drastic difference of demand in the electronic gaming products. Gaming industry is one which always welcomes innovation. In the past 10 years, lot of innovations has happened in this sector and it has led to the introduction of lot of product items into the market. There is a wide range of market for this sector and the most interesting part is that, the demand for electronic gaming products has always shown a rise and it has now become an unavoidable part of entertainment for the customers of almost age group. If we take Games Workshop PLC into consideration, it has made an appreciable contribution to the whole British Gaming Industry. Games workshop has been planning lot of new projects and proposals and as a latest update, Games Industry and Fantasy Flight games have entered an agreement. As per the agreement, the Fantasy Flight becomes the exclusive publisher of card games, board games and role playing games based on Games Workshops family of renowned intellectual properties. The company has got an expectation of achieving a 20% growth in profit behind the making of this contract. The company saw its revenues rise 13.5pc to 61.2m for the six months to November 30, as the company swung into a 3.1m pre-tax profit from a 300,000 the year before and is expecting a higher rate in the coming years. On the other hand, Hornby Plc, has announced that it has entered into a contract with Humbrol Limited in Administration for acquiring a few assets. The contract has been made worth 6.5 million pounds. The company is thereby forecasting a significant growth in the near future. They have got plans to launch a series of new products with better performance. The company is expected to have an upward growth after having received the rights for the production for the Olympics in the year 2012. Hornby has also got plans to re-construct their present business, after relocating their distribution, sales and marketing operations centre to its own site in kent. They have also got plans to re-locate their manufacturing and assembling processes to third parties which will help the company to focus on the other aspect of sales whereby they could shoot up their sales level. The success of all companies is in identifying the most appropriate market, fixing their target, identifying the market trend and developing products which could satisfy the present customer wants. Games Workshop and Hornby has the ability to provide a wide selection of product items and have scale advantages in purchasing, producing, distributing,marketing and selling of products. Both the games and hornby are expecting a bright and successful future laid before them. CONCLUSION