Financial Analysis of Sports Direct 2013 Financial Year end Project Due For March 16TH

These are the finding and  highlights of my financial Analysis assignment due for 16th March 2014 on the Use of ratio analysis on the Performance of a FTSE 100 company. For this assignment I had to work out the relevant ratios from Sports directs 2013 annual report. Then using my findings I  had to make a decision whether or not to purchase a 10% stake in the company.   This Report is a brief review of the Annual Report from Sports Direct PLC for the Financial year end 2013. This Report will identify the company’s future focus and goals; it will also identify financial ratios of Profitability, Solvency, Activity, Capital Structure and Stock Market Measures. Company Introduction: Sports Direct PLC is the UK’s leading sports retailer by revenue and operating profit. They have an outstanding collection of world famous brands in the ranges of sport, fashion and lifestyle. Their core product is the sportswear and clothing. The company manages a broad range of brands across four categories-UK retail, international retail, Premium lifestyle and brands. It manages its own brands such as Dunlop, Everlast and Donnay and has third-party brands including Adidas, Nike, Reebok and Puma.  Goals of the Company: To become the consumer’s champion They aim to provide customers with an enjoyable experience both in-store and online and ensure all our products are safe and fit for purpose. They are committed to responsible business practices in our own business and within our supply chain. Established corporate responsibility framework focuses on five key areas: employees, health and safety, the environment, our customers, and the community, ensuring the long-term success of the group Considering the obligations to shareholders and other stakeholders Considering the effect the group’s activities have on the environment and community in which it operates Maintaining a high business reputation with suppliers, customers and the wider community Key financial information: Sports direct has spectacular growth in revenue and profitability over the last five years. The online area is of significant growth which grew by 52% in 2013 and is 15% of revenue. Sports direct has an underlying free cash generation of £245.6m.The group’s expansion policy is funded by strong cash flow and a no dividend policy. Mike Ashley the company’s founder holds and unduly large percentage of the group’s shareholding which amounts to 64%. The groups share price has risen by 90% in the last year. In 2013 Sports Direct grew despite that 2013 was not a tournament year in many major sports. Sports Direct revenue increased growth year on year in the company’s top and bottom line. There was a 40 % increase in pre-tax profits to £207.2million for the year. Underlying earnings jumped 22.1 per cent to £287.9million.  In the case of sports direct the key issues are: issues regarding Mike Ashley’s large shareholding, Mike Ashley’s influence on management and performance and the dividend policy, acquisition policy and their vulnerability to take over. Ratio analysis needs to be used in the context of clarifying and understanding these issues.     Profitability Ratios Summary: The Gross Margin: for 2013 stands at 40.09 % compared to 2012 which had  40.5%,The strong performance of online sales which grew by 52% since 2012 and amounts to a total of 15% of total sales would have helped to boost the gross margin.   The Operating Profit and the Profit before Interest and tax: for 2013 shows a positive trend of a 1.1% rise in operating profit before taxation on the previous year. The PBIT shows the profitability of the business before incurring financial costs.The Profit before Tax for Sports Direct plc shows a better performance in 2013 of 9.48% in comparison to the 8.45% in 2012. The profit after tax: for 2013 was at 6.94% in comparison to 5.75 % for 2012. This is a satisfactory profit percentage. The Return on Capital Employed: In 2013 the ROCE had an increase to 21.82% in comparison to 2012 where the ROCE ratio was 19.74%. This is a very positive result for the shareholders and investors. The Return on Equity:In 2013 the ratio was 23.52% which was a increase from 2012 the ratio was 22.38%.This is a very healthy figure, the company’s activities like  increasing their presence in emerging markets increased the costs associated to the company for 2013 but the rise in profit after tax helped to offset any of the potential damage to the ROE figure.  Capital Turnover: the ratio was 2.24 in 2013 compared to 2.28 in 2012. There is a decrease in the ratio turnover is negative. While this figure will be of some concern, the company’s strategy to increase investing in emerging markets and further online retail would have affected the figure. The ratio performance for Sports direct in 2013 is seen as adequate.  The outlook for Sports Direct is extremely positive. The company is aggressive in holding market share in existing markets and investing through partnerships and acquisitions in emerging markets and has an is increasing the its online business with massive growth rates which shows that it is diversifying its business and reacting to the different factors that could affect the business. Sports Directs net sales grew from 2013 to 2013 by 19%.The strategy taken by the company to increase profitability and the return on investment for its shareholders. Considering there is a £207.2 million increase on profit before tax from 2013 compared to 2012 also reinforces the company’s activities.   Solvency Ratios Summary: The Current ratio for Sports Direct shows that in 2013 the ratio was at 1.64 in comparison to the 2012 ratio of 1.43.There is an increase in Current liabilities from £337,711,000 in 2012 to £432,289,000 in 2013 impacted on the current ratio though the increase in current assets help to increase the ratio towards the rule of thumb which is 2:1. (2012 1.43:1). This ratio is acceptable it is an increase from the previous year. The Acid test Ratio or Quick Ratio:There is an increase of inventories from 2012 to 2013 by the difference of £129,892,000 or 41%. This increase in stock seems quite dramatic even with the huge growth of the online retail side of the business. Sports direct would need to be aware of the dangers of having so much stock and would need to investigate this area further. The ratio for 2013 is (0.61:1) in comparison to 2012 where this ratio (0.5:1). Sports directs quick ratio has Increased from 2012 to 2013.  Efficiency Ratios Summary:  The Debtor Days from 2012 to 2013 is down by slightly by 0.03% this would have little effect on the business. Although 30 days is seen to be the industry average the fact that Sports Direct receives payment after 8 days is a huge advantage even for cash business, the current rate sees a payment receivable ratio of 8.42 days. Considering the industry and market Sports Direct trades in, these credit terms are probably acceptable (if any thing put pressure on the buyer).  The Creditor Days: from 2012 to 2013 has decreased by 7% by 4 days, suggesting that suppliers have decreased the credit terms with Sports Direct. Although this is a decrease in credit terms the fact that sports direct has such strong credit terms allows them a free source of finance as there is a difference of payment between debtors and creditors of 40 days.  Stock Days:, the stock days or inventory sees an increase from 105 days in 2012 to 126 days in 2013 this is an indicator of the recent rate of usage. Could this indicate a lag in demand? Or is it just to the predicted growth of the business through online sales? The Operating Cycle days: has increased from 2012 to 2013, these measurement highlights the time from receiving payment from debtors and spending capital on production. The Percentage ratio of the operating cycle in 2013 has increased slightly to 14.98% compared to the percentage rate of 11.19% in 2012.  The Asset Turnover: measures the performance of the company in generating sales revenue from the assets under its control. Sports Directs measurement in 2013 is 1.55, in 2012 the figure was 1.62. While there is still a decrease in the figure since last year this figure shows that the assets are being utilised effectively within the company. There has been an increase in net sales but there is an increase in total assets.  Capital Structure Summary: The Debt Ratio: has dropped to 33.93% in 2013; Gearing has implications on the long term stability of the company. Sports Direct has decreased its debt ratio by 7.43%. The Debt / Equity Ratio: in 2013 stand at as a percentage 51.44% compared to 2012 of 70.48%. Market conditions and Management decisions will impact on this ratio.Sports Directs gross profit, operating profit and profit before tax for 2013 are all higher than the quoted 2012 figures. The Interest Cover: for 2013 stands at 18.30 times in comparison to the 2012 figure of 18.72 times. This shows that Sports Direct can repay its loans 18 times over. Stock Market Measures Summary: The average shares on page 72 of the report show that the average shares for 2013 is 568,972 thousand and in 568,972 thousand 2012. As Sports Direct has not provided a dividend for the last few years many of these ratios are pointless. The shares have performed remarkably well in the last two years and the price is growing steadily. The Earnings per Share: for Sports direct is 26.64 p and the Diluted Earnings per Share of 24.42p. The Dividend per Share: for 2013 is 0 as the board has determined not to recommend a dividend this year. This is follows the same pattern as 2012. From a shareholders perspective it is concerning not to have received dividends in the last two years. The shareholders can make returns of the possible price fluctuations of the shares in the stock market. The Dividend Cover: this measures the number of times the profit attributable to equity shareholders covers the dividends payable. The 2012 and 2013 figure shows 0 times for Sports Direct. The Dividend Yield percentage: for 2013 is 0% compared to 2012 which shows a yield of 0%.. The Price Earnings Ratio for 2013: is 17.7 which is an increase on the ratio 16.17 of 2012.  Conclusion: After undertaking this brief analysis of Sports Directs 2013 Annual report, it is evident to see that the company has finished the financial year in a very strong position. The use of ratio analysis helped to highlight certain aspects on how the business as a whole performed. It helps potential buyers or investors get a clearer picture of the businesses performance and the inner workings of the businesses revenue. From my analysis there is strong cash flow generation of 245.6m in 2013. Their diversified brand portfolio spreads risk. The group’s ability to grow their EBITDA by over 50% while with out the same significant rise in revenue is to be commended. Sports Direct have started to implement changes to drive further top line growth and deliver sustained operating margin improvement.  Sports Directs operating margin has improved from 2012 and 2013, this shows further efficiency in delivering the product. The return on invested capital has improved on the same period plus the company holds a free cash flow of £141.6m. If a company was to buy a 10% stake in Sports Direct given as the market capitalisation of the company is £5,004.32m according to the London stock exchange (London stock exchange data 2014) it would cost a business £50m for a 10% stake in the business. Personally I feel this quite high given the fact we would be subject to management control of Mike Ashley. There is certain issues that I feel would need to be investigated further: why would a company invest now when the share price is so high and there is no dividend? Do we wish to have a seat on the board for our 10% stake? How would Sports direct view our company’s investment and finally what will be the reaction of the stock market to our investment.  After the Submission of the assignment Mike Ashley subsequently sold 7% of his stake in Sports Direct which was worth £200m at the time. The sale appeared to dent investor confidence in Sports Direct as its share price fell 82.5p to 811p after the announcement the week previously the shares were as high as 900p.