Fairfax Media Limited: Company Analysis

Executive Summary

Fairfax Media Limited is one of the largest newspaper and media companies in Australia and New Zealand with a strong presence in the United States of America. The success of the company has been analyzed in this report through three key areas of business operations. The three areas have been analyzed carefully using the multivariate approach of analysis where more than one variable of a company or scenario is analyzed to reach a valid conclusion. The three variables studied here are a market success, financial success, and accomplishment of corporate objectives. The three areas of business evaluated for a thorough analysis include SWOT analysis, financial analysis, and stakeholder analysis. The three areas have been analyzed separately and the individual and combined results indicate that the company is quite successful in all three areas but due to the recent global financial crisis and a significant decrease in advertisement revenue the company has reported significant losses in 2009. The various strengths, weaknesses, opportunities, and threats of the company were analyzed in the first section of the report and this analysis indicates that the company is quite strong in areas of operation and generating profits while it has quite a few opportunities to further expand business operations and gain from the expansion. The second area analyzed is the financial success of the company where the profitability, liquidity, and leverage of the company have been evaluated using financial ratios and a comparison to peers in the industry has been presented to gain insight into the financial success of the company. The last section analyzed for Fairfax Media Limited is the stakeholder section where the key stakeholders of the company are identified and their needs and views evaluated to observe the success of the firm. All of the three areas analyzed indicate that the company is quite successful in the areas of the market, finance, and meeting corporate objectives.

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Introduction

The contents of this report make up the analysis and evaluation of Fairfax Media Limited to determine the success of the company in various areas. The report uses a multivariate approach for analyzing the company as a single measure or variable of the company would be insufficient to draw any logical and valid conclusions about the success of the company. The multivariate approach is useful in evaluating a firm’s performance from various perspectives (Diakoulaki, Mavrotas, and Papayannakis). This multivariate approach would be used to evaluate the performance of Fairfax Media Limited by collecting data from various sources such as the company website, annual reports, and other corporate websites. The collected data would provide comprehensive insight into the company’s comparative performance concerning management functions, financial position, and stakeholders. The report has been prepared with extreme care based on the data collected from reliable sources but there are limitations to these sources as there may be some inaccuracies in the data contained therein.

Situation Analysis

Fairfax Media Limited is one of the largest media companies in Australia and the scope of business for the company in Australia, New Zealand, and America ranges from newspapers, periodicals, and magazines to radio and television including digital media. The company was established and owned by the Fairfax family under the banner of John Fairfax holdings but the company name was changed in 2007 from John Fairfax Holdings to Fairfax Media. The objective and strategy of the company are divided into three areas. The first part of the strategy includes defending and growing the newspaper line, the second area of significance in terms of strategy is the earnings from the internet and the third priority is given to enhance the digital media business of the company.

SWOT Analysis

The SWOT analysis is a technique to evaluate and understand the strong points, prospects, disadvantages, and risks of an organization. The SWOT analysis for Fairfax Media Limited is given below.

Strengths

  • Fairfax is the largest media company in Australia and New Zealand and this alone is one of the greatest strengths of the company as it provides a competitive edge to the company. This large size enables the company to make decisions irrespective of smaller competition and focus on other segments and areas of business.
  • The personnel and human resource of the company are adequately trained and the company is quite experienced in the areas of media and communication as it has been in the trade for a long time and has grown to become one of the largest companies in Australia.
  • The large size of the organization is significantly helpful in increasing the overall image of the company for shareholders and prospective employees. The overall image of the company can positively impact the business of the company and attract customers for a variety of the services it offers through newspapers, radio, and digital media.
  • The ability of the company to generate higher profits during the low season is also one of the strengths of the company. The diversified business areas of the company enable it to take advantage of one segment if another segment of the business is losing.
  • The brand name is quite established in the minds of people at large in Australia and New Zealand and magazines and newspapers of the company are given much preference over other newspapers and magazines.
  • The company’s high volume of business in newspapers, magazines, radio, and digital media attracts advertising from individuals and corporations which is one of the main sources of revenue for the company. The established image and name of the company helps in motivating more individuals and companies to advertise in the company’s several products.

Weaknesses

  • The size of the organization makes it quite difficult to manage the overall operations and implement policy decisions throughout each department and segment of business individually with a major problem of management and supervision where some departments may be overstaffed and some understaffed.
  • The revenue for larger organizations is quite high but this also means that the cost of doing business is also high. The higher cost would mean a lower average net profit per product or unit.
  • As the company has an established image in the market it would be quite difficult for various small companies to advertise with Fairfax due to the high cost of advertisements and the company loses a great deal of revenue in this regard.
  • One important aspect to consider is the loss of one segment or division of a company which is quite substantial for the company image but produces huge losses for the company. Such an example is Fairfax’s metropolitan newspaper business which has caused the company major losses.

Opportunities

  • The biggest opportunity Fairfax Media can take advantage of is to spread business operations in newer locations and explore business options in new countries of Asia and Europe. The company has the advantage of previous experience in media and communications which would be quite helpful in launching its products in markets of Europe and Asia.
  • The company has already merged with and acquired various other companies to increase value, diversify and broaden the scope of business. The company can further merge with or acquire companies locally and internationally to diversify and expand to other areas of the globe and increase its international presence.
  • Fairfax also has an opportunity to launch new products and move into newer market segments to increase profitability and growth. This diversification can be in the areas of media and communication or in the wide range of internet services available at the disposal of the company or in any other areas that may seem feasible.
  • The company may take advantage of regions with lower taxes and loose regulations for operating a business. This would not only increase the company’s profits but it can take advantage of the tax-saving derived from the lower tax rates in that country or region and in some areas it can take advantage of the foreign currency exchange parity.
  • The company can also take advantage in areas where there is very low or no competition and can enter the market by either as a new entrant or by acquiring the smaller firms in that area to create monopolistic conditions and take advantage of higher profits in these conditions.

Threats

  • The biggest threat the company faces is that of declining sales and advertisement revenues shortly due to worsening economic conditions and companies going bankrupt. The main sources of revenue for the company are advertisements and if the quantity and frequency of advertisements decrease the revenues of the company would be adversely affected.
  • The company may have to face problems if any policies or regulations are changed by regulatory bodies of the respective countries the company operates in or when companies and individuals have alternative options to the company’s various products and services.
  • New competitors may enter the market and merge with or acquire other competitors which would cause problems to Fairfax media as the revenues of the company would be affected adversely if it goes unchecked and the company would have to bear losses in the long run.
  • The last but not the least threat the company faces is that the tax rates may be increased in any one of the countries the company operates in. Another threat the company faces is that the competitors may significantly lower their prices and the company would also be forced to lower its prices.

The SWOT analysis of Fairfax Media reflects the various advantages, disadvantages, prospects, and risks the company may face in the future. The company can formulate strategies based on this analysis and take advantage of its strengths and opportunities to achieve its objectives and increase profitability. The SWOT analysis and the brief description of the company indicate that the company has been quite successful in accomplishing its objectives in the past and adding value to the firm in the form of steady profits and taking advantage of the several strengths and opportunities.

Financial Analysis

The financial stability or success of a company can be evaluated by analyzing three major areas of a company through financial ratios. The three areas of profitability, liquidity, and comparison with other companies in the sector are based on financial ratios. The financial ratios of Fairfax Media have been calculated for five years of operations by data collected from the annual report of the company. The relevant financial ratios used in the analysis of this report are included in Table 1 which includes ratios related to profitability, liquidity, degree of operating leverage, and degree of financial leverage. The analysis of profitability, liquidity, and leverage, and comparison to other sectors in the company is described separately in the section below.

Ratios 2009 2008 2007 2006 2005
Net Profit Margin -15% 13% 12% 12% 14%
ROA -5% 5% 3% 6% 7%
ROE -8% 8% 5% 11% 12%
Current Ratio 0.79 1.30 1.72 0.43 0.95
Quick Ratio 0.73 1.21 1.61 0.39 0.89
DFL 1.59 (0.04) (0.36) 2.32 (0.35)

Table 1

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Profitability

The profitability of Fairfax Media Limited can be evaluated from three basic financial ratios over the past five years of operations. These ratios include the net profit margin, return on assets and return on equity. The net profit margin for Fairfax Media Limited analyzed over the five years from 2005 to 2009 indicates a particular trend. The net profit margin of the company has been quite consistent during the years 2005 to 2008 which range between 12 percent and 14 percent. The net profit margin of the company was 14 percent in 2005 and rose to 12 percent in the year 2006 and remained at the same level through the next year 2007 but went up one percentage point to 13 percent in 2008. The net profit margin of the company experiences a steep downturn in the last year of operations where it has dropped to a negative 15 percent which indicates a decline of 28 percent which is quite significant. This steep decline in the net profit margin is due to significant losses to the company in 2009. The company has experienced this net loss due to the significant write-downs of newspapers and global economic crises which started with subprime mortgages in the United States of America but have affected practically every industry across the globe. The Return on Assets – ROA, and Return on Equity – ROE also indicate a stable trend through 2005-2008, and in 2009 both of these ratios fall to negative levels. The ROA witnessed levels of 7 percent in 2005, 6 percent in 2006, and 3 percent in 2007, 5 percent in 2008, and eventually it declined to a level of -5 percent in 2009. The ROE on the other hand was 12 percent in 2005, 11 percent in 2006, 5 percent in 2007, 8 percent in 2009, and -8 percent in 2009. Both of these ratios indicate stability throughout the years of operation under analysis. Initially, both of these ratios indicate a decline in profitability but eventually recover in 2008 to fall again in 2009 to adverse levels. It should be considered here again that the company has witnessed huge losses in the last year due to the global financial crisis and significant write-downs of newspapers (Kelly).

Liquidity and Leverage

The liquidity of the firm can be evaluated through the current and quick ratios included in Table 1 of this report. The current ratio and quick ratio both indicate that the company is in a good position to pay off its short-term obligations. The efficiency of both ratios in 2005 and 2006 was quite low as the current ratio was 0.95 and 0.43 in 2005 and 2006 respectively while 2006 and 2007 witnessed stability in the firm’s liquidity as the current ratio was 1.72 in 2007 and 1.30 in 2009. The liquidity decreased in 2009 as the current ratio is at a level of 0.79. The quick ratio of the company indicates a similar trend as it is quite low in the earlier years but experiences stability in 2007 and 2008 to decline to a lower level in 2009. The quick ratio indicates how the company can meet its short-term obligations without selling off its inventories. The level of inventories in the company is quite low as compared to other current assets therefore the current and quick ratios display similar results.

The leverage of a company indicates the number of assets that are financed by debt and indicates how the capital of a company is structured. The leverage of Fairfax Media Limited is analyzed through the Degree of Financial Leverage – DFL. The analysis of DFL indicates how much the company relies on fixed assets to finance its fixed assets and current assets and the degree to which the company relies on fixed costs and variable costs to finance its assets. The higher a company uses debt to finance its assets and operations the higher will be the risk to debt holders (Investopedia). The higher level of DFL means higher volatility in EPS which explains that the level of DFL is directly linked with EPS. The trend in the DFL from 2005 to 2009 indicates a varying pattern as it was -0.35 in 2005, 2.32 in 2006 -0.36 in 2007, -0.04 in 2008, and 1.59 in 2009. This indicates that the risk of shareholders and creditors increases and decreases throughout the five years as the DFL increases and decreases.

Comparison with Sector

The companies involved in the business of media and newspapers have reported huge losses in the last year which is primarily due to the global financial crisis and a major shift of advertising trends from newspapers to online sources. This is the reason why companies are looking for merger partners to bail out of huge loss conditions and base more of their services online to decrease the number of losses and keep the business intact. The Australian media industry consists of many companies with the largest being Fairfax Media limited and other companies like Consolidated Media Holdings and Seven Network. Both of these companies have suffered tremendously due to the global financial crisis and the shifting of advertisements to online portals and websites. Consolidated Media Holdings reported net profits of 427 million which was 6.08 billion one year ago and is quite low considering previous levels of profit. Another company Seven Network reported a decline in profit of 91 percent. This indicates that companies from the media industry are facing difficulties to increase the level of profits (Mehta). This reflects that Fairfax is not the only firm having difficulty in making profits and avoiding losses like other companies and the comparison suggests that though these companies are giants of their industry they are facing problems due to changing global economies. The current losses of companies do not necessarily indicate a failure of these companies as the companies have experienced a steady growth trend in the past four years of operation and only witnessed losses in the current year and that too is due to the global financial crisis.

The overall financial analysis of Fairfax Media Limited including the profitability, liquidity, and comparison to other companies indicates that the company has been quite stable for the past four years but has witnessed a downturn in revenues and profits due to the global financial crisis and a shift in choice of newspapers as a medium of advertising. The company under analysis is not the only company affected by these conditions and other companies of the industry are also affected which had to lower the revenue structure just to remain stable.

Stakeholder Analysis

The key stakeholders of the company include the shareholders, customers, creditors, or suppliers. The impact of the company’s decisions, management policy, and business operations on these stakeholders and the success of the firm concerning all these stakeholders are explained below.

Shareholders

The most important stakeholders of a company are its shareholders as they are the owners of the company and influence the actions of the management in various ways. The basic objective of a shareholder while investing in a firm is financial benefit either through a capital gain or through dividends. The basic responsibility of the company’s management is to maximize shareholders’ wealth and this can be achieved only by earning higher earnings throughout the year. If the company faces any financial trouble or goes into a loss the shareholders are most highly affected. The two most important ratios for the shareholders included in the financial analysis are the profitability ratios and the degree of financial leverage of the firm. The profitability ratios of the company helps enable investors to realize how much profit they can make when they invest in the company. The trend of the profit margin ratio indicates that the company is earning a profit and distributing it to shareholders. The shareholders of the company would also be quite interested in the DFL as it directly affects the Earnings per Share of the company. This entails that the shareholders would want the company to increase the profit margin and keep the DFL at lower levels to derive the highest benefits for shareholders. The company has been quite consistent in generating profits for the last four years and the DFL has been quite volatile to keep both the shareholders and creditors satisfied. The shareholders would term the company quite successful as it has achieved its corporate structure and reported losses in the last year not due to poor management but due to overall economic crisis.

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Creditors

The second most important stakeholders of the company are its creditors. These are the individuals or companies who have lent money or goods to the organization and have not yet been paid by the company. The more important of these creditors are the people who have lent money to the company as a long-term loan or debt. This long-term loan or debt usually involves an amount of principal and interest. The bondholders or debenture holders usually expect the company to pay interest and principal as it becomes due. The people who have lent money to the company would also have an interest in the firm’s liquidity to ensure that the company can pay off all current and noncurrent liabilities. The most important financial ratios for creditors and bondholders would be the current ratio and quick ratio which throughout the five years indicate a positive and stable position of the company and the creditors would term this as the success of the company.

Customers

The third most important stakeholders of the company are its customers who would want to keep buying products and receiving services from the company. The financial analysis would be of no use in analyzing the relationship of customers with the company but any decisions made by the management regarding the quality of products and services would be beneficial. The customers would deem the company to be successful based on the quality of products and services instead of any financial ratios. It was discussed earlier that one of the strengths of the company is the established brand image in the market and as the customers would have a good perception of the company and its products they would deem it to be successful.

The stakeholder analysis of the key stakeholders indicates that all key stakeholders analyzed interpret and perceive the company as a successful entity based on different assumptions.

Conclusion

The report has been prepared in three sections by performing the SWOT analysis, financial analysis using various ratios, and stakeholder analysis to observe if Fairfax Media Limited is successful or not. The analysis of all the three areas is based on three different scenarios and the multivariate approach to evaluate the company’s performance from various points of view (Diakoulaki, Mavrotas, and Papayannakis). The SWOT analysis of Fairfax Media Limited was performed to evaluate the advantages, disadvantages, prospects, and risks. The financial analysis performed on the three areas of the company demonstrated that the company was quite successful in the areas of profitability, liquidity and leverage, and debt management. The stakeholder analysis of the key stakeholders indicated that shareholders, creditors, and customers regard the company as a successful entity. An overall evaluation of all these individual factors is sufficient to conclude that the company is quite successful and stable.

Works Cited

Diakoulaki, D., G. Mavrotas and L. Papayannakis. “A Multicriteria Approach for Evaluating The Performance of Industrial Firms.” Omega (1992): 467-474.

Fairfax Media Limited. Annual Report. Annual Report. Pyrmont: Fairfax Media Limited, 2009.

Investopedia. Degree of Financial Leverage. 2009.

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Kelly, R. 5th UPDATE: Fairfax Media FY Net Loss A$380.1M On Writedowns. 2009. Web.

Mehta, M. Westfield Loss Consolidated Media Sells Seek. 2009. Web.

Appendix 1

Financial Information

Years 2009 2008 2007 2006 2005
Net Profit (380,050) 386,878 263,510 227,453 263,249
Current Assets 509,602 665,142 824,259 385,568 448,821
Current Liabilities 641,939 512,160 480,547 899,272 472,353
Inventory 40,055 44,801 48,527 35,663 30,195
Quick Assets 469,547 620,341 775,732 349,905 418,626
Total Assets 7,595,207 8,293,101 8,000,542 4,087,194 3,592,783
Shareholders’ Equity 5,011,790 4,965,334 4,960,994 2,136,809 2,168,711
Net Sales 2,599,132 2,900,755 2,111,385 1,907,842 1,873,407
EBIT (172,125) 735,092 455,186 415,892 435,665
EPS (21.60) 22.50 23.00 23.80 26.60
% change in EBIT (1.23) 0.61 0.09 (0.05) 0.22
% change in Sales (0.10) 0.37 0.11 0.02 0.06
% change in EPS (1.96) (0.02) (0.03) (0.11) (0.08)

Source: (Fairfax Media Limited)

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