Introduction
The preparation of financial statements is done by all public companies as a legal requirement. The information contained in the financial statements is used by the different stakeholders of the companies for varied reasons (Harrison, et al. 2011). However, for purposes of decision-making, the information contained in the financial statements is usually insufficient. Thus, financial analysis becomes necessary to provide information that can be relied upon when making crucial decisions. A common form of financial analysis is ratio analysis, which entails the calculation of important ratios and observing their trend over time. This report entails an analysis of several financial ratios of Games Workshop Group for the years 2008 and 2009.
Ratio analysis of Games Workshop Group
Games Workshop Group is a publicly-traded company based in Britain that specializes in the production and retail of games. The company’s analysis of ratios for the years 2008 and 2009 is summarised in appendix 1. The ratios include the gross profit margin, return on equity, operating profit margin, interest cover, asset turnover, current ratio, and balance sheet gearing.
The profitability of an enterprise, as determined by its ability to control the direct production costs, is measured by the gross profit margin (Walker 2011). Companies prefer a high gross profit margin because it leaves more resources to meet other operating costs. A firm’s profitability through the control of both direct costs and operating expenses are measured by the operating profit margin. A high operating profit margin depicts superior performance. The return on equity is a measure of monetary returns per unit of ownership in the company (Needles, Powers and Crosson 2014, p. 1163). Being a profitability ratio, a high ratio is preferred. To understand the number of times the operating profit can be used to pay the interest expenses, the interest coverage ratio is used (Narayanaswamy 2011, p. 555). Superior financial performance is depicted by a higher interest coverage ratio. The current ratio is a measure of the amount of money available to repay each monetary unit of short-term liabilities whose due dates are shorter than a year. A current ratio above 1.0 is an indication of the company’s ability to pay these amounts on a timely basis. A current ratio below 1.0 indicates financial difficulties within the firm. The sales revenue per monetary unit of assets is determined by calculating the asset turnover ratio. A high asset turnover ratio indicates efficient asset utilization. Finally, the balance sheet gearing ratio measures the proportion of a firm’s operations that is financed using borrowed capital (Harrison, et al. 2011). A risky enterprise is identified by a high gearing ratio.
In Games Workshop Group, the return on equity ratio increased from 1.51% in 2008 to 14.3% in 2009. This was an improvement in financial performance as the amount of returns generated for each unit of shareholders’ funds increased during the year. In calculating this ratio, exceptional items have not been incorporated into the net income because it shall give a false impression of the profitability of the enterprise during the year. The reason behind this is that exceptional items are the result of extraordinary events, which do not recur in subsequent financial periods. A false trend of financial performance might thus be observed if the exceptional items are included in the calculation.
The gross profit margin increased during the period from 69.43% to 71.43%. Similarly, there was an increase in the net profit margin from 2.31% to 7.17%. This increase is an indication of efficiency, not only in controlling the direct production costs of the enterprise, but also in the operating expenses of the company. The business review of the company attributes these improvements to various measures that were put into place during the year. These included the return of raw materials to normal price levels, reduction of staffing levels, rent negotiations, and cutting unnecessary capital expenditures.
The asset turnover ratio increased from 1.64 to 1.79; an indication of a slight improvement in the efficiency with which Games Workshop Group utilized their assets. The interest cover ratio also increased by a large margin from 1.33 to 4.99, thus placing the company in no financial strain to pay the interest expenses. The balance sheet gearing ratio reduced to 24% in 2009 from 34% in 2008. This reduction was attributed to an increase in equity during the year as well as a reduction in the amount of debt. The reduction in gearing gives a positive impression to potential investors as well as to the potential lenders (Walker 2011).
Finally, Games Workshop Group’s current ratio improved from 1.4 in 2008 to 1.74 in 2009. Although the ratio of 1.4 in 2008 was still good for the company because it was in a good liquidity position, an increase in the ratio indicates an improvement in the company’s cash flow position.
Based on the ratios of Games Workshop plc for the two financial periods discussed above, it is evident that the company’s financial performance was positive, hence giving a positive return on investment to the stockholders. The performance improved in the year 2009 compared to that of 2008. Profitability levels in the company improved as shown by the increase in ratios such as return on equity ratio and the operating profit margin. This increase in profitability trend is expected to be observed in the future following the controls put in place by the company to reduce operating costs as well as the reduction of input prices. These controls include the reduction of the number of staff as well as the relocation of company shops from malls to cheaper premises.
In addition, the efficiency with which the company utilised its assets increased as shown by the increase in the asset turnover ratio. The expansion plan set out by Games Workshop plc to increase its customer base might increase the future revenues of the company, hence increasing the asset turnover ratio. Another important aspect of the company that improved in 2009 was its gearing level, which reduced. This decrease was as a result of debt repayment, which reduced the amount of outstanding debt. The decrease in the gearing level increased the company’s attractiveness to potential investors. However, the company’s growth strategy might negatively affect this ratio in the future, since expansion might necessitate the use of borrowed funds.
Conclusion
Games Workshop Group’s cash flow statement reported an increase in the net cash flows from operating activities in 2009. This increase could be the result of the large amount of cash used for investing activities during the previous year where more assets were acquired for purposes of generating revenue. The large cash outflows from financing activities in 2009 could have resulted from loan repayments during the year.
References
Harrison, T, Horngren, T, Thomas, W & Suwardy, T 2011, Financial accounting : international financial reporting standards, Pearson Education, Jurong.
Narayanaswamy, R 2011, Financial accounting : A Managerial perspective, PHI Learning Private Limited, Delhi.
Needles, B, Powers, M & Crosson, S 2014, Principles of Accounting, South-western Cengage Learning, Mason.
Walker, J 2011, Accounting in a nutshell : accounting for the non-specialist, CIMA, London.