Ratio Analysis for Creditworthiness of Games Workshop Plc

ACCOUNTING AND
FINANCIAL
MANAGEMENT
STUDENT ID:
[Pick the date]

PART A
Ratio analysis is a useful tool which can enable a better understanding of the financial
statements particularly with regards to the underlying concern that a particular user may have
about the company. It is difficult to interpret absolute numbers in isolation especially when
some items may show favourable movement while the others unfavourable. As a result, ratio
analysis emerges as a useful tool which can be used to analyse the financial performance not
only for the period for which financial statements are provided but can also uncover the
underlying trend. There are various ratios possible but typically only those ratios are included
which form the focus of the underlying user. The common focus of ratio analysis is
profitability, liquidity, solvency, efficiency along with investment (Parrino and Kidwell,
2014).
In the given case, the concern for my friend is the creditworthiness of Games Workshop Plc.
The set of relevant ratios for my friend would be solvency ratios which essentially highlight
the ability of the company to meet the debt repayment and interest payment obligations. The
solvency ratios are commonly used by lenders so as to ascertain the credit risk associated
with the underlying entity (Damodaran, 2015). Based on this risk assessment, lenders tend to
take the decision whether credit facility should be extended to the borrower or not and also
ascertain the risk associated. Further, these ratios are also useful for the existing lenders that
tend to ascertain company’s ability to meet existing debt obligations. In case these ratios tend
to deteriorate significantly, then the existing lenders can demand a higher collateral or
repayment of debt within a short period (Arnold, 2015).
One of the key ratios to measure creditworthiness is the debt equity ratio. This typically tends
to highlight the extent of debt when compared with the equity. A high value of this ratio in
comparison to the industry average would imply that the balance sheet of the company is
over leveraged and indicates higher risk of credit default. Additionally, the trend of this ratio
would also be pivotal as it would highlight the approach of the management with regards to
leverage. If this ratio is on the increase and also significantly above industry average, then it
could have significant adverse impact on the creditworthiness of the entity. On the other
hand, a trend where debt as a percentage of equity is on the decline would imply that the
management is taking appropriate measures to reduce the leveraging of the balance sheet and
reduce credit risk (Lasher, 2017).

Similarly another useful ratio is interest coverage ratio. Typically, the borrower would need
to make interest payments and the same ought to be funded from operating profits. This ratio
highlights the operating profits as a multiple of interest expense which highlights the extent
of comfort available to the lender in relation to the borrower meeting the interest payments in
a timely manner. Also, other ratios such as debt ratio can also be computed which enable
estimation of the balance sheet strength which is key consideration with regards to
creditworthiness. The solvency ratios aim to address two primary concerns of lenders. The
first concern relates to the extent of debt currently present on the books and the second
concern is whether the borrower makes enough profits to comfortably service the interest
payments and debt repayments (Watson and Head, 2015).
It is imperative that solvency ratios for Game Workshop Plc should be computed not only for
the current period but also for recent past periods. This is important for trend analysis with
regards to the creditworthiness of the company. Also, it needs to be noted that ratio analysis
essentially focuses on past performance of the company and hence along with ratio analysis,
focus should also be given on the likely future performance of Game Workshop Plc (Petty et.
al., 2016).
PART B
(i) Return on sales – It highlights the extent of profitability from sales and provides an
estimate of the efficiency of business operations.
Asset utilisation ratio- This highlights the efficiency of usage of assets for generating
sales.
Return on capital employed – This indicates the returns earned in terms of profits on the
capital employed by the shareholders.
Current ratio – This provides indication of the ability of the company to meet the current
liabilities using current assets.
Gearing – This highlights the extent of debt in the capital structure of the firm.
Payables days – This indicates the credit period given by suppliers to make the payment.
Receivables days – This indicates the time required to collect cash from credit sales.
Gross profit margin – This highlights the profitability of business operations which is
crucial for debt repayment and interest payment.