Financial Analysis of Playtech Plc

This assignment provides a thorough examination of Playtech Plc's past years' performance, highlighting its well-adopted progressive dividend policy. The company's earnings per share (EPS) has increased from €23.9 cents to €36 cents per share, reflecting its effective financial management. However, the dividends paid to shareholders have decreased, with a payout maximized at €45,734 in 2016 and reduced to €10,466 in 2017. The analysis also discusses the company's investment strategy, which is appropriate and guides investors to anticipate risks for higher returns.

Accounting and Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Background of Playtech Plc...............................................................................................1
2. Capital structure and dividend Policy.................................................................................4
3. Reviewing investment appraisal tools for business............................................................6
4. Discussing effectiveness of corporate governance system of Playtech Plc.......................9
5. CONCLUSION..........................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting and finance plays major role in every industry. The present report is
providing critical analysis of Playtech Plc which comprises in Software and computer services
industry. It would be articulating key corporate objectives along with type of issues which are
faced through business entity and relevant decisions. In the same series, it is depicting capital
structure and dividend policy of this organization and its major impact on its performance over
previous 3 years. This report is also stating investment appraisal tools which could be applicable
via managers for purpose of investment decisions and to ensure about accomplishments of
corporate objectives of organization. This report would be discussing about analysis of corporate
governance system along with major policies. In this context, it would be concluding by
providing analysis of each investment strategy and policy.
1. Background of Playtech Plc
Playtech Plc is one of the largest online gaming software company traded on London
Stock Exchange Market. It offers value added and cutting edge solutions to leading operators of
industry. They are committed for providing best gaming services and products across whole
platforms. Their main objective is to get rid of technological barrier and to forefront innovation.
Along with comprehensive set of platforms, content and products there leading industry
technology had been leveraged for appropriate growth and positioning in unique aspect with
competitive environment and rapid change.
Corporate objective of Playtech Plc is as follows-
 To support organic growth in innovative business world
 To cross-sell products and services
 To improve quality of earnings
 To increase product, service and capability of distribution
They had framed various strategies for attaining success which could be stated as
providing support to organic growth. Playtech Plc had gained capability for partnering with their
licenses for providing innovative and successful online business in world. This organisation had
attained growth of organic revenue of 13% in year 2016 along with underlying global market.
This industry leads in integrated management and business intelligence system as it allows
licenses for enhancing customer service, journey and for cross selling ability. The offering of
Playtech Plc's value is market leading and reflecting on momentum for attracting innovative
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licenses each year. It consists of track record of each year with addition of 5 to 10 new licenses
which is impressive for organisation. The main reason of this addition is of offering Omni
channel, technology and software's quality.
Its main philosophy is for offering product vertical in every distribution channel. The
reason of investing is to expand its major offering for giving support to its licenses with
innovative technologies and avenue to products and markets such as Playtech Plc Live, casual
gaming and virtual racing. It also improves earning's quality with strategic emphasis for
continuation of growth of its regulated revenue. It is increasing on regular aspect from last years
and with proportion of regulated revenue of 2016, rose up as 42%. In the same series, it has
presence of outstanding acquisition for track record or to invest in innovative technology and
product and exciting content. Usually, organisations are acquired on basis of earn out as it
enables company for leveraging in its existing business and base for creating strong synergy. It is
laying special emphasis on similar bolt and large acquisition.
Playtech Plc had made numerous value creating, successful acquisition and has presence
of establishing process with context of experience staff and place for conducting due diligence
prior to completion of transaction. In the same series, there is integration team along with work
place to integrate every possible acquisition.
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Illustration 1: Strategies for quality and
innovation
(Source: Playtech Plc Strategy and Vision,
2017)
The risk management process is strengthened and controlled by various steps in which
communication is reinforced along with training and awareness among staff. The compliance are
integrated into process of decision making, core functions along with merger and acquisition.
The process of due diligence had been enhanced and third party controlled as well. In the yaer
2017, compliance of risk assessment procedure is updated for licenses. Playtech Plc had adopted
progressive dividend policy for investor perspective. It is derived as major pillar of this model
along with capability for transforming its performance through operations in context of
generating strong cash with allowance of 10% raise in whole year of dividend per share.
The corporate governance system of Playtech Plc is quite good and has imparted
transparency in the best possible manner. Furthermore, it is able to provide better understanding
of financial statements and carried out various policies related to the rules and regulations
imparted by IFRS, FRC and Companies Act 2006 governing standards to be followed so as to
provide transparency of accounting transactions quite effectively. Furthermore, organisation has
taken into consideration listing rules as per the law and timely public announcements are made to
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it. On the other hand, Playtech Plc has duly formed UK audit committee governed to assess
whether financial statements presents true and fair view or not.
Moreover, company has formed risk management committee liable for carrying out
whether corporate objectives are met in order to assess riskiness of projects. This has been
provided with better prospectus for company as it is able to communicate risk to shareholders as
well. In addition to this, firm communicates with investors so that they may analyse financial
health of organisation and then make decisions whether to invest or not.
2. Capital structure and dividend Policy
Earnings before Interest and tax: It is considered as very important parameter for
measuring profit of organization which consist of expenses and income but it excludes interest
and income tax expense. In year 2015 it was 162796 which got raise 200028 in year 2016 which
indicates good position of Playtech Plc. Due to high expenses as compared to revenue its EBIT
got decreased so company should keep proper track on its expenses and must be capable to
generate huge revenues and EBIT as well.
Net Profit: It is represented as amount of money which is remained after deduction of
expenses from its income. Playtech Plc is generating net profit on incremental basis from year
2015 to 2017 due to appropriate control of its business operations.
Interest paid: It is referred as non operating expenses which is reflected in statement of
profit and loss. Generally, it specifies interest on payable on any borrowings such as loans,
bonds, line of credit and convertible debt. It is increasing on regular basis or year to year.
Year 1 (2017) in
thousands
Year 2 (2016) in
thousands
Year 3 (2015) in
thousands
Earning before Interest
and tax
188126 200028 162796
Net profit 248140 193030 135810
Equity 1344273 1078005 1253387
Debt 276638 466230 159806
Interest Paid 11719 11287 10873
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Dividends Paid 113200 102800 91000
Capital structure: The capital structure reflects about method of financing the
organization along with its overall growth and operation with application of various sources of
funds. Generally, this structure is presented through debt equity ratio. In this organization, its
ratio was 0.13 in 2015 which states level of debt is lower than compared to equity which is not
good for business entity. In year 2016, it had attained optimum level of debt with 0.43 or 43% of
debt and remaining as equity. Due to increment of equity, its debt had been decreased so it gave
0.21 as debt equity ratio. So, Playtech Plc must keep appropriate track on balance of debt and
equity for attaining growth. The amount of debt and equity had been extracted from Annual
report of Playtech Plc of year 2015, 2016 and 2017.
It can be analysed that organisation is under-capitalised as it is not utilising much of debt
in comparison to equity and as such, debt is low and equity is high. In relation to this, it is
identified that firm should have optimum mix of debt and equity so that advantage can be taken
of both the financing options with much ease. On the other hand, more usage of equity means
that there will be increment in paying off dividends to shareholders. Demand of investors will be
increased. Hence, to overcome this, it is required that balance of equity and debt should be used,
thus, minimising risk. Moreover, organisation will have good capital structure and operational
requirements will be met in accordance to the finance options.
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Dividend Policy: Playtech Plc has adopted progressive dividend policy which signify
that payout ratio is not fixed. It is based on profit earned by organization throughout year.
This policy had allowed board for purpose of reflecting confidence for growth and to
generate cash in business without specifying fixed percentage (Michaely and Qian, 2017). It is
directly impacting outcome like foreign exchange from year 2016 to 2017. The above graph is
depicting dividend payout ratio of three consecutive year 2015, 2016 and 2017 as 0.60, 1.27 and
0.42 respectively. It directly reflects position of earning which was higher bin 2017. The main
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objective of Playtech Plc is dividend growth along with current level of business performance on
appropriate basis. It would be continuing to pay its dividend split of approx 1/3rd as of interim
and 2/3rd of final dividend.
3. Reviewing investment appraisal tools for business
NPV (Net Present Value)
NPV is an investment appraisal technique used to analyse whether investment should be
made in a project or not by taking into consideration several factors. It is the difference between
cash inflows and outflows which are discounted to arrive at a conclusion. Playtech Plc could
easily make decisions whether to invest or not in project. In relation to this, for acceptance,
inflows must exceed outflows so that returns may be yielded quite effectually. Higher the NPV,
better for Playtech Plc to take decisions for investing in it.
Advantages-
 It considers time value of money concept while assessing project's effectiveness.
 Calculating cash flows are subjective in comparison to profits. Moreover, it is much
useful when selecting mutually exclusive project (Gotze, Northcott and Schuster, 2016). It takes into account total benefits which will be received over the period.
Disadvantages-
 The computation of NPV is complex rather than ARR method.
 It is difficult to calculate cost of capital which is used to discount cash flows.
Furthermore, more emphasis is made on net present value of project and initial
investment is ignored.
 NPV is absolute measure and does not take into account on which basis, less NPV should
be preferred over more. In other words, reason for rejection of project is not clarified.
IRR (Internal Rate of Return)
IRR is another useful appraisal technique which can be used by Playtech Plc to make
decisions regarding project. IRR relies on same formula of NPV because it is the rate at which
NPV would be zero. In simple words, project's cost and future cash inflows are equalled. In
addition to this, IRR should be higher which provides clarity to organisation that investment
should be made quite comfortably and adequate returns can be generated (Harris, 2017).
Advantages-
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 IRR is useful as it takes into consideration time value of money in ascertaining
effectiveness of project in a better way. It is suitable technique as total amount of cash inflows and outflows are taken.
Furthermore, calculating and interpreting results of IRR is pretty much easy.
Disadvantages-
 IRR considers multiple rates which leads to confusion for assessing suitability of project
for investment.
 The discounting rate taken does not consider varying interest rates that might arise in the
future.
Payback period
Playtech Plc can take payback period so as to ascertain when it will garner returns in
accordance to time period (Li and Trutnevyte, 2017). This method recognises when initial
amount invested will be recovered covering initial cost of project. Hence, length of time is taken
into consideration and when will company recover investment cost. Since, it is based on time,
less the payback period, better for Playtech Plc to make decisions to invest in new project.
Advantages-
 It is easy to make analysis of project on the basis of payback period and firm can take
decisions whether investment should be made or not seeking the time taken by project. Payback period is emphasised when making investment in capital rationing project where
funds are less and thus, the shortest payback period is considered.
Disadvantages-
 It is unsuitable as acceptance and reject criteria is based on shortest period but no reason
is provided in it leading to selection of project.
 Payback period is based more on liquidity than on profitability as it ignores cash
generation beyond period computed.
ARR (Accounting Rate of Return)
ARR is useful for Playtech Plc in identifying return on investment and used for
measuring maximisation in profit expected from investment outlined as percentage of capital
(Locatelli, Invernizzi and Mancini, 2016). Higher the ARR, it is beneficial for Playtech Plc to
invest in it so as to yield adequate returns. The data is easier to gather as it is readily available in
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financial reports. Hence, overall effectiveness of investment can be effectively analysed by
deploying ARR technique.
Advantages-
 It is suitable for company in making decisions as all years involved in project is
considered. ARR is also advantageous as ranking can be done of various proposals leading to quick
decision.
Disadvantages-
 One of the major limitation of ARR is that it does not take into account concept of time
value of money (Throsby, 2016).
 It is not suitable for making decisions for short-term projects and hence, better decision
cannot be provided.
From the above discussion of investment appraisal tools, Playtech Plc can take into
account so as to take decisions quite easily relying on computations. NPV and payback period
both methods are quite useful in analysing whether investment is viable or not. Moreover, time
required for recovering initial cost can also be assessed with help of payback period. Thus,
capital appraisal techniques are useful for Playtech Plc so as to make proper and viable decisions
for generating adequate returns on invested capital (Burns and Walker, 2015).
4. Discussing effectiveness of corporate governance system of Playtech Plc
Corporate governance is a framework within which Board of Directors of organisation
effectively ensures transparency of company's operations, policies, practices by which
organisation is controlled in a better manner. In relation to this, Playtech Plc is software
company listed on LSE delivering gambling services to customers and attaining good amount of
profits and returns. Playtech Plc is committed to maintain high UK corporate governance code.
Balance has been maintained in order to ensure that shareholders and stakeholders are benefited
with firm's robust growth and procedures in 2017 financial year. Over the year, company has
constantly reviewed various elements and factors leading to better structure of corporate
governance. It included appointment with joint appointment of brokers, operational activities
review, Asian markets, reviewing of UK market, making evaluation of Sun Bingo, tax planning
and many more important materials were being considered.
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Risk management has been comfortably carried out in relation to various type of risks
such as market risk, liquidity risk, credit risk, organisation is subjected to. The strategic
objectives are taken into account so as to willing to take significant risks for accomplishing the
same. Effectiveness of corporate governance system of Playtech Plc is that everything related to
operational activities and internal management related to Board of Directors is transparent
enough which makes possible to review financial and non-financial information to stakeholders
quite easily. Effectiveness of audit committee can be seen in annual report that financial
information have been duly disclosed through taking into consideration UK's Company Act
2006. Furthermore, it can be interpreted that transparency and accuracy has been analysed in
financial statements. Accounting concepts and rules are being taken for compliance with
international accounting bodies such as IFRS (International Financial Reporting Standards), FRC
(Financial Reporting Council) and abiding by their laws.
Disclosure committee of Playtech Plc has been providing all the necessary disclosures. It
ensures accuracy and timeliness of announcements to public and obligations of company under
Listing Rules and Disclosure and Transparency Rules of UK listing authority. Another
effectiveness of system can be assessed from Management committee managed by higher
personnels. The committee discusses operational side of business from various group's divisions.
Strategic plans and recommendations are formulated which eases-off while preparing investment
budgets of company. Moreover, it carries out plans and approves it or transfer the same to Board
for its normal review.
Investors relationship is also focused by company. In addition to this, it has maintained
Investor Relations (IR) processes supporting well-mannered programs of communications with
existing shareholders. Executive Directors and team members are involved in meeting with them
ensuring that Group's financial strategies and corporate objectives are effectively communicated
to shareholders. It can be analysed here that transparency relating to objectives is imparted in
clarified manner so that investors may ascertain whether it is worth investing in it or not. Hence,
overall corporate governance system is highly effective which can be analysed from annual
report. The information is perfectly communicated to shareholders, customers, suppliers,
creditors and government. Thus, it is perfectly transparent and accurate to rely upon.
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5. CONCLUSION
Hereby it can be concluded that Playtech Plc has performed well in past years. It is
reflected from financial statements, organisation is able to perform good. In relation to this,
Playtech Plc has adopted progressive dividend policy in 2016 in which Board is allowed for
reflecting confidence in cash generation and prospective growth without being stick to fixed
percentage payout. It is the policy of company to pay one-third part of dividend as interim and
two-third as final dividend at the end of year. EPS (Earnings Per Share) was €23.9 cents per
share and increased to €36 cents per share which means that company is performing quite
effectively. On the other hand, dividends paid to shareholders have gone down as it was 81805 in
2015, maximised to 245734 in 2016 and reduced to 104656 in 2017. This means that
organisation has minimised dividends payout to investors. Apart from this, investment strategy is
appropriate and firm is guiding shareholders to invest in accordance to anticipation of risks taken
by them for attaining higher returns. Thus, it can be said that dividend policy of organisation is
progressive. But it has taken less debt for financing activities than equity and hence, it needs to
take advantage of both financing options for managing risks properly.
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