Business Accounting and Finance for Managers: Analyzing Performance and Investment Appraisal in the UK Gambling Industry

This report analyzes the performance of three major UK gambling companies: Paddy Power Betfair Plc, William Hill Plc, and Ladbrokes Coral Group Plc. It utilizes financial and non-financial ratios to compare their profitability, liquidity, solvency, and operational efficiency. The report also explores the key stages of the capital investment decision-making process and the role of investment appraisal techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), and Discounted Cash Flow (DCF), in evaluating investment opportunities. Through a comprehensive analysis, the report identifies Paddy Power Betfair Plc as the best-performing company and Ladbrokes Coral Group Plc as the least successful. The findings provide valuable insights into the UK gambling industry and the importance of sound financial management and investment appraisal in achieving sustainable growth.

AS 1 - BUSINESS ACCOUNTING AND FINANCE FOR MANAGERS
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Table of Contents
Introduction................................................................................................................................3
Section A – Question 1..............................................................................................................4
(a) Selection and justification of at least 10 financial ratios and calculate 2 non-financial
ratios to analyse the performance and financial position of the three companies......................4
(b) Identification of the best performing company in the industry..........................................11
(c) Identification of the most poorly performing company in the industry..............................12
Section B – Question 2.............................................................................................................13
(a) Identify and explain the key stages in the capital investment decision-making process, and
the role of investment appraisal in this process.......................................................................14
(b) Identify and explain the main methods of investment appraisal used in practice (including
DCF), use numerical examples to help illustrate the key aspects............................................15
Conclusion................................................................................................................................17
Reference list............................................................................................................................18
2

Introduction
Measurement and analysis of performance is important for every industry. There are different
tools that can be used by an industry in order to measure and control its performance. Ratio
analysis is one such tool that helps in measuring the performance of a company or an
industry. This report evaluates the performance of the three big companies in the gambling
industry in UK, which are Paddy Power Betfair Plc, William Hill Plc and Ladbrokes Coral
Group Plc. This industry is one of the key players that contribute a major portion of the
revenue of the UK economy. The report also contains the evaluation of the importance of
investment appraisal in order make decisions such as capital investment. It also discusses
about the investment appraisal techniques that can be used in a company.
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Section A – Question 1
(a) Selection and justification of at least 10 financial ratios and calculate 2 non-financial
ratios to analyse the performance and financial position of the three companies
Ratio analysis is one of the most effectual performance metrics, which can be used by a
business for accurately measuring the performance of a company. This metric not only helps
a company in measuring its own performance but also facilitates it to measure and compare
its performance with other companies in the marketplace (Uechi et al., 2015). The
performance of the three best companies in the gambling industry operating in UK has been
done below using both financial as well as non-financial ratios. The comparison is as follows
–
Comparison of profitability ratios –
Companies WILLIAM HILL LADBROKES CORAL
GROUP
PADDY POWER
BETFAIR
Year 2014 2015 2016 2014 2015 2016 2014 2015 2016
Profit
margin (%)
14.45 11.55 11.20 3.21 - 3.60 - 14.15 18.89 15.67 0.79
ROCE
using Net
income
(%)
12.69 13.72 10.51 7.38 3.79 - 6.80 36.52 54.66 - 0.02
4

2016
2015
2014
2016
2015
2014
2016
2015
2014
WILLIAM HILL PLC LADBROKES CORAL
GROUP PLC PADDY POWER
BETFAIR PUBLIC
LIMITED COMPANY
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
Profit margin (%)
ROCE using Net income (%)
Figure 1: Figure comparing the profit margin and return on capital employed of the three
gambling companies Paddy Power, William Hill and Ladbrokes Coral
(Source: Created by the author)
The compare and contrast of the profit margin and return on capital employed of Paddy
Power, William Hill and Ladbrokes Coral indicates in case of both ROCE and profit margin,
William Hill Plc has the best performance. The second best is the performance of Paddy
Power while the poorest performance is of Ladbrokes Coral Group.
Comparison of operational ratios –
Companies WILLIAM HILL LADBROKES
CORAL GROUP
PADDY POWER
BETFAIR PLC
Year 2014 2015 2016 2014 2015 2016 2014 2015 2016
Interest
coverage
5.76 5.47 4.51 0.59 0.65 0.33 1.34 0.82 0.99
Net assets
turnover
0.81 0.95 0.80 0.59 0.65 0.33 1.34 0.82 0.99
Credit
period
(days)
24 24 29 2.759 -
0.081
- 0.19 978.34 61.70 2.64
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Collection
period
(days)
2 1 5 1.246 1.36 0.622 2.22 3.94 0.33
2016 2015 2014 2016 2015 2014 2016 2015 2014
WILLIAM HILL PLC LADBROKES CORAL
GROUP PLC PADDY POWER
BETFAIR PUBLIC
LIMITED COMPANY
-200
0
200
400
600
800
1,000
Collection period (days)
Credit period (days)
Figure 2: Figure comparing the collection period and credit period of the three gambling
companies Paddy Power, William Hill and Ladbrokes Coral
(Source: Created by the author)
The comparison of the collection period and credit period of the three gambling companies
Paddy Power, William Hill and Ladbrokes Coral done above shows that in case of collection
period, Paddy Power is leading while in case of credit period, William Hill is leading
followed by Paddy Power and Ladbrokes Coral.
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2016 2015 2014 2016 2015 2014 2016 2015 2014
WILLIAM HILL PLC LADBROKES CORAL
GROUP PLC PADDY POWER
BETFAIR PUBLIC
LIMITED COMPANY
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Net assets turnover (x)
Interest cover (x)
Figure 3: Figure comparing the net asset turnover and interest coverage of the three gambling
companies Paddy Power, William Hill and Ladbrokes Coral
(Source: Created by the author)
The above graph shows the comparison of the net asset turnover and interest coverage of the
three gambling companies Paddy Power, William Hill and Ladbrokes Coral Group. As per
interest coverage, William Hill is leading, followed by Ladbrokes Coral and Paddy Power.
On the other hand, even if the interest coverage of Paddy Power is poor, the company shows
the best performance as per net asset turnover while Ladbrokes Coral Group shows the
poorest.
Comparison of liquidity ratios
Compan
y
WILLIAM HILL LADBROKES CORAL
GROUP
PADDY POWER
BETFAIR
Year 201
4
2015 2016 2014 2015 2016 201
4
2015 2016
Current
ratio
0.76 0.52 0.71 0.59 0.65 0.33 1.34 0.82 0.99
Liquidity
ratio
0.76 0.52 0.71 0.59 0.65 0.33 1.34 0.82 0.99
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2016 2015 2014 2016 2015 2014 2016 2015 2014
WILLIAM HILL PLC LADBROKES CORAL
GROUP PLC PADDY POWER BETFAIR
PUBLIC LIMITED
COMPANY
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Current ratio (x)
Liquidity ratio (x)
Figure 4: Figure comparing the current and acid test ratios of the three gambling companies
Paddy Power, William Hill and Ladbrokes Coral
(Source: Created by the author)
The above table and figure shows the comparison of the liquidity ratios of the three gambling
companies Paddy Power, William Hill and Ladbrokes Coral. As per industry standards, the
higher the liquidity ratio, higher is the financial stability of a company. In case of all the three
companies, the current and acid test ratio are going to be equal (Megaravalli and
Sampagnaro, 2017). This is because the companies do not hold any inventory or marketable
securities. As per the comparison of liquidity ratios, Paddy Power Betfair has the highest
financial stability, followed by William Hill and Ladbrokes Coral Group.
Comparison of structure ratios
Company WILLIAM HILL LADBROKES
CORAL GROUP
PADDY POWER
BETFAIR
Year 2014 201
5
2016 201
4
2015 2016 2014 2015 2016
Solvency
ratio
(Asset
48.74 51.8
1
50.17 33.6
4
39.95 42.31 61.08 12.42 86.47
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based)
Sharehold
ers
liquidity
ratio
1.36 2.60 1.52 0.71 1.07 1.45 37.58 0.34 14.27
2016
2015
2014
2016
2015
2014
2016
2015
2014
WILLIAM HILL PLC LADBROKES CORAL
GROUP PLC PADDY POWER
BETFAIR PUBLIC
LIMITED COMPANY
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
Shareholders liquidity ratio (x)
Solvency ratio (Asset based) (%)
Figure 4: Figure comparing the shareholders’ liquidity and asset based solvency of the three
gambling companies Paddy Power, William Hill and Ladbrokes Coral
(Source: Created by the author)
The comparison shareholders’ liquidity and asset based solvency of the three gambling
companies Paddy Power, William Hill and Ladbrokes Coral show that in terms of
shareholders’ liquidity ratio, Paddy Power shows the best performance, followed by William
Hill and Ladbrokes Coral. On the other hand, the comparison of the asset based solvency of
the three companies show the same result. Thus, as per the comparison of structure ratios,
Paddy Power Betfair Plc has the best performance while William Hill Plc has the worst.
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Comparison of non-financial ratios
Companies WILLIAM HILL LADBROKES
CORAL
GROUP
PADDY POWER
BETFAIR
Year 2014 2015 2016 2014 2015 2016 2014 2015 2016
Profit per
employee
(pounds)
15 12 11 3 -3 -8 27 25 2
Average
cost of
employee
(pounds)
19.46 21.36 22.52 20 20 13 41 42 47
2016
2015
2014
2016
2015
2014
2016
2015
2014
WILLIAM HILL PLC LADBROKES CORAL
GROUP PLC PADDY POWER
BETFAIR PUBLIC
LIMITED COMPANY
-10
0
10
20
30
40
50
Profit per employee (th)
Average cost of employee (th)
Figure 5: Figure comparing the profit and average cost of each employee of the three
gambling companies Paddy Power, William Hill and Ladbrokes Coral
(Source: Created by the author)
The comparison of the non-financial ratios of the three companies Paddy Power, William Hill
and Ladbrokes Coral show the in terms of profit per employee of William Hill Plc has the
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best performance while Ladbrokes Coral has the poorest. In case of comparison of the
average cost spent by the companies for each employee, Paddy Power shows the best
performance while Ladbrokes Coral again remains at the lowest position.
Ranking of the companies as per their respective ratios –
Ratios Rank 1 Rank 2 Rank 3
Liquidity ratio Paddy Power William Hill Ladbrokes
Coral
Current ratio Paddy Power William Hill Ladbrokes
Coral
Asset based solvency ratio Paddy Power William Hill Ladbrokes
Coral
Shareholders liquidity Paddy Power William Hill Ladbrokes
Coral
Interest coverage William Hill Ladbrokes Coral Paddy Power
Net asset turnover Paddy Power William Hill Ladbrokes
Coral
Credit period William Hill Paddy Power Ladbrokes
Coral
Collection period Paddy Power William Hill Ladbrokes
Coral
ROCE William Hill Paddy Power Ladbrokes
Coral
Profit margin William Hill Paddy Power Ladbrokes
Coral
Average cost per employee Paddy Power William Hill Ladbrokes
Coral
Profit per employee William Hill Paddy Power Ladbrokes
Coral
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(b) Identification of the best performing company in the industry
As per the analysis and comparison of all the financial as well as non-financial ratios of
Paddy Power, William Hill and Ladbrokes Coral, it can be analyzed that the best performing
company in UK gambling industry is Paddy Power Betfair LC. This is because according to
all the financial and non-financial ratios, Paddy Power Betfair PLC stands at Rank 1. In
addition to ratio analysis, the SWOT analysis of Paddy Power shows that the strengths of the
company are huge (Orbiseurope.bvdinfo.com, 2017). This is because the company has a high
rate of growth, has highly experienced business units, provides good quality of odds and has
a strong presence online. These factors in turn help the company in acquiring the first rank in
UK gambling industry. Hence, as per comparison of ratios and SWOT analysis, Paddy Power
Betfair PLC is the best performing company in UK gambling industry and proves to be a
positive investment opportunity.
(c) Identification of the most poorly performing company in the industry
According to the comparison of the ratios of the three companies, Ladbrokes Coral Group Plc
shows the poorest performing in the UK gambling industry. In addition to the ratio analysis
and ranking, the SWOT analysis of the company shows that the weaknesses of the company
are more than its strengths. This is mainly because the forecasts of the company related to
product demand is poor, the attrition of the company’s rate of workforce is high, the
marketing operations of the company is poor and it does not invest in adaptation of new
technologies within the company (Orbiseurope.bvdinfo.com, 2017). Thus, Ladbrokes Coral
Group Plc can be analyzed to have the poorest performance among the three companies.
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Section B – Question 2
Investment Appraisal
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(a) Identify and explain the key stages in the capital investment decision-making
process, and the role of investment appraisal in this process.
Capital investments can be referred to as the funds that an organization or business invests for
accomplishing its own business objectives (Manigart, 2016). The capital investments in a
company can be made for acquiring fixed assets and capital assets of a company such as
plant, property, machinery, furniture, buildings, equipment, etc. that are anticipated to be
profitable as well as productive for the company. These investments generally include
investment of lump sum amounts and require huge amount of resources to operate these, as
they are quite difficult to operate (Barton and Wiseman, 2014). Due to this reason, the
process of decision-making regarding capital investments is vital for a company or business.
The process of capital investment decision-making comprises of several steps and stages,
which are as follows –
 Planning – The first stage of capital investment decision-making comprises of planning.
A company must be planning on what it wants to invest and what will be the company’s
benefits from these investments. For instance, in case if a company plans to invest in
purchase of a new building for expanding its office premises, the company needs to plan
how much it can invest and how will it be benefitted from this investment.
 Screening – Screening is the second stage of the decision-making process of capital
investment. During this stage, a company evaluates and investigates its potential capital
investments and assesses the suitability of all the investments for the profit
maximization and sustainability of the company.
 Analyzing – In this stage, the appraisal and viability of the potential investments are
evaluated with the application of different capital budgeting or investment appraisal
techniques such as ARR, IRR, NPV, Discounted Cash Flow, etc.
 Finalizing decision – In this stage, the decision related to capital investments are
finalized.
 Deal making of investment – After finalizing the investment decision, the deal of
investment is made between the business and third party from which it is going to
purchase capital or with the people who it is going to undertake the investment plan.
 Monitoring and evaluation – This step comprises of the supervision and evaluation of
the decisions made on capital investment is done in an effective manner.
 Reporting – This is the last stage of the decision-making process. The growth and
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progress of the projects or areas in which the capital investments are made are reported.
With the explanation of the different stages in decision-making related to capital investment,
it can be analyzed that that there is a huge role of investment appraisal in capital investment
decision-making (Gotze et al., 2016). This is because the returns and the viability of a
company from its capital investments can be measured and analyzed only with the
application of investment appraisal techniques. A company will not be able to analyze
whether the investments made by the company will be productive and profitable or not
without the adaption and application of these techniques (Lambert and Yitzhaki, 2015). This
is the significance of investment appraisal in capital investment decision-making.
(b) Identify and explain the main methods of investment appraisal used in practice
(including DCF), use numerical examples to help illustrate the key aspects.
There are different techniques in investment appraisal that helps a business in making
decisions on capital investment. The main methods used by a business for investment
appraisal are the following –
 Net Present Value – One of the most common methods of investment appraisal is the
net present value or NPV method. In this method, the profitability of an investment is
measured by computation of the difference in cash inflows and outflows and the rate
of cost of capital (DeFusco et al., 2015). For example, if the initial investment made
by a company is 150000 and the cash flows from it are 30000, 50000, 60000 and
75000 respectively, with 12% cost of capital, then the NPV of the investment is
6264.36.
 Internal Rate of Return – IRR (Internal Rate of Return) is another method of
investment appraisal in which the rate at which a company attains its return from its
investments is measured (Vernimmen et al., 2017). For example, if the initial
investment made by a company is 150000 and the cash flows from it are 30000,
50000, 60000 and 75000 respectively, with 12% cost of capital, then the IRR of the
investment is 14%.
 Discount cash flows – The investment appraisal method that measures an
investment’s viability based on anticipated interest accumulation is the discounted
cash flows (DCF) of from the investment (Geltner and de Neufville, 2018). Brooks
(2015) stated that the DCF of an investment can be measured from the following
formula –
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DCF = CF 1 / (1+r) 1 + CF 2 / (1+r) 2 … CF n /(1+r) n where CF = Cash Flow, r = Rate
and n = Number of years
For example, if a business has a cash inflow of 50000, 30000 and 40000 from its
investment, then the DCF of the investment = 50000 / (1 + 1.10) 1 + 30000 / (1 + 0.10)
2 + 40000 / (1+ 0.10) 3 = 45454.55 + 24793.39 + 30052.59 = 100300.5
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Conclusion
Thus, the discussion and evaluation of the three gambling companies in the UK gambling
industry helps in understanding that the best performing company in the industry is Paddy
Power Betfair Plc. On the other hand, Ladbrokes Coral Group Plc is found to have the best
performance in the company. The discussions about capital investments and investment
appraisal in the company helps in understanding the stages in the process and the role of
investment appraisal in the process along with reviewing the main investment appraisal
methods such as net present value, internal rate of return and discounted cash flows, which
help a company in making good capital investment decisions.
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