Financial Analysis of Sports Direct UK

This report provides a detailed financial analysis of Sports Direct UK, including its profitability, liquidity, working capital management, capital structure, and stock market performance. It also discusses the limitations of ratio analysis and concludes with key findings.

FINANCIAL
MANAGEMENT

Sports Direct UK
Executive Summary
When it comes to the point of financial analysis, the best method that can be followed is
fundamental analysis. It helps in knowing the performance of the company and helps to
ascertain the current position. Ratio analysis is used as a tool for financial comparison. In this
report, Sports Direct UK is considered for the purpose of report and analysis is done on the
same. The report initiates with the introduction followed by financial performance. It then
stresses the financial ratio that pertains to profitability, liquidity, working capital
management, capital structure, and stock market performance. Lastly, a discussion on the
deficiency of the ratio analysis is being done followed by the conclusion.
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Contents
Introduction...........................................................................................................................................6
Financial performance...........................................................................................................................6
1. Profitability ratio............................................................................................................................8
 Return on Assets............................................................................................................................8
 Net profit margin...........................................................................................................................9
 Gross profit margin......................................................................................................................10
2. Liquidity.......................................................................................................................................10
 Current ratio................................................................................................................................10
 Acid test ratio..............................................................................................................................11
3. Working capital............................................................................................................................12
 Working capital ratio...................................................................................................................12
 Working capital turnover.............................................................................................................13
4. Capital Structure..........................................................................................................................14
 Debt to equity ratio.....................................................................................................................14
 Debt ratio.....................................................................................................................................14
5. Stock market performance..........................................................................................................15
Limitation of Ratio Analysis.................................................................................................................17
 Inflationary impact......................................................................................................................17
 Comparison with different industry is difficult............................................................................17
 The difference in accounting methods........................................................................................17
Conclusion...........................................................................................................................................19
References...........................................................................................................................................20
Appendix.............................................................................................................................................22
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Sports Direct UK
Introduction
Sports Direct International Plc was founded by Michael James Wallace Ashley in 1982. Its
headquarters are in Shirebrook, UK. It deals in retailing of sports items. It retails in not just
sports brands but also fashion and lifestyle brands. The company performs in three segments
namely Sports Retail, Premium Lifestyle, and Brands. The Sports Retail segment is engaged
in the supply of sports and leisure equipment and apparel (Sports Direct UK., 2018). The
Premium Lifestyle segment provides a wide range of clothing, footwear, and accessories
from luxury retail brands. The Brands segment is all about the wholesale, licensing, and
distribution of the company’s own brand along with the third party brands which are then
sold to sports retails and premium lifestyle products.
Financial performance
The Group revenue of Sports Direct International Plc increased by 3.5 percent excluding
acquisitions, disposals on its 1st week. The same increased by 0.7 percent on a currency
neutral basis on 53rd week.
The UK Sports Retail revenue of Sports Direct International Plc decreased by 2.0 percent on
its first week excluding disposals and acquisitions. The same decreased by 0.3 percent on the
53rd week. Also, there was a fall of 0.6 percent in UK Sports Retail like-for-like stores gross
contribution. The revenue fell by 0.1 percent in European Sports Retail (formerly
International Retail) of Sports Direct International Plc excluding its acquisitions. The same
decreased by 3.2 percent on the 53rd week. Also, there was a fall by 2.0 percent in European
Sports Retail (formerly International Retail) like-for-like stores gross contribution (Sports
Direct UK., 2018).
On account of online sales and an increased store portfolio the Premium Lifestyle Retail
revenue increased by 42.7%. On the other hand, due to the acquisition of Bob’s Stores and
Eastern Mountain Sports, and increased inventory provisions there was an acquisition
accounting. This hampered the Group gross margin by allowing it to fall down from 41.0
percent to 39.7 percent.
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Sports Direct UK
There was a noticeable increment in free cash flow (pre-capex) as the same increased from
£257.4 million to increase from £326.2 million dollars. There was a 12.2 percent increase in
Group underlying EBITDA. The same after an increase of 12.2 percent is about £306.1
million. The underlying Profit before tax increased to £152.9 million after a rise of at least
34.5 percent. The reported profit before tax came down from £281.6 million to £77.5 million
because of mainly two reasons (Sports Direct UK, 2018). First being the prior year
investment income from the sale of JD Sports shares and disposal of the Dunlop brand while
second being Debenhams strategic investment that impacted the company to suffer from a
loss of not less than £85.4 million.
Also, the reported earnings per share came down to 4.6p for the rise in underlying basic
earnings per share of about 19.9p. The Reported profit after tax came down to £27.6 million
from £231.7 million.
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Sports Direct UK
1. Profitability ratio
Profitability ratio is determined through various types of ratios. Every organization focuses
on earning profits on its capital and with the help of return on capital employed it becomes
easier for the same to calculate and ascertain the amount of profit that has been yielded over a
period of time (Christensen, 2011). This also allows the investors to look for the profits
ascertained by an organization that enables them to make appropriate decisions regarding
making/adding investment in the same or reselling their held investments and switching to
another.
Return on assets indicates the efficiency with which the assets are put to use. When it comes
to return on assets, it indicates the efficiency of the company in using the assets...
Return on assets = Net income/ average assets
The above ratio helps the investors to assess the well being of an organization. The
profitability ratio can be evaluated in three stages that are the Return on Capital Employed,
Gross Profit Margin, and Net Profit Margin.
 Return on Assets
As seen from the graph that the return on assets of the company has declined over a period of
time. It indicates that the company has not been able to utilize the assets in an efficient
manner (Madura & Fox, 2011). As compared over the past five years, this ratio explains that
the management of the assets of the company. The ratio was seen at 16.43% in the year 2014
which increased in 2015 and ultimately fell in the year 2018 stands at 10.41%. The main
reason for the low key ratio is the utilization of assets.
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Sports Direct UK
 Net profit margin
The net profit indicates the efficiency with which the company operates its management.
This ratio gives an indication of the way, the company managed the operation and expenses.
A higher ratio is always desirable by the company (Mankiw, 2010). In the case of Sports
direct, the ratio gives an interpretation that the ratio remained in the range of 6-8%. A
marginal increment and decline is witnessed in the ratio meaning that that the company failed
to boost the sales. Any movement in the sales revenue would have enhanced the ratio but the
increment in the sales did not synchronized with the profit margin.
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Sports Direct UK
 Gross profit margin
Gross profit is used to ascertain the financial health of the company and the model of the
business by revealing the money left behind after the sales are made by deduction of the cost
of goods sold (Deegan, 2011). The GP margin of sports direct has declined in the past few
years that stress on the fact that movement in the gross profit of the company was marginal
and could not match the trend of the sales revenue. In 2014 the ratio stood at 42.68% while it
fell to 39.7% in the year 2018 that stress the low key movement.
2. Liquidity
Liquidity ratio helps in calculating the short term resources of an organization while the
Efficiency ratio helps in managing the assets of the same. Liquidity ratio helps in determining
the resources owned by an organization so as to meet its short term obligations (Mankiw &
Taylor, 2011). This further helps in determining the capability of an organization to perform
in the future with respect to its cash inflows and cash outflows.
 Current ratio
The current ratio indicates the ability of the company in meeting the short term obligations. It
gives an indication that the company will be able to meet its obligations. The standard ratio is
2:1 however; a ratio of 1:1 indicates that the company has a dollar of current assets for every
dollar of current liabilities (Needles & Powers, 2013). The current ratio of Sport direct is
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Sports Direct UK
healthy and indicates that liquidity is present in the company. In the year 2018, it is almost
near to the standard ratio and presence of more current assets makes it formidable.
 Acid test ratio
Acid test ratio is a better version than the current ratio as it ignores the stock present in the
company. The ratio indicates the liquidity but ensures that the stock is not considered while
computing this ratio (Parrino et. al, 2012). As seen from the calculation it comes to the
forefront that the acid test ratio is near to the standard ratio of 1 meaning that the company
has one dollar of current assets for every single dollar of current liabilities.
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Sports Direct UK
3. Working capital
With working capital, it is easier to evaluate the efficacy of an organization and how it is
doing in terms of cash inflows and outflows, accounts payable, debt management, financial
credit receivable, revenue collection, payments to suppliers and other short-term accounts
(Henderson et. al, 2015).
When the current liabilities are less than the current assets of an organization the working
capital is said to be positive which indicates that it is less likely for an organization to go
liquidity crisis in the coming time (Laux, 2014). When the current liabilities exceed current
assets of an organization the working capital is said to be negative which indicates that the
same shall not be able to set off its current liabilities as and when it falls due.
 Working capital ratio
The working capital ratio ascertains the current assets as a percentage of current liabilities. A
higher ratio is more impactful in nature. Working capital ratio is more than 1 for the company
indicating that the company can meet the current liabilities and still will have current assets in
possession. (Kaplan, 2011)
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Sports Direct UK
 Working capital turnover
The working capital turnover indicates the efficiency with which the company utilizes the
working capital to have a desired level of sales (Henderson et. al, 2015). In this company, the
company is having a low ratio meaning that the business is investing too many accounts
receivable and inventory assets to back up the sales that can to a heavy amount of bad debts.
The graph indicates that there is be a major drop in the ratio and is not a strong indicator.
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Sports Direct UK
4. Capital Structure
The long term liability of an organization is evaluated by means of shareholders and long
term solvency ratio. This allows an organization to not just determine its long term liabilities
but also calculate its expenses (Leo, 2011). The long term solvency ratio allows an
organization to achieve its growth. Debt equity and debt ratio are the ratios used to evaluate
the results from the shareholder and long term solvency ratio.
 Debt to equity ratio
The debt to equity ratio enables to compare the total debt of a company with that of the total
equity. It reflects the percentage of the finance of the company coming from the creditor and
investors (Petty et. al, 2012). In the case of sports direct the ratio ranks more than 1 that
indicates the company has more of debt and this will hamper the company in having loans
from bank and other institutions. The main reason why the ratio is high is due to increment
in the level of debt in the past five years.
 Debt ratio
The financial leverage of the company is computed through this ratio. The companies that
have higher stress on liabilities as compared to assets are deemed to be leveraged and thereby
riskier in nature (Gowthrope, 2011). The same was witnessed in the case of Sports direct
where the total liabilities kept on increasing however, the same was supplemented with the
help of increment in assets. Sports direct is having a ratio of less than .50 indicates that the
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Sports Direct UK
company is less risky in nature. However, in 2018 the ratio surged ahead of .50 meaning that
the debt level increased. The overall analysis indicates that the creditors own fifty percent of
the assets of the company while shareholders own the remaining.
5. Stock market performance
 Earnings per share (EPS)
EPS indicates how profitable the company is considering the shareholder basis. Hence, a
larger share of the profit of the company can be compared with the smaller profit per share.
This ratio depends on the shares that are outstanding (Ferris et. al, 2010). Higher EPS is
better as compared to a lower one as it showcases the fact that the company is more profitable
and the company will contain more profit for the purpose of distribution. As seen from the
discussion, it can be commented that the sports direct EPS is lower and hence denotes that
there can be a decline in the stock price. The EPS is in a declining trend and indicates that the
company can be in trouble in the upcoming days.
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Sports Direct UK
Limitation of Ratio Analysis
Ratio analysis is undoubtedly one of the most effective and trustworthy tools so as to evaluate
the financial well being of an organization. It enables one in determining the financial
position of an organization as on a given date. Ratio analysis is a powerful tool that helps an
organization in displaying the present scenario of the same and depicting the trend for the
future (Porter & Norton, 2014). But there are also few loopholes in the results obtained from
ratio analysis. Hence, it is not always desirable to rely on the results obtained from ratio
analysis for the same can be deceptive and misleading.
 Inflationary impact
As the inflationary impact was not used to be taken into consideration earlier while
evaluating various ratios, therefore, the financial data recovered from the same are not always
reliable for the results lacked transparency and it was difficult for the users to understand.
The assets are recorded at their historical dates in the statements in spite of the need to be
recorded at their present values. As the value of an asset depreciates with time therefore, the
same needs to be recorded at their present values and not at a value at which the same were
purchased (Bodie et. al, 2014).
 Comparison with different industry is difficult
It is very true that the comparison of ratios of the different organization is difficult or rather
just complicated. Therefore, the results obtained from the same shall not portray clarity and
therefore shall be confusing. This is because of the fact that every organization has a different
market scenario, capital structure and gestation period. Drawing comparisons between
industries with different parameters shall be difficult. Therefore, it is always advisable to
make comparisons between the same industries.
 The difference in accounting methods
The accounting methods are not the same for every organization. The accounting practices of
an organization are mostly performed according to its standards and are highly dependent
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Sports Direct UK
upon its flexibility and the ease at which the policies can be implemented. The major reason
behind the difference in accounting methods is inventory valuation and depreciation that
differs from one organization to another (Subramanyam &Wild, 2014). Therefore, drawing
comparisons between the performances of companies from the results that are drawn from the
different accounting methods adopted by the same shall be a foolish thing.
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Sports Direct UK
Conclusion
The overall gives a glimpse that the company Sports direct has strong fundamentals. Further,
a strong analysis derives the notion that the company has been able to perform in an effective
manner. The profitability indicates that the company is well established and has delivered
strong numbers when it comes to gross profit margin and returns on assets while the net profit
margin is low that needs to be carefully analyzed. Further, the liquidity is high with the
company and will be able to meet the obligations easily. The working capital turnover is low
while the working capital ratio is high that indicates a positive trend. Moreover, the trend of
the past five years indicates that the company rests on equity and debt hence; there is not a
major reliance on the debt. Lastly, the EPS has fallen that is a major concern with the
company.
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Sports Direct UK
References
Bodie, Z. Kane, A. and Marcus, A. J. (2014) Investments (3rd ed). McGraw Hill
Christensen, J. (2011) Good analytical research. European Accounting Review, 20(1), 41-51
Available from:
https://www.researchgate.net/publication/227613941_Good_Analytical_Research [Accessed
1 April 2019]
Deegan, C. M. (2011) In Financial accounting theory (4th ed). North Ryde, N.S.W:
McGraw-Hill
Ferris, S.P., Noronha, G. & Unlu, E. (2010) The more, merrier: an international analysis of
the frequency of dividend payment. Journal of Business Finance and Accounting. [online].
37(1), pp. 148–70. Available from https://doi.org/10.1111/j.1468-5957.2009.02174.x
[Accessed 1 April 2019]
Gowthrope, C. (2011) Business accounting and finance for non specialists (3rd ed.). South
Western
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015) Issues in financial
accounting. Pearson Higher Education AU.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and
practice. The Accounting Review, 86(2), 367–383. Available from:
https://www.jstor.org/stable/29780239 [Accessed 1 April 2019]
Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting.
Accounting and Business Research, 44(4), 380-382. Available from:
http://www.ccsenet.org/journal/index.php/ijbm/article/viewFile/4235/3672 [Accessed 1
April 2019]
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Madura, R., & Fox, J. (2011). International financial management (2nd ed.). South Western
Mankiw, N.G. (2010). Macroeconomics (7th ed). New York Worth Publishers
Mankiw, N.G. and Taylor, M.P. (2011) Economics (2nd ed). Andover: Cengage Learning
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Needles, B.E. and Powers, M. (2013) Principles of Financial Accounting. (12th ed). Financial
Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. (2nd ed).
Hoboken,
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012)
Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education
Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker.
Texas: Cengage Learning
Sports Direct UK. (2018) Sports Direct UK annual report and accounts 2018. Available
from: https://www.sportsdirectplc.com/~/media/Files/S/Sports-Direct/annual-report/annual-
report-2018.pdf [Accessed 1 April 2018]
Subramanyam, K & Wild, J. (2014) Financial Statement Analysis. (11th ed). McGraw Hill
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Appendix
Profitability
retrun on assets
2014-04 2015-04 2016-04 2017-04 2018-04
Net income 179613 241353 278981 231700 276000
Avg assets 1092578 546289 2066792 2404350 2649200
retrun on assets 16.43938 44.18046 13.49827 9.6367 10.41824
Net profit margin
2014-04 2015-04 2016-04 2017-04 2018-04
Net income 179613 241353 278981 231700 276000
Sales revenue 2706000 2833000 2904000 3245000 3360000
Net profit
margin 6.637583 8.519343 9.606784 7.140216 8.214286
Gross profit margin
2014-04 2015-04 2016-04 2017-04 2018-04
Gross profit 1155 1241 1285 1331 1335
Sales revenue 2706 2833 2904 3245 3360
Gp margin 42.68293 43.80515 44.24931 41.01695 39.73214
Liquidity
Current ratio
2014-04 2015-04 2016-04 2017-04 2018-04
Current assets 843872 878297 1311500 1274000 1485300
Current liabilities 799245 382621 540700 740900 709100
Current ratio 1.055836 2.295475 2.425559 1.71953 2.094627
Acid test ratio
2014-04 2015-04 2016-04 2017-04 2018-04
Current assets 843872 878297 1311500 1274000 1485300
Inventories 565479 517054 702200 674200 873400
Current assets-
inv 278393 361243 609300 599800 611900
Current liabilities 799245 382621 540700 740900 709100
Acid test ratio 0.34832 0.944127 1.126873 0.809556 0.862925
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Working capital
Working capital ratio
2014-04 2015-04 2016-04 2017-04 2018-04
Current Assets 843872 878297 1311500 1274000 1485300
Current Liabilities 799245 382621 540700 740900 709100
Working capital 44627 495676 770800 533100 776200
Working capital
ratio 1.055836 2.295475 2.425559 1.71953 2.094627
Working capital turnover
2014-04 2015-04 2016-04 2017-04 2018-04
Net sales 2706 2833 2904 3245 3360
Working capital 44627 495676 770800 533100 776200
WCT 0.060636 0.005715 0.003768 0.006087 0.004329
Capital structure
Capital structure
Debt Equity Ratio
2014-04 2015-04 2016-04 2017-04 2018-04
Total Debt 883185 612132 975200 1210500 1635400
Total Equity 817554 1164361 1386400 1239000 1212500
Debt Equity Ratio 1.080277 0.525724 0.703405 0.976998 1.348784
Debt ratio
2014-04 2015-04 2016-04 2017-04 2018-04
Total liabilities 883185 612132 975200 1210500 1635400
Total assets 1092578 1773683 2359900 2448800 2849600
Debt ratio 0.80835 0.345119 0.413238 0.494324 0.573905
Stock market performance
2014-04 2015-04 2016-04 2017-04 2018-04
EPS 0.3 0.41 0.47 0.39 0.04
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