Financial Analysis of Sports Direct UK

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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Sports Direct UK
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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