Financial Ratio Analysis and Investment Appraisal: A Case Study of UK Gambling Companies

This report analyzes the financial performance of three major UK gambling companies - William Hill, Ladbrokes, and Paddy Power - using a range of financial ratios. The analysis covers profitability, liquidity, operational efficiency, and gearing ratios over a three-year period. The report identifies Paddy Power as the best performing company based on its strong profitability, liquidity, and operational efficiency. Ladbrokes is identified as the poorest performer due to its weak profitability and liquidity. The report also explores the key stages involved in the capital investment decision-making process and examines the key methods of investment appraisal, including net present value (NPV), discounted cash flow (DCF), and payback period.

ACCOUNTING AND FINANCE FOR
MANAGERS

Table of contents
Section A.........................................................................................................................................3
1. a Financial ratio analysis.............................................................................................................3
1. b Identifying the best performing company...............................................................................11
1. c Identifying the poor performing company..............................................................................12
2.a Identifying and explaining the key stages in the capital investment decision making process
.......................................................................................................................................................13
2.b Identifying and explaining the key methods of investment appraisal.....................................14
Reference list.................................................................................................................................17

Section A
1. a Financial ratio analysis
Financial ratios may be regarded as one of the most reliable signs of the performance of
companies. Examining the development scene of the Gambling industry in the United Kingdom,
it can be concluded that scutinising the performances of the organizations is paramount. In this
table the performances of the said three Gambling organisations in the United Kingdom have
been perused utilizing the financial ratios:
Financial ratios of William Hill:
Financial ratios 2016 2015 2014
Profitability ratios:
ROA using the net income 6.73 8.09 8.67
EBIT margin 13.72 14.01 17.41
Gross profit margin 81.74 85.27 88.57
Liquidity ratios:
Current ratio 0.71 0.52 0.76
Shareholders liquidity ratio 1.52 2.60 1.36
Operational ratios:
Credit period (days) 29 24 24
Collection period (days) 5 1 2
Net assets turnover 0.80 0.95 0.81
Interest cover 4.51 5.47 5.76
Gearing ratio:
Gearing 65.86 63.07 73.30
(Source: Sports.williamhill.com 2018)

Financial ratios of Ladbrokes:
Financial ratios 2016 2015 2014
Profitability ratios:
ROA using the net income -6.02 0.45 3.52
EBIT margin -0.50 -0.19 6.72
Gross profit margin -14.15 -3.60 3.21
Liquidity ratios:
Current ratio 0.33 0.65 0.59
Shareholders liquidity ratio 1.45 1.07 0.71
Operational ratios:
Credit period (days) 25 15 16
Collection period (days) 1 2 2
Net assets turnover 0.62 1.36 1.25
Interest cover -0.19 -0.08 2.76
Gearing ratio:
Gearing 96.75 93.19 140.90
(Source: Ladbrokes.com 2018)
Financial ratios of Paddy Power:
Financial ratios 2016 2015 2014
Profitability ratios:
ROA using the net income -0.11 26.41 22.87
EBIT margin 0.88 15.54 18.42
Gross profit margin 76.91 75.92 80.97

Liquidity ratios:
Current ratio 0.99 0.82 1.34
Shareholders liquidity ratio 14.27 0.34 37.58
Operational ratios:
Credit period (days) 2 5 5
Collection period (days) 2 2 2
Net assets turnover 0.33 3.94 2.22
Interest cover 2.64 61.70 978.34
Gearing ratio:
Gearing 7.02 296.46 2.66
(Source: Paddypower.com 2018)
The three tables mentioned above allude to the standards of financial performance of the three
gambling organizations in the United Kingdom in the past three years. The juxtaposition among
the financial performers of the three organizations is illustrated graphically below:
Profitability comparison:
Gross profit comparison
EBIT margin comparison:

2016 2015 2014
-20
0
20
40
60
80
100
81.74 85.27 88.57
-14.15
-3.6
3.21
76.91 75.92 80.97
William Hill
Ladbrokes
Paddy Power
EBIT margin comparison:
2016 2015 2014
-5
0
5
10
15
20
13.72 14.01
17.41
0.88
15.54
18.42
William Hill
Ladbrokes
Paddy Power
ROE comparison:

2016 2015 2014
-50
0
50
100
150
200
250
13.42 15.62 17.78
-14.24
1.12 10.47
-0.13
212.57
37.45
William Hill
Ladbrokes
Paddy Power
The graphs given above describe the profitability performances of the two companies Paddy
Power and William Hill during the timeframe of three years which is quite alike. It must be
pointed out that the profit generated by these companies has lessened progressively from 2014 to
2016. The performance of the company Ladbrokes was dismal during the above mentioned
years. It is true also that the performance of Paddy Power fluctuated during the time frame. The
profit generated by the three organisations clearly demonstrates that levels of cost of the
organizations have increased, which have to be reduced immediately.
Liquidity comparison:
Current ratio comparison:
2016 2015 2014
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0.71000000000
0001
0.52
0.76000000000
0002
0.33000000000
0001
0.65000000000
0002 0.59
0.99 0.82000000000
0001
1.34
William Hill
Ladbrokes
Paddy Power

Quick ratio comparison:
2016 2015 2014
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0.7100000000
00001
0.52
0.7600000000
00002
0.3300000000
00001
0.6500000000
00002 0.59
0.99 0.8200000000
00001
1.34
William Hill
Ladbrokes
Paddy Power
By collating the liquidity ratios of the three organizations for a period of three years, it can be
concluded that the performance of Paddy Power was definitely better compared to the other two
organizations. In this frame of reference, it must be considered that the performance of the three
organizations were not up to the mark in the context of liquidity. The latest position of the assets
of the three organizations was not up to the mark. The performance of the organisations has
reduced progressively. There was a high amount of fluctuations in the performance of
Ladbrokes. Notwithstanding, the positions of liquidity of the other two organizations were even
wavering. This implies that in the years to come the organizations have to improve the assets that
they have in the short term to better the condition.
Comparing the operational ratios:
Net assets turnover comparison:

2016 2015 2014
0
0.5
1
1.5
2
2.5
3
3.5
4
0.8
0.9500000000
00001 0.810.6200000000
00001
1.36 1.25
0.3300000000
00001
3.94
2.22
William Hill
Ladbrokes
Paddy Power
Interest coverage comparison:
2016 2015 2014
-200
0
200
400
600
800
1000
4.51 5.47 5.76
-0.19 -0.08
2.762.64 61.7
978.34
William Hill
Ladbrokes
Paddy Power
Collection period comparison:

2016 2015 2014
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5
1
2
1
2 22 2 2
William Hill
Ladbrokes
Paddy Power
Credit period comparison
2016 2015 2014
0
5
10
15
20
25
30
29
24 2425
15 16
2
5 5
William Hill
Ladbrokes
Paddy Power
The operational ratios of the three organisations if compared can be noted that for the case of the
ratios of the net assets turnover and the ratios of interest coverage, the performance of Paddy
Power was comparatively better than the other two companies. Even though the three companies
performed in a manner of a reduced pattern, it should be noted that the performance of the
organisation Paddy Power reduced by a greater ratio compared to the other two organisations. If
the other two ratios are taken into consideration, it can be concluded that the collection period of
debt is more in William Hill, this implies that the organisation requires a lot of time to recover
the debt. Additionally, the time frame of the collection of debt of the company has progressively

gone high, it can be noted that the functioning of the organization was not up to the mark. In this
frame of reference, it should even be pointed out that the period of credit given to the
organisation William Hill was even more than the two other organisations. This has helped the
organization in managing the condition. Collating the performance of the organization Ladbrokes
with the organization of William Hill, it can even be noted that in the case of Paddy Power the
balance between the period of credit and the period of collection was less for the organization
Paddy Power.
Gearing comparison:
2016 2015 2014
0
50
100
150
200
250
300
65.86 63.07 73.3
96.75 93.19
140.9
7.02
296.46
2.66
William Hill
Ladbrokes
Paddy Power
The above graph shows that in the case of the three companies were a bit wavering during the
time frame of the three years. In the case of the organisation Paddy Power the fluctuation was
more. In 2014 and 2016, the organization utilised the least amount of debt capital, in 2015
though the debt capital utilized by the organization was 200% more than the other two years. The
level of fluctuation was low in the case of William Hill and Ladbrokes. However, it should be
pointed out that company Ladbrokes utilized greater debt capital than the capital for equity
compared to William Hill. Therefore, when comparing the gearing ratios of the three
organizations for three years, it can be concluded that the position of gearing of William Hill was
much better compared to the other two organisations as the proportion of risk in this organization
was better balanced compared to the other two organizations.

Based on the comparison on the whole, it can be said that the performances of all three
organisations was quite alike as the financial performances of the three organisations were in a
reduced pattern and the waverings were more or less alike. However, it surely does not imply
that there were no variations between the performances of the organizations. Based on the
performances of the organizations during the timeframe of 2014 to 2016, the highest and lowest
performing organization had been noted.
1. b Identifying the best performing company
When considering the financial performances of the three companies, it can be concluded that
the Paddy Power was the highest performing company among the three organisations. As Paddy
Power was the best performing organization, the opportunities for investment are considerably
high in this specific company. However, the causes that made this organisation the company for
the highest opportunities are mentioned below:
 The total profit and other ratios of profitability of this organisation were much better in
this organization. Even though the ROE of the organization has reduced in the financial
year of 2016, the organization has the ability of bettering the situation as the other ratios
of profitability were at a much better condition. Due to the fact that the position of
profitability of the organisation was much better than the other two companies, it can be
totally expected that this organization has a better chance of having higher percentage of
return in the future ( ). Hence, it can be totally taken as a much better investment choice.
 The position of liquidity of the organisation was also much higher than the other two
organisations. The good position of liquidity of the organisation is totally a factor that
secures its stability in the future. If the future of an organisation is secured, it can be
totally expected that in the future the organization will be able to sustain itself properly
and also keep up its standard of performance. (Plantinga 2017).
 The operational level of this company was also much better than the other two
organisations. The organisation was able to use the assets it has in a better way, which
shows that the level of efficiency of the organization was much better. As the level of
efficiency of the organisation was much better, it may be expected that in the years to

come the organisation will have more profit and return to the investors of the company.
(Scholtens and 2017).
1. c Identifying the poor performing company
In the discussion given above, it has been noted that the Paddy power is the best performing
company among the three companies. In this context, it must be noted that Ladbrokes is the
company that is the lowest performing one, among the three gambling companies located in the
United Kingdom. The position of profitability of the company was really bad during the years
and at the exact same time, the levels of efficiency levels of the business and the liquidity, was
also not very satisfactory in comparison with the other organizations in the industry. However
management of the organization Ladbrokes can be better if they keep in mind the following
suggestions well:
 The management of the organisation requires developing much better methods for
increasing the scenario of profit generating by taking control of indirectly and directly
the levels of price. The management may change the method of costing and apply more
advanced system of costing like the activity based system of costing (Riyadh 2017). This
will aid to reduce the level by decreasing the level of waste generated by the
organization.
 The management of the company Ladbrokes requires bettering the level of efficiency of
the managers and also the other workers. This can be achieved in a way that could be
much better if the organization introduces certain programs for training the managers and
employees (Lan and Aliari 2018).
 There is also the requirement to better the condition of the present assets of the
organization. To improve the present ratio, the company has to improve the inflow of
cash in the enterprise and the cash inflow level may be increased through doing away
with cash outflow that is not required, from the enterprise.

2.a Identifying and explaining the key stages in the capital investment decision making
process
Capital investment decision making and are serious and lengthy process. This process involves a
number of stages which are mentioned below:
 Stage 1: The identification of different business scopes, are the foremost stage of capital
investment and decision making. This is the stage where the management of an
organization need to take a look for the new scope for opportunities. In case of any
capital investment decision, there can be more than two opportunities (Graham et al.,
2015). So it is the work of the management to search for the better opportunities for the
company.
 Stage 2: After researching about the new capital investment opportunities, it is the work
of the management to demonstrate the cost of individual opportunities. This is the most
important stage within the capital investment decision making as a whole. The company
work is to calculate the cost of individual opportunity separately keeping in mind the
implementation of the cost as well as the maintenance cost (Zhang et al., 2015).
 Stage 3: In this stage, the process of capital investment decision making, the business
management need to estimate the future cash inflows from each investment opportunity
separately. This the most important stage in the capital investment decision making
process. In order to find out the future cash flow from the investment opportunities the
management needs to keep in mind about the cash flow from the similar projects which
are made previously.
 Stage 4: This stage involves the risk analysis. Here in this stage, the risk proportion of the
different investment opportunity are studied with the help of different methods. This is
done by the calculation of future demand of the project or investment. Simultaneously,
the management also needs to study the internal and external nature of the business to
recognize and study the percentage of risks.
 Stage 5: In this last stage, is all about the final controlling for capital investment. At this
point, the management needs to make the final controlling for the capital investment
keeping in mind the consequences that are drawn from the last four stages which are
discussed above. Here, the management chooses the most suitable opportunities for the
company.

In the process of investment and decision making which is already been discussed in the above
portion, the investment appraisal plays an important role. With the different investment appraisal
tools, the manager needs to interpret or to explain the possible return from a definite investment
option. Simultaneously, the manager can easily understand the time period that the company
needs to get back the initial investment return (Lan, C 2017). This defines that the company, with
the aid of appraisal can study the investment projects and opportunity appropriately which
contrarily enhance the company to make proper or rational capital investment controlling.
2.b Identifying and explaining the key methods of investment appraisal
There are many ways that the organization might utilize for the purpose of investment appraisal.
Some ways are mentioned along with their examples below:
Net present value method- This is one the most preferred methods of investment appraisal that
organizations are utilizing for the purpose of investment appraisal while at the same time making
any choice for investment of capital. This way is accepted everywhere in the globe and has many
uses. The main advantage is that the method called NPV takes into consideration the factor of
profitability in each chance for investment. Also the NPV method considers the value of money
with respect to time, while at the same time srutinising any type of chance for investment, which
is really required for making a choice for investment (Moneta, F and 2017). The application of
the method NPV can be made sense of in a better way with the help of the example:
Example: Organisation A has an opportunity for investment, in which it requires to invest
$100000. The price of capital is 10% and the approximate cash that is invested are given below:
Cash inflow in the year 1 = $30000
Cash inflow in the year 2 = $30000
Cash inflow in the year 3 = $30000
Cash inflow in the year 4 = $30000
Cash inflow in the year 5 = $30000
Cash inflow in the year 6 = $30000

Hence, the NPV will be as given below:
Initial investment -100000
Cash inflow in the year 1 30000
Cash inflow in the year 2 30000
Cash inflow in the year 3 30000
Cash inflow in the year 4 30000
Cash inflow in the year 5 30000
Cash inflow in the year 6 30000
Cost of capital 10%
Therefore, NPV $27,870.75
Discounted cash flow method - This method is another way utilised a lot for investment. In this
way, an opportunity for investment and is scrutinised by spotting the current value of the cash
inflows in the future. The main benefit is that the method of cash flow helps in pinpointing the
value that is fair for each chance for investment (Wermers, R et al. 2017). Therefore, the choice
for capital investment making decisions gets easier for the organizations. In order to figure out
the method of discounted cash flow in a much better way, the example given below can be taken
into consideration:
Through considering the example given above, the DCF is calculated and mentioned below:
Years Cash inflows Cost of capital Discounted cash flows
1 30000 1.1 33000
2 30000 1.21 36300

3 30000 1.331 39930
4 30000 1.4641 43923
5 30000 1.61051 48315.3
6 30000 1.771561 53146.83
254615.13
Payback period method- It is a method that is one of the effortlessly understood techniques of
investment appraisal. Through utilising the period of payback, the organisations can be noted
that the years that investment will require to yield returns back the first investment to the
organization. This way can be understood in a much better way by taking into consideration the
example that is given below:
By considering the data given in the example given first, the period of payback is calculated and
mentioned below:
Payback period = Initial investment / average cash inflows
= $100000 / $30000
= 3.33 years

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