Financial Analysis of Sports Retail Firms

This assignment focuses on the financial analysis of two sports retail firms: JD Sports Fashion Plc and Sports Direct International Plc. It requires students to utilize various financial ratios to evaluate the firms' performance, profitability, liquidity, and solvency. The assignment also delves into the concept of capital budgeting, examining its importance in investment decisions for these companies. Students will analyze the advantages and disadvantages of different capital budgeting methods and apply them to real-world scenarios within the sports retail industry.

MANAGERIAL FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PORTFOLIO 1.................................................................................................................................1
Question 1...............................................................................................................................1
A) Calculating financial ratios of two companies for two accounting periods i.e. 2015 and
2016........................................................................................................................................1
B) Analysing performance, financial condition and investment potential of Sports Direct and
JD Sports firms.......................................................................................................................4
C) Providing appropriate suggestions to the firm which has poor financial performance...11
D) Discussing drawbacks of financial ratios which used to analyse firm's performance....11
PORTFOLIO 2...............................................................................................................................12
Question 2.............................................................................................................................12
A) Use of basic investment appraisal methods and suggestions to management of a local
manufacturing enterprise......................................................................................................12
B) Discussing limitations associated with investment appraisal technique for taking long-term
decisions...............................................................................................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Finance is considered as blood for every organisation because it helps to exist and operate
in the industry. Due to unavailability of financial resources, an entrepreneur unable to establish
its business in the market and sale products and services. The present project reflects about some
methods which help to assess financial information and make profitable investments. For
measuring the business performance, two companies are taken into consideration i.e. Sports
Direct International Plc. and JD Sports Fashion Plc. Both these firms operate in apparel industry
and have a huge market presence. Further, using some financial ratios, financial condition,
performance as well as investment potential are analysed. Under the second part of present
assignment, investment appraisal methods i.e. NPV, ARR and payback period are calculated for
local manufacturing company. On the basis of these tools, suggestions to the management for
making fruitful investment are to be given.
PORTFOLIO 1
Question 1
A) Calculating financial ratios of two companies for two accounting periods i.e. 2015 and 2016
2015 2016
Name of
financial ratios Formula
Sports Direct
International
Plc.
JD Sports
Fashion Plc.
Sports Direct
International
Plc.
JD Sports
Fashion
Plc.
Current assets
(CA) 878297 400259 1311437 510695
Current liabilities
(CL) 382621 326748 540608 348154
Current ratios
(CR) CA / CL 2.30 1.22 2.43 1.47
Current assets
(CA) 878297 400259 1311437 510695
1

Current liabilities
(CL) 382621 326748 540608 348154
Stock 517054 91024 702158 106336
Prepaid expenses 0 0 0 0
Quick ratios
(QR)
CA – (stock +
prepaid
expenses) / CL 0.94 0.53 1.13 0.78
Gross profit (GP) 1240812 739550 1284644 884221
Net sales 2832560 1522253 2904325 1821652
Gross profit
ratio
GP / net sales *
100 43.81% 48.58% 44.23% 48.54%
Operating profit
(OP) 8345 92646 11137 133406
Net sales 2832560 1522253 2904325 1821652
Operating profit
ratio
OP / net sales *
100 10.44% 6.09% 7.68% 7.32%
Net profit (NP) 241353 53971 278981 100630
Net sales 2832560 1522253 2904325 1821652
Net profit ratio
NP / net sales *
100 8.52% 3.55% 9.61% 5.52%
Debt 136849 -374 333063 -247
2

Equity capital 1161551 309991 1384728 400825
Gearing ratios
Debt / Equity
capital 16.50 12.66 23.88 9.55
Profit available
for equity
shareholders 241353 53971 278981 100630
Number of equity
shares outstanding 9798931.8 2707185.36 13056310.8 3539157.1
Earnings per
share
Profit available
for equity
shareholders /
Number of
equity shares
outstanding 46.8 27.06 40.60 50.16
Net operating
profit 8345 92646 11137 133406
Employed capital
(Total assets –
current liabilities) 1391062 354922 1819248 443142
Return on
capital employed
Net operating
profit /
employed
capital 21.25% 26.10% 12.27% 30.10%
3

Cost of goods
sold 1591748 782703 1619681 937431
Average
inventory 517054 91024 702158 106336
Average
inventories
turnover period
COGS /
Average
inventory 119 days 105 days 158 days 93 days
Dividends 0 13260 0 13820
Net income 241353 53971 278981 100630
Dividend payout
ratio
Dividends / Net
income 0.00% 25.17% 0.00% 14.15%
B) Analysing performance, financial condition and investment potential of Sports Direct and JD
Sports firms
In order to analyse performance of the company, financial ratios are interpreted which a
show clear scenario of the whole business in proper manner. Under this study, two companies of
apparel industry are considered i.e. Sports Direct International Plc and JD Sports Fashion Plc.
Basically ten financial ratios are calculated and on the basis of that the best company is
determined which will be beneficial for investors (Vogel, 2014). Further, interpretation of such
ratios is stated below:
Current Ratios
4

Considering to current ratios, liquidity position of an enterprise in the industry is to be
analysed properly. In accordance to the present case, CR of Sports Direct and JD Sports is 2.30:1
and 1.22:1 respectively at the end of FY 2015. Apart from this, values of CR in both the
companies are improved and closed at 2.43:1 and 1.47:1 at the year ending 2016. On the basis of
this, business performance of Sports Direct is well in both the years in comparison to another
stated company. Moreover, as per the standard value of CR also first firm has better and
attractive performance. The rise in the current ratio is due to increase in the amount of current
assets as well as reduction in the debts of company.
Quick Ratios
5

Quick or acid test ratio is also a major part of liquidity ratios which reflect cash
availability at the working environment of business (Babalola and Abiola, 2013). Looking at the
above chart it can be pertained that value of QR is 0.94:1 and 0.95:1 in Sports and JD Sports
company in FY 2015. As the year passed then stated value enhanced which is 1.13:1 and 1.16:1
in the same firms. Further, JD Sports having a high level of performance in apparel industry. In
accordance with the present analysis, the previous company has to take corrective actions. Due to
this, it will be able to enhance quick ratios and meet financial objectives. In perspective of
investing money JD Sports is better as per acid test ratios.
Gross Profit Ratios
Sports Direct
International
Plc
JOD Sports
Fashion Plc
Sports Direct
International
Plc
JOD Sports
Fashion Plc
2015 2016
41.00%
42.00%
43.00%
44.00%
45.00%
46.00%
47.00%
48.00%
49.00%
43.81%
48.58%
44.23%
48.54%
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This is a part of profitability ratios where company can determine gross profit generated
at the end of accounting period. Higher the value of this tool is one of the profitable for company
and investors both (Delen, Kuzey and Uyar, 2013). At the end of fiscal year 2015, GP ratio of
Sports and JD Sports was 43.81% and 48.58% respectively which enhanced up to 44.23% and
48.54% in the year 2016. This value clearly shows that, profit generation capacity of JD Sports is
well as compared to its competitor. Moreover, it is highly able to manage and reduce cost of
goods sales which are unproductive and create unnecessary burden on the management.
Operating Profit Ratios
Sports Direct
International
Plc
JOD Sports
Fashion Plc
Sports Direct
International
Plc
JOD Sports
Fashion Plc
2015 2016
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
0.29%
6.09%
0.38%
7.32%
Operating profit is to be computed on the basis of various operating expenses incurred at
the workplace for producing and selling goods and service. It can be observed from the above
graph that, Sports Direct has 10.44% OP ratio in previous year which enhanced up to 6.09% later
on. Apart from this, second mentioned company has 7.68% value of OP ratio which increased up
to 7.32% at the end of accounting period 2016. Herein, JD Sports applied wide range of effective
cost management strategies in the workplace due to which it has better performance.
Net Profit Ratios
7

Sports Direct
International
Plc
JOD Sports
Fashion Plc
Sports Direct
International
Plc
JOD Sports
Fashion Plc
2015 2016
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
8.52%
3.55%
9.61%
5.52%
NP is another measurement of financial ratios through which business capability to
generate net income at the end of year assessed properly. When value of this specific ratio is the
higher, then better performance will be commented. As per the present scenario, Sports Direct
has 8.52% and 9.61% in FY 2015 and 2016 respectively (Annual report of Sports Direct
International Plc 2016, 2016). In addition to this, JD Sports has 3.55% and 5.52% in same years.
Overall performance of the first company is well because it will be able to pay more dividend
amount to its shareholders. Herein, JD Sports should apply some strategies for managing indirect
costs and enhance NP ration.
Gearing ratios
Sports Direct
International
Plc
JOD Sports
Fashion Plc
Sports Direct
International
Plc
JOD Sports
Fashion Plc
2015 2016
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.12
0.00
0.24
0.00
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A tool of financial ratio which represents capital structure of the firm is considered as
gearing ratio. Standard value of this is 0.5:1 where debt capital must be half of the equity capital
in the firm (Kou, Peng and Wang, 2014). In the current case, JD Sports not having any kind of
debt value due to enhancing required capital from equity financing source only. Moreover,
Sports Direct has 16.50:1 and 23.85:1 gearing ratio at the end of FY 2015 and 2016 respectively.
In point of this particular tool, JD Sports will be the most beneficial for making investment
because it not has any type of debt and interest burden.
Earnings per share
In accordance with EPS ratio, Sports Direct has poor and well performance at the end of
financial period 2015 and 2016 respectively. The reason is that EPS of JD Sports is 50.16 in FY
2015 which is higher than another firm i.e. 40.6. Moreover, in the next year EPS of Sports and
JD Sports is worth of 46.8 and 40.6 respectively where first enterprise is beneficial (Annual
report of JD Sports Fashion Plc 2016, 2016). Considering to average EPS of both the financial
years it can be said that Sports Direct has better performance in apparel industry.
Return on capital employed
9

It can be said from the above chart that Sports Direct has 21.25% ROCE ratio and later
on reduced up to 12.27% in fiscal period 2016. On the other side, JD Sports company has value
of the same ratio is 26.10% at the end of accounting year 2015. As the year passed then same
ratio reached up to 30.10% which is highly profitable for investors. Therefore, JD Sports is the
better for generating more return on investment for investors in comparison to its competitor.
Average inventories turnover period
This ratio reflects efficiency of company to generate revenue by utilising available stock
in the business (Uechi and et.al., 2015). Sports Direct utilises inventory up to 118 days and the
10

same value within JD Sports is 105 days in previous year. When looking at the next accounting
period then it can be seen that, Sports Direct uses stock up to 158 days and the same in second
firm is 93 days. As per decision rule that higher the average stock turnover ratio is better, JD
Sports performing well in the apparel industry. As per this, the second firm the most beneficial
for investing money.
Dividend pay-out ratios
This ratio shows that from generated net income, company is paying how much level of
dividend among shareholders. This is one of the best important method taken into consideration
by investors for making judgements of investing money (Robinson and et.al., 2015). Looking at
the above graph it can be observed that, Sports Direct International Plc not allowing shareholders
for paying any kind of dividend in both FY i.e. 2015 and 2016. Apart from this, JD Sports
Fashion Plc has 24.17% and 14.15% dividend payout ratio at the year ending 2015 and 2016
respectively. On the basis of this, Sports Direct has to provide dividend for attracting more
stockholders towards it. Therefore, the dividend payout ratio of Sports Direct is Zero because
the company did not make any dividend liabilities in such years.
Moreover, JD Sports performing well in both the years where it provides huge dividend
to shareholders in comparison to its stockholders. Therefore, making investment in this firm only
will be the most beneficial and helps to boost up return on investment.
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C) Providing appropriate suggestions to the firm which has poor financial performance
From the above financial ratios it can be analysed that Sports Direct has poor
performance and its rival performing well in apparel sector. For resolving poor condition and
enhancing it some strategies are suggested below:
 Sports Direct needs to generate capital for any business project from equity financing
rather than debt. On the basis of this, it will become able for declining interest burden and
gearing ratio both in the industry.
 Apart from this, it has to enhance operating profit by using some strategies for reducing
operating expenses. This particular tactic will support to Sports Direct for increasing
return on capital employed ratio which is one of the attraction point of shareholders.
 It requires giving training to the workforce about ways for utilising stock in an optimum
direction. Due to this, it able to boost up average inventory turnover times at the end of
upcoming accounting period.
 At the last, management of Sports Direct provide dividend among shareholders at the end
of year. On the basis of this, stockholders will attract towards it for purchasing shares.
 Further, JD Sports needs to manage indirect costs incurred at the workplace which will
support to enhance NP ratio at the end of next accounting period and make it financially
sound.
D) Discussing drawbacks of financial ratios which used to analyse firm's performance
Despite various kinds of advantages, the financial ratios have some drawbacks which will
affect to the business organisation. Further, some limitations of this stated below:
 Main problem associated with financial ratios is that, it considers only quantitative
measures for analysing business performance. Further, it ignores those aspects which
come into consideration under qualitative (Peavler, 2017).
 It shows that company is performing whether well or poor in the industry only. Reasons
due to which performance changes at the workplace are not reflected by financial ratio
analysis.
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 When two or more companies consider different accounting standards and principles for
preparing financial statements then proper comparison cannot be made among the firms.
 The tools of ratio analysis help to measure and analyse only historical data and
information. On the basis of these, management of selected two firms cannot make
effectual as well as fruitful predictions.
 The financial ratios not considering impact of inflation rate on various information. Due
to this particular situation, company unable to analyse and predict performance properly
(The limitations of ratio analysis, 2011).
 Apart from this, only one of two kinds of ratios are not enough for analysing business
performance in the industry. Requirement of calculating several ratios is there for
knowing performance of the firms in appropriate direction.
PORTFOLIO 2
Question 2
A) Use of basic investment appraisal methods and suggestions to management of a local
manufacturing enterprise
A method through which viability of one project among two or more simultaneous
alternatives is analysed is known as capital budgeting. Further, it is basically used to make
investment in one specific alternative among two or more at the workplace. Due to this particular
nature, it is called as an investment appraisal technique. There is a wide range of tools involved
in this which are like NPV, IRR, ARR, payback period, profitability index, etc (Abor, 2017). In
the present case scenario, a local manufacturing company has two options in order to purchase
machines i.e. A and B. Further, investment decisions are to be made with the help of basic three
techniques which involve NPV, payback and ARR. Calculations and suggestions are given as
below:
Net Present Value
Year
net profit of
Machinery 1 Depreciation cash flow
Discounting
factor @20%
Present
value of
project B
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Initial
Investment £170000
2017 65000 25000 90000 0.833 74970
2018 65000 25000 90000 0.694 62460
2019 55000 25000 80000 0.579 52110
2020 55000 25000 80000 0.482 38560
2021 45000 25000 70000 0.402 32160
2022 70000 25000 95000 0.385 30150
Total 505000 290410
Less: Initial
investment 170000
NPV 120410
Year
net profit of
Machinery 2 Depreciation cash flow
Discounting
factor @20%
Present
value of
project B
Initial
Investment £170000
2017 25000 28333 53333 0.833 44426.4
2018 35000 28333 63333 0.694 62460
2019 45000 28333 73333 0.579 52110
2020 75000 28333 103333 0.482 38560
2021 85000 28333 113333 0.402 32160
2022 65000 28333 93333 0.385 30150
Total 499998 259866
Less: Initial
investment 170000
NPV 89866.4
NPV is a technique which helps to determine future value of initial investment at the end
of project life. It is widely considered a method among all the tools of capital budgeting
14

(Chandel and et.al., 2017). It can be analysed from the above table that NPV of machine A is
worth 120410 of whereas, the same for machine B is 89866.4. It can be said from these both
values that at the same investment amount i.e. £170,000, project A gives higher value as
compared to B where first machine will be the most profitable.
Payback Period
Year
Cash flows
of project A
Cumulative cash
flow of project A
Cash flows of
project B
Cumulative cash
flow of project B
Initial Investment £170000 £170000
2017 90000 80000 75000 95000
2018 90000 -10000 62500 32500
2019 90000 -100000 52083 -19583
2020 80000 -180000 38580 -58164
2021 80000 -260000 32150 -90314
2022 70000 -330000 23443 -113757
Payback period 1.9 years 2.6 years
As per the current method i.e. payback period, management is able to know the number
of years in which initial investment will be recovered. Lower the value is more profitable for
cited manufacturing firm because investment will be received within a short duration of time
(Echanis and Kester, 2016). Looking at the above calculation, it can be seen that initial
investment of machine A and B will be recovered within 1.9 and 2.6 years. As per the decision
rule, project A is highly beneficial in comparison to second for company.
Average rate of return
Year Cash flows of project A Cash flows of project B
Initial Investment £170000 £170000
2017 65000 25000
15

2018 65000 35000
2019 65000 45000
2020 55000 75000
2021 55000 85000
2022 45000 65000
Total net profit 350000 330000
Average accounting net profit 350000/6=58333 330000/6=55000
Average investment (170000+20000)/2=95000 (170000+0)/2=85000
ARR 58333/95000*100=61.40% 55000/85000*100=64.71%
In accordance with the average rate of return (ARR) technique of capital budgeting,
machine A has value of 61.40% at the end of project life which is 6 years. Apart from this,
machine B has ARR is 64.71% which is lower than first alternative available with local
manufacturing firm. On the basis of this method, project A is viable as well as profitable for
purchasing machine.
From the above analysis of investment appraisal methods, it can be assessed that machine
A provides more NPV and ARR value i.e. £113757 and 32.35% respectively. Apart from this,
money invested at the initial time for purchasing machine is also recovered within 1.9 years.
Henceforth, it can be suggested to management of local manufacturing firm that it should make
investment in the first project. Further, machine A will be the most and highly profitable in
comparison to second for implementing at the workplace.
B) Discussing limitations associated with investment appraisal technique for taking long-term
decisions
Along with helping some decisions in the working environment, investment appraisal
methods have some drawbacks also which are described as below:
 Several tools of capital budgeting ignoring time value of money at the time of performing
proper calculations and make decisions. However, only net present value method
considers this particular aspect (Samonas, 2015).
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 This is not useful for taking those investment decisions which are for short period of time
at the workplace. Further, these techniques are of the irreversible nature at most of the
times in the business environment.
 Calculation of capital budgeting tools are based on various assumptions as well as
estimations. Further, situation of the future market are uncertain where company cannot
predict for long term.
 This technique remains introspective in its nature due to which profitable kind of
investment decisions cannot be made. The reason behind this is that, risk and discounting
both the factors remain unchanged for the project life while performing calculations.
 Apart from this, wrong investment appraisal decisions can create negative impact on long
term durability of the business (Capital Budgeting – Advantages and Disadvantages,
2016). Therefore, highly talented as well as skilled professional of the financials is
required to hire in the company.
Limitations of ARR:
This technique is helpful in analysing the returns a business will going to acquire from
the cost of investments made in new operations. The limitation lies over it as it only considers
the practice aspects as it ignores the time value of money. Therefore, it is been unhealthy for the
financial stability.
Limitations of NPV:
This method will help in analysis the present value of future investments but it did not
help in improving the profitability of firm.
Limitations of payback period:
This technique is used to determine the time over which the firm will going to have that
must gains that they have invested in the project. It also does not bring adequate profitability or
helps in decision making.
CONCLUSION
Hereby, it can be articulated that when financial resources are managed effectively in the
business then company able to boost up its financial performance in the industry. As per the ratio
17

analysis it can be said that, Sports Direct International Plc performing poor in comparison to JD
Sports Fashion Plc at the end of financial year 2015 and 2016 both. However, in terms of net
profit and current ratio only Sports Direct perform better. From the second part it can be
summarised that, machine A generates higher NPV and ARR as well as lower payback period at
as compared to machine B. Hence, management of local manufacturing firm needs to invest
money in project A which will be the most beneficial.
18