International Finance: Sage Group Plc Financial Performance Analysis

This report presents a detailed financial analysis of Sage Group Plc, a prominent British multinational software company. The analysis begins with an introduction to Sage Group Plc, including its background, core products, and global presence. The report then delves into a comprehensive ratio analysis, examining key financial ratios such as current ratio, quick asset ratio, stock turnover ratio, debt-equity ratio, fixed asset turnover ratio, capital gearing ratio, and return on capital employed. The interpretation of these ratios provides insights into the company's liquidity, solvency, and profitability. Furthermore, the report explores three valuation methods: net asset basis, price/earnings method, and dividend valuation method, including calculations and comparisons. The report also assesses Sage Group Plc's current risk exposure and the impact of the economic environment. Finally, the report concludes with recommendations based on the financial analysis. The report utilizes financial statements to support the analysis, offering a comprehensive understanding of Sage Group Plc's financial health and performance.

INTERNATIONAL
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Introduction and Background of Sage Group Plc.......................................................................1
Calculation of the ratios and its interpretation ...........................................................................1
Overall state of the company.......................................................................................................3
TASK 2............................................................................................................................................3
a) Advantages and disadvantages of three valuation methods....................................................3
b) Calculations with the help of three valuation methods...........................................................4
c) Difference in the three valuation methods..............................................................................5
d) Current risk exposure to Sage group Plc................................................................................5
e) Impact of economic environment ..........................................................................................6
TASK 3............................................................................................................................................7
Recommendation through the information.................................................................................7
REFERENCES................................................................................................................................8

Illustration Index
Illustration 1: Consolidated balance sheet.....................................................................................10
Illustration 2: Statement of Cash flow...........................................................................................11
Illustration 3: Consolidated Income statement..............................................................................12

Index of Tables
Table 1: Ratio analysis.....................................................................................................................1

TASK 1
Introduction and Background of Sage Group Plc
Sage group is a British Multinational software company having headquarter in Newcastle
upon Tyne, United kingdom. It is considered as the third largest Enterprise Resource Planning
(ERP) company having more than 6.1 million customers worldwide. The entity is currently
operating in 24 countries. It has 13400 employees across the world. Sage is listed in London
Stock Exchange and it is also a constituent of FTSE 100 index (About Sage, 2017). The core
products of the company is included in three key areas, which includes, Accounting, Payroll and
Human capital management and payments. The products are tailored as per the needs of the
customers as Sage is being operated in large number of countries the availability of the product
varies. Some the Sage's worldwide products includes, Sage One, Sage Live, sage X3 etc.
Calculation of the ratios and its interpretation
Table 1: Ratio analysis
Particulars Formula 2014-15 (GBP in
Million)
2015-16 (GBP in
Million)
Increase /
Decrease
Current Assets Current Assets /
Current liabilities
586 695 109
Current Liabilities 823 988 165
Current Ratio 0.71 0.70 -0.009
Quick Assets Quick assets /
Current liabilities
559 657 98.000
Current Liabilities 823 988 165.000
Quick Asset Ratio 0.68 0.66 -0.014
COGS
COGS / Average
inventory
87 103 16.000
Average Inventory 2 2 0.000
Stock turnover
Ratio 43.50 51.50 8.000
Debt
Debt / Equity
571 534 -37.000
Equity 862 1053 191.000
Debt Equity Ratio 0.66 0.51 -0.155
Net sales Net sales / Fixed 1436 1569 133.000
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Assets
Fixed assets 1078 1961 883.000
Fixed Asset
turnover ratio 1.33 0.80 -0.532
Long term liabilities Long term
liabilities / Capital
employed
610 615 5.000
Capital employed 1472 1668 196.000
Capital gearing
ratio 0.41 0.37 -0.046
Operating profits
Operating profit /
Capital employed
1436 1569 133.000
Capital employed 1472 1668 196.000
Return on capital
employed 0.98 0.94 -0.035
Current Ratio help in assessing the liquidity of the company. A higher ratio shows that
the company is able to payout its short term debts. There is decrease in the current ratio of Sage
by 0.01 which is less significant. It shows that the entity is not liquid enough and require
increasing its current assets or reduce its current liabilities.
In case of quick assets, these are the assets which can be readily converted into cash. It
indicated that the company will be able to payout its current liabilities through the available
current assets. In case of sage it has decreased from 0.68 to 0.66. However, it comes under the
bracket of ideal ratio which is 0.5. Hence, the company have enough readily available assets to
meet out its liabilities.
Stock turnover ratio helps in assessing that how many times the company has replaced its
stock after sales in a year (Agénor and Pereira da Silva, 2012). In case of Sage, the inventory
turnover ratio is 43s.5 in 2015 which has increased to 51.5 days I 2016. An increase in the ratio
shows reduction in sales which do not reflect sound position of the company.
Debt Equity ratio helps in ascertaining the financial leverage. It shows that how the debt
have been used by the company in order to finance its assets. High ratio shows greater risk borne
by the company in terms of paying off the amount. There is a decrease in the ratio of Sage from
0.66 to 0.51 in 2016. It reflects sound position of the company. Hence, the capital contribution of
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shareholders have become higher in comparison to that of debt. There is a decrease in ratio
which shows that there is an increase in equity and decrease in the debt.
Fixed asset turnover ratio helps in measuring the operating performance of the company.
Th generation of net sales from the fixed asset investment is find out trough this ratio. Hence, in
case of sage, the ratio has reduced from 1.33 to 0.80 which shows that less sale is generated by
the company through the investment in the fixed assets. A decrease in the ratio is not good for
the company.
Capital gearing ratio helps is analysing the capital structure of the enterprise. It plays a
vital role in assessing the financial leverage of the entity (Francis and Osborne, 2012). A
company is said to be low geared if a large portion is constituted through common shareholder's
equity and vice versa. Sage ratio has reduced from 0.41 to 0.37 which shows sound financial
strength of the enterprise.
In the end, return on capital employed have been calculated, which is a profitability ratio
measuring that how efficiently the enterprise have been able to generate its capital employed.
There is a decrease in Sage ratio from 0.98 to 0.94 to 2016. It is important for the company to
focus on elements of this ratio in order to increase its profitability.
Overall state of the company
The overall state of the company shows that Sage is required to improve upon its profits
as the company is not able to generate enough sales that can help in laying off its cost and other
necessary expenses. Further, the company is also facing cash flow and insolvency issues which is
required to be solved by increasing the cash inflow of the enterprise (Gopinath, Helpman and
Rogoff, 2014).
It can be interpreted that the company is not in very strong state. However, its profits is
on increasing stage. Appropriate allocation of resources can further help in generating higher
profits as the company have enough potential. Assessing the overall state of the company from
the first analysis, it is recommended that Barclay's can invest in the company with the aim of
generating higher returns.
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TASK 2
a) Advantages and disadvantages of three valuation methods
Business valuation helps in calculating the cost of the business. It takes into consideration
business, ownership interest, security and intangible assets as well. It also helps in estimating the
selling price of the business. There are various methods of valuation. However, the three main
methods are,
 Net Asset basis: It is an important method used in calculating business valuation whose
major focus is on Net Asset Value (NAV) or Fair market value of the business. It helps in
determining the cost that will be required to recreate the business and bring it to the
position where it is today. It uses the data in financial statements of the company and is
often considered in case of company is n longer operational and going concern (Asset
based valuation approach, 2017). The main advantage of this method is that it is easy to
calculate, readily available and helps in assessing the minimum value ton the company.
However, the major disadvantages of this approach is that it becomes difficult to analyse
the valuation of intangible assets such as, intellectual property rights. In addition to this,
the method do not consider future earnings of the company as well.
 Price / earning method: It is a business valuation ratio which helps in measuring the
current share price of the entity with the help of its recent earnings per share. It also
assesses that how much pound an investor is willing to pay in order to get one pound
from the earnings of the company. An enterprise having higher P/E ratio shows higher
potential for the future earnings and it will pay higher dividend to its investors and vice
versa (Melvin and Norrbin, 2017). The main advantage of it is that it is easy to use,
interpret and calculate. The method is considered to be reliable as well. However, the
main disadvantage of the method is that the ratio is useful only if the two companies from
the same industry are compared. In addition to this, it does not give the overview that
how the company is earning profits and in what pace.
 Dividend valuation method: This model is considered as reliable in order to ascertain
the valuation of the company. It is useful method in case of the growth rate is similar or
lower than the nominal growth rate of the economy. However, the main disadvantage of
the model is that it is difficult to ascertain the growth rate of future and hence the
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valuation through dividend method become sensitive. If growth rate is more than
discount rate, in that case the results will be negative and not appropriate.
b) Calculations with the help of three valuation methods
Net Asset based Valuation (Sage Group (The) PLC ADR, 2016)
Company value = Current Assets + Non current Assets – Current Liabilities – Non Current
Liabilities
= £695 + £1961 – £988 – 615
= 2656 – 1603
= GBP £7977.78 Million
Price / earning Method of Valuation (Sage Group (The) PLC ADR, 2016)
Value of the company = Share price (30st September 2016)* No. of Ordinary shares
= £7.38 * £1081 million
= GBP 1328.4 million
Dividend Valuation Method (Sage Group (The) PLC ADR, 2016)
Ke = Rf+ (Rm-Rf)beta
= 1.4 + (7.37 – 1.4) *1.2
= 8.56
Share price = [{D(1+g)} / (Ke-g)]
= [{93(1+.0275)} / (0.08-.0275)]
= 99.5575 / .0525
= 1896.33
Value of the company = Share price * No. of shares
= 1896.33 * 1.8 million
= GBP 3413.4 million
c) Difference in the three valuation methods
Three valuation methods have been used to ascertain the value of the firm. The methods
are, Net Asset based Valuation, Price earning method of valuation and Dividend valuation
model. The results obtained from Sage using three methods are quite different.
The value received from Net Asset based valuation is GBP £7977.78 Million. However,
in case of Price / earning Method of Valuation and Dividend Valuation Method are GBP 1328.4
million and GBP 3413.4 million. It can be ascertained that the lowest value is received through
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Price earning method of valuation. It is difficult to rely on the value received from Dividend
Valuation model as it happens to be quite high in comparison to the values received from the
other two models (Brealey and et.al., 2012).
Asset based method is reliable to the firms who are going to get liquidated and are not
performing well since few years. Hence, this method wont be considered as reliable in case of
Sage. Hence, the value received from price earning method of valuation that is 1328.4 million
seems to be reliable in comparison to then other two method of valuation being used.
d) Current risk exposure to Sage group Plc
Sage is exposed to various risk in UK market. Some of them are mentioned below:
 Crash in IT system can act as a major drawback for the company as almost every process
of the company are depended upon technological front. Sudden breakdown of the system
without backup can lead to data loss of thousands of customers that are connected to Sage
(Cowling, Liu and Ledger, 2012).
 The company is also at financial risk as there is not much increase in the profits of the
company which may lead the company in to losses in the forthcoming years.
 The company face problems in ascertaining contingent liabilities where it is difficult to
assess the risk involved in the software and take appropriate actions to avoid it (Ammann,
2013). Strategic planning is the only way through which Sage can reduce this risk to the
minimum.
 Threat to cyber crimes and unavoidable access to the private data can disclose all the
personal information of the company to the foreign server. It can further reduce the
customer base and affect the reputation of the company as well. The entity requires a
competitive firewall so that the data can be protected from foreign host and no private
information is leaked outside (Wang, 2013).
 Less or unsatisfied customers may not turn back to the company affecting the reputation
and revenue of the company as well. Sage is required to be ready for this type of scenario
and must be aware of the factors that can ultimately contribute to the profits of the
organization (Silvius, 2012).
e) Impact of economic environment
The crisis in US in 2008 had a great impact on the businesses all over the world. A major
hit was undergone by technological companies. It reduced the pace of growth rate of Sage
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leading to demand failure of the software. It has a greater impact on the demand made by their
permanent clients further declining their revenues as well (Inger, 2013). It brought recession to
the technological market. Further, another important incident took place in UK in 2015 when
there was a rise in the inflation rate making the available market costlier. It reduces the demand
of the customers leading sage to losses.
Hence, it can be assessed that the global as well as UK market is unstable and it difficult
to evaluate the contingent risk available to the company. Another economic risk associated to it
is changes in the tax rate by the government further increasing the tax liability of the enterprise.
It also affects the demand level of the customer further contributing to decline of entity's
revenues.
TASK 3
Recommendation through the information
The overall analysis made above through various ways such as ratio analysis. It helped in
comparing the financial position of Sage of 2016 with that of 2015. Further, in order to provide
final recommendation to Barclay, the value of the firm is ascertained using three different
methods of valuation which are, Net Asset based Valuation, Price earning method of valuation
and Dividend valuation model (McNichols and Stubben, 2015). It helped in assessing that
overall value of the firm which Barclay has to pay is GBP 1328.4 million. Although it is a big
amount to be paid to acquire a company, it can be analysed that the deal will prove to be fruitful.
The company’s position is good and hence will be able to grow in future years.
In concern to the major risks involved in the business, better strategic planning can help
in dealing with the issue. Hence, after considering all the important aspects of the business it is
advised that Barclay must opt for acquiring sage as it reflects better financial position that will
prove to be fruitful for the company (Brösel, Matschke and Olbrich, 2012).
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REFERENCES
Books and Journals
Agénor, P. R. and Pereira da Silva, L. A., 2012. Macroeconomic stability, financial stability, and
monetary policy rules. International Finance. 15(2). pp.205-224.
Ammann, M., 2013. Credit risk valuation: methods, models, and applications. Springer Science
& Business Media.
Brealey, R. A. and et.al., 2012.Principles of corporate finance. Tata McGraw-Hill Education.
Brösel, G., Matschke, M. J. and Olbrich, M., 2012. Valuation of entrepreneurial
businesses. International Journal of Entrepreneurial Venturing. 4(3). pp.239-256.
Cowling, M., Liu, W. and Ledger, A., 2012. Small business financing in the UK before and
during the current financial crisis. International Small Business Journal. 30(7). pp.778-
800.
Francis, W. B. and Osborne, M., 2012. Capital requirements and bank behavior in the UK: Are
there lessons for international capital standards?. Journal of Banking & Finance. 36(3).
pp.803-816.
Gopinath, G., Helpman, E. and Rogoff, K. eds., 2014. Handbook of international
economics (Vol. 4). Elsevier.
Inger, K. K., 2013. Relative valuation of alternative methods of tax avoidance.
McNichols, M. F. and Stubben, S. R., 2015. The effect of target-firm accounting quality on
valuation in acquisitions. Review of Accounting Studies. 20(1). pp.110-140.
Melvin, M. and Norrbin, S., 2017. International money and finance. Academic Press.
Silvius, J. G., 2012. A conceptual model for aligning IT valuation methods. Business Strategy
and Applications in Enterprise IT Governance. Hershey, PA, USA: IGI Global, pp.182-
201.
Wang, M. C., 2013. Value relevance on intellectual capital valuation methods: the role of
corporate governance. Quality & Quantity, pp.1-11.
Online
Asset based valuation approach. 2017. [Online]. Available through
<https://explainry.com/finance/asset-based-valuation/>. [Accessed on 23rd October
2017].
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