1.0 Introduction
This paper evaluates the financial performance of Sports Direct in the past three years that is 2015, 2014 and 2013. The analysis used profitability, asset efficiency, and liquidity and market ratios. The second part assesses the limitations associated with using these ratios.
Sports Direct International Plc is a “UK sports retailer engaged in retailing of sports and leisure clothing, footwear and equipment; wholesale distribution and sale of sports and leisure clothing, footwear and equipment under Company-owned or licensed brands, and licensing of its brands” (Financial times 2016). The firm’s revenue increased by 4.68% to £2.83 billion in 2015 compared with £2.71 billion in 2014. There was a significant rise in firm’s profit for the year with increases of 34.37% in 2015 to £243.35 million compared with £179.61 million in 2014. Its key competitors in general retailers industry include “Auto Trader Group PLC, BCA Marketplace PLC , Card Factory PLC ,Halfords Group plc ,Home Retail Group Plc, Inchcape plc, JD Sports Fashion PLC ,Pendragon PLC ,Pets at Home Group PLC and WH Smith Plc,”(Financial times 2016)
2.0 Financial analysis
This assesses Sports Direct’s profitability, asset efficiency, liquidity and market performance in the years 2015, 2014 and 2013.
3.0 Profitability ratios
The profitability ratios help to indicate a firm’s overall performance and the efficiency in utilizing its assets and management of its operations to create profits (Ross, Westerfield & Jordan 2001).
The return on capital employed (ROCE) indicates a firm’s efficiency in utilization of the capital it employs in profit generation. Sports Direct’s ROCE declined to 21.25% in 2015 after increases in 2014 of 27.64% and 21.82% in 2013. This shows a weakness in the firm’s capital efficiency in 2015 compared to the previous years. However, Sports direct ROCE of 21.25% is greater than the industry average of 7.42% meaning that its capital utilisation relative to the industry is greater. This therefore shows that Sports Direct’s profitability relative to the industry is strong.
The operating profit margin assesses the proportion sales which remain when all a firm’s expenses as well as costs have been subtracted. Sports Direct’s operating profit margin to 10.44% compared with 9.21% in 2014 and 9.75%. This shows a decline in the firm’s operating efficiency in 2014 but increased in 2015 to show the firm’s strong profitability.
The gross profit margin on the other hand shows the relationship between the gross profits compared to the sales that a firm generates in a given period. A firm with higher gross profit margin means that it’s producing each unit at a relatively lower cost and is therefore profitable. Sports Direct’s gross profit margin shows an increasing trend from 0.94% in 2013 to 42.68% in 2014 and 43.81% in 2015. This shows a strengthening of the firm’s profit arising from sales made and thus reveals that Sports Direct’s profitability is strong. A decrease in the firm’s cost of sales to 56.19% in 2015 compared with 57.32% in 2014 is the reason for the increase in its gross profit margin. The decrease in cost of sales shows an increase in efficiency managing its sales costs. Sports Direct’s gross profit margin of 43.81% is greater than the industry average of 43.16% to indicate that its profitability is strong (Reuters finance 2016)
4.0 Liquidity ratios
“The liquidity ratios measure the ability of a firm to satisfy its short-term obligations as they come due. Liquidity refers to the solvency of the firm’s overall financial position; the ease with which it can pay its bills” (Gitman & Zutter 2012, p.71)
The current ratio indicates the relationship existing between a firm’s current assets and current liabilities to indicate whether the former are adequate to ensure its short term obligations are met (Van Horne & Wachowicz 2008). Sports Direct’s current ratio increased to 2.30 in 2015 after declining to 1.06 in 2014 and 1.64 in 2013. The increase in the firm’s liquidity and it’s also greater than the industry average of 1.28 shows that Sports Direct’s liquidity is strong (Reuters finance 2016)
The quick ratio/acid test ratio on the other hand has similarities with the current ratio but does not include inventory in its calculations. The reason for eliminating inventory is because it takes time to convert into sales. Sports Direct’s quick increased to 0.94 in 2015 after falling to 0.35 in 2014 and 0.60 in 2015. The firm’s quick ratio is also better than the industry average of 0.79 shows Sports Direct’s liquidity to be strong within the industry (Reuters finance 2016)
5.0 Efficiency ratios
The efficiency ratios indicate the efficiency with which a firm utilises its assets in sales generation (Atrill & McLaney 2006). A firm is said to be efficient when it’s able to employ lower amounts of assets to produce goods that are of high quality and thereby greater sales.
The settlement period for trade payables shows the period which a firm takes to make payments to its creditors (Wahlen, Baginski & Bradshaw 2010). Sports Direct’s settlement period for trade payables shows a decreasing trend. It decreased to 78.18 days in 2015 compared with 92.25 days in 2014 and 90.56 days in 2013. The decrease in the days it takes the firm to pay its suppliers shows that its debt collection is strong to pay for the debt it owes and is an indication that its payables management is strong.
Settlement period for receivables shows the period that a firm’s customers that make credit take to pay for the cash they owe. Sports Direct’s settlement period for trade payables increased to 24.58 days compared with 16.59 days in 2014. This shows that the firm’s credit customers took a little longer to pay for debt owing. However, this does not suggest a weakness in the firm’s receivables since Sports Direct’s settlement period is greater than the industry average of 20.91 days (Reuters finance 2016). This means that its receivables management is favourable.
“The stock turnover indicates the efficiency with which the firm uses its assets to generate sales” (Gitman & Zutter 2012, p.75). There is a positive trend in Sports Direct’s stock turnover given that it increased to 1.60 in 2015 compared with 1.59 in 2014 and 1.55 in 2013. This means that the firm generated sales of £1.60 in 2015, £1.59 in 2014 and £1.55 in 2013 for each £1 of asset utilised. This shows that the firm’s asset efficiency is strong given that its stock turnover is greater than the industry average of 0.75 (Reuters finance 2016)
6.0 Market ratios
The market ratios are used in the assessment of the returns from the stocks they invest in.
The earnings per share (EPS) shows the earnings derived from each share increased 31.82% to 40.6p in 2015 compared with 30.8p and 26.6p in 2013. This shows an increasing trend in Sports Direct’s EPS and these shows the firm’s market performance is strong.
The price/Earnings ratio (P/E) reveals the level of investor’s confidence in a firm’s future performance. Sports Direct’s P/E decreased to 17.52 in 2015 compared with 22.21 in 2014 and greater than 14.84 in 2013. The decline in the firm’s P/E in 2015 suggests that investors were not as confident of its future compared to the previous year. However, this P/E is high enough to show Sports Direct’s future performance remains strong.
7.0 Limitations of ratio analysis
The main limitations of using ratios include:
- (i) The information used in computing is not current data but rather it’s historic in nature.
- (ii) The increase in general prices or inflation means that adjustments need to be done in the available information.
- (iii) It’s difficult to make comparisons between different companies given they employ different conventions. “When comparing businesses, differences in such matters as accounting policies, financing methods (gearing levels) and financial year ends will add to the problems of evaluation.”(Atrill & McLaney 2006, p.216)
- (iv) The data that is used in making calculations could be obsolete.
- (v) The array of ratios brings about difficulties in evaluating them due to different interpretations.
- (vi) A given ratio could be having more than form or version leading to different interpretations. For example some asset efficiency ratios for example the settlement period for trade receivables use averages in the numerator. This means that results for ratios that use end of year figures will be different from those using ratios averages and hence the interpretations will also be different.
8.0 Conclusion
Sports Direct’s profitability is favourable as indicated by a gross profit margin of 43.81% and the increasing trend in its operating profit margin. Sports Direct’s current ratio of 2.30 and quick ratio of 0.94 in 2015 shows that its liquidity is strong. Its asset efficiency is also strong and indicated by the increasing trend in its stock turnover to 1.60 in 2015 compared with 1.55 in 2013. Finally, its market performance is also good given by the 31.82% increase in EPS to 40.6p in 2015 compared with 30.8p in 2014. Its P/E of 17.52 is high to show great confidence in its future performance.
9.0 References
Atrill, P, McLaney, E (2006). Accounting and Finance for Non-specialists.
Essex: Pearson Higher education
Financial times. (2016). Sports Direct International PLC: Business profile. Retrieved
from
http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=SPD:LSE
Gitman, L, J, Zutter, C, J. (2012). Principles of Managerial Finance (13th Ed)
London: Pearson.
Reuters finance. (2016). Financials: Sports Direct International PLC. Retrieved from
http://www.reuters.com/finance/stocks/financialHighlights?symbol=SPD.L
Ross, S, A, Westerfield, R, W, Jordan, B, D. (2001). Essentials of corporate finance.
Boston: McGraw-Hill Irwin
Van Horne, J, C, Wachowicz, J, M. (2008).Fundamental of financial management.
London: Pearson education ltd.
Wahlen, J, M, Baginski, S, P, Bradshaw, M, T. (2010).Financial reporting, financial
Statement analysis and valuation: A strategic Perspective. Ohio: Cengage learning
Sports Direct.com Annual Report. (20123). Annual Report 2013.
Sports Direct.com Annual Report. (2014). Annual Report 2014.
Sports Direct.com Annual Report. (2015). Annual Report 2015.
Yahoo finance. (2016). Sports Direct International PLC: Historical prices. Retrieved
from
https://uk.finance.yahoo.com/q/hp?s=SPD.L&b=27&a=01&c=2002&e=1&d=02&f=2016&g=m
10.0 Appendices
| Profitability ratios | |||
| 2015 | 2014 | 2013 | |
| 100 | |||
| Liquidity ratios | |||
| 2015 | 2014 | 2013 | |
| -inventories | |||
| Asset efficiency ratios | |||
| 2015 | 2014 | 2013 | |
| Market value ratios | |||
| 2015 | 2014 | 2013 | |
