Financial Analysis Of Sky Plc: Profitability, Asset Efficiency, And Liquidity Ratios Essay.

You are required to prepare an individual written financial analysis of the most recent full financial statements of your chosen company. You may use whatever (legal!) techniques and methods you think appropriate and any extra information.

Sky plc is a European media and telecommunication company which is situated in London, UK. The key products of the company are direct broadcast satellite, broadband, telephony services, broadcasting, pay television etc. the total revenue of the company was € 12.916 billion in 2017. Currently, 21 million subscribers are entertained by the company and 30,000 people are employed by the company (Home, 2018). The company operates its business through its segments and subsidiary companies which are sky UK, the cloud, Sky Italia, Sky Ireland etc. Currently, company is planning to expand the market through grabbing the international market more. The annual report of the company briefs that the financial position and performance of the company is quite better and chief financial officer describes about some new projects of the company (annual Report, 2017)

Ratio analysis is a process which is conducted by the financial analyst and the financial managers of the company to evaluate the profitability, liquidity, solvency, capital structure etc position of the company. It aids the company to compare the performance from last year as well as with competitors. Though, ratio analysis process has some limitations as well. The benefits and limitations of the ratio analysis are as follows:

Brigham and Ehrhardt, (2013) has briefed that ratio analysis is one of the most used tool of financial analysis to evaluate and measure the financial performance of the company. Ratio analysis aids the financial manager of the company to predict the future and evaluate the current performance of the company. Ratio analysis also assists the manager of the company to evaluate that whether the target has been achieved or not.

On the other hand, it has some limitations as well. The ratio analysis calculations totally based upon the financial statement of the company. If the financial statements are not reliable than the ratio analysis measurement is also not good and reliable (Borio, 2014). Ratio analysis is based on many assumptions and the level of an organization could not be compared with other organization in terms of liquidity, capital structure etc.

For the analysis, sky plc’s financial statement of last 4 years (2017, 2016, 2015 and 2014) has been used. The calculations and the analysis of ratios of the company are as follows:

Profitability ratios brief about the capability of an organization to generate profit on various bases such as sales revenue, total assets, equity etc. In the report, return on capital employed, gross profit margin and operating profit margin has been evaluated.

Asset Efficiency Ratios

Return on capital employed measures that how the long term finances are used by the company to enhances and generate the operating profits.

Return on Capital employed
Operating profit /		11,54,000	9,77,000	9,72,000	11,61,000
Capital employed (total assets - current liabilities)		1,28,88,000	1,30,84,000	1,11,54,000	39,30,000
Answer:	%	8.95%	7.47%	8.71%	29.54%

The calculations of return on capital employed briefs that the return on capital employed of the company is quite better. Currently, company is offering 8.97% return to the long term financers of the company.

Gross profit margin:

Gross profit margin measures the profit generation capability of the company in context with the total sales revenue of the company.

Gross Profit Margin
Gross profit /		71,03,800	65,80,750	49,77,000	41,97,600
Sales Revenue (note used operating revenue)		1,29,16,000	1,19,65,000	99,89,000	76,32,000
Answer:		0.55	0.55	0.50	0.55

The calculations of gross profit margin brief that the gross profitability position level of the company is quite competitive. The company has maintained a good limit of gross profit margin in last 4 years.

Operating profit margin:

Operating profit margin measures the profit generation capability of the company in context with the total sales revenue of the company.

Operating profit margin
Operating profit /		11,54,000	9,77,000	9,72,000	11,61,000
Sales Revenue	%	1,29,16,000	1,19,65,000	99,89,000	76,32,000
Answer:		8.93%	8.17%	9.73%	15.21%

Analysis:

The calculations of operating profit margin brief that the operating profitability position level of the company has been lowered from 2014 and 2015 but still the company is managing a competitive position.

Asset efficiency ratios brief about the capability of an organization to manage the assets and the working capital management for the daily operations of the company. In the report, inventory turnover, debtors turnover and trade payable payment days has been evaluated (Gitman and Zutter, 2012).

Inventory turnover days:

Inventory turnover days brief that how long would it take for an organization to turnover the inventories.

Inventory Turnover (days)
Average Inventory /		11,13,000	9,90,000	8,47,000	5,46,000
Cost of Sales	# days	58,12,200	53,84,250	50,12,000	34,34,400
Answer:  (note the above needs to be x 365)		69.90	67.11	61.68	58.03

Analysis:

The calculations brief that the inventory turnover days of the company has been enhanced from last year which explains about high working capital.

Debtors’ turnover days:

Debtors’ turnover days brief that how long it takes to the credit customers of the company to pay the amount.

Receivables Turnover (days)
Average trade debtors /		4,13,000	3,45,000	2,67,000	1,40,000
Sales revenue  (note used operating revenue)	# days	1,29,16,000	1,19,65,000	99,89,000	76,32,000
Answer:  (note the above needs to be x 365)		11.67	10.52	9.76	6.70

Analysis:

The calculations brief that the debtors’ turnover days of the company has also been enhanced from last year which explains about high working capital requirement.

Creditors’ turnover days brief that how long it takes to the company to pay the amount to its creditors (Borio, 2014).

Trade payable payment period ratio
Accounts payable/		16,12,000	14,21,000	13,61,000	8,02,000
Cost of sales		58,12,200	53,84,250	50,12,000	34,34,400
Answer: (note the above needs to be x 365)		101.2319	96.3300	99.1151	85.2347

Analysis:

The calculations brief that the creditors’ turnover days of the company has been increased from last year which explains about less working capital requirement

Liquidity ratios brief about the capability of an organization to manage and pay the short term debt of the company. In the report, current liquidity ratio and acid test ratio have been evaluated.

Current liquidity ratio:

Current liquidity ratio brief about the ability of the company pay off all the current liabilities of the company on the basis of current assets of the company.

Current Ratio
Current Assets /		53,34,000.00	47,02,000.00	45,59,000.00	25,73,000.00
Current liabilities		55,50,000.00	43,26,000.00	42,04,000.00	25,19,000.00
Answer:		0.96	1.09	1.08	1.02

Liquidity Ratios

Analysis:

The calculations of current ratio brief that the level of liquidity position has been lowered from last year. The company is required to maintain a competitive level.   

Acid test ratio brief about the ability of the company pay off all the current liabilities of the company on the basis of quick assets of the company.

Acid test ratio
Current Assets - Inventory /		42,21,000	37,12,000	37,12,000	20,27,000
Current Liabilities		55,50,000	43,26,000	42,04,000	25,19,000
Answer:		0.76	0.86	0.88	0.80

Analysis:

The calculations of current ratio brief that the level of liquidity position has been lowered from last year. The company is required to reduce the level of current liabilities to maintain a competitive level.  

Capital structure ratio briefs about the capability of an organization to manage its capital structure such as debts and equity (Kaplan and Atkinson, 2015). In the report, gearing ratios and interest coverage ratio have been evaluated.

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Gearing ratio briefs the position of capital structure of a company. It evaluates the long term liabilities and long term funds of the company.

Gearing ratio
Long term liabilities /		90,41,000	96,43,000	79,30,000	28,58,000
Capital employed		1,28,88,000	1,30,84,000	1,11,54,000	39,30,000
Answer:	%	0.702	0.737	0.711	0.727

Analysis:

The calculations of gearing ratio brief that the level of long term liabilities have been reduced from last year’s which briefs about less cost position of the company.  

Interest coverage ratio briefs the position of capital structure of a company. It evaluates the total cost of the company.

Interest Coverage Ratio
EBIT /		11,54,000.00	9,77,000.00	9,72,000.00	11,61,000.00
Net Finance Costs (used net interest expense)		2,45,000	2,32,000	2,21,000	1,35,000
Answer:	times p.a	4.710	4.211	4.398	8.600

Analysis:

The calculations of interest coverage ratio brief that the level of cost of the company has been enhanced in context of the last year.

Investors’ ratios brief about the investment position of an organization. It evaluates the shareholders position in the company (Grinblatt and Titman, 2016). In the report, earnings per share and dividend coverage ratio have been evaluated.

Earnings per share:

Earnings per share ratio brief the total net income of the company in context with the outstanding share of the company.

Earnings per share
Net income		6,95,000	6,66,000	19,57,000	8,65,000
Weighted average shares outstanding		17,10,000	17,07,000	16,90,000	15,62,000
Answer:		0.406	0.390	1.158	0.554

Analysis:

The calculation of earnings per share ratio briefs the level of EPS has been enhanced from last year but in context of last 4 years, the position of the company has been lowered. It briefs the alterations among the profitability position of the company.

Dividend coverage ratio brief the total net income of the company in context with the dividend paid of the company.

Dividend coverage ratio
Net income /		6,95,000.00	6,66,000.00	19,57,000.00	8,65,000.00
Dividend paid to shareholders		3,58,000	5,64,000	5,49,000	4,85,000
Answer:		1.941	1.181	3.565	1.784

(Morningstar, 2018)

Analysis:

The calculations of dividend coverage ratio briefs the level of dividends have been lowered and it explains about lower dividend payout ratio of the company. If the investors are looking forward for continuous return then the company is not a good opportunity.

The report briefs that few changes are required to be done by the chief financial officer of the company to maintain the better financial position and performance of the company. Liquidity position and the asset efficiency position should be enhanced and managed by the company for better performance.

To conclude, the overall financial position of the company is quite better and company is a good opportunity for the purpose of investment.

References:

Annual Report. 2017. Sky plc. [Online]. Available at: https://www.skygroup.sky/corporate/articles/annual-report-2017 [Retrieved on 14^th April 2018].  

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.

Grinblatt, M. and Titman, S., 2016. Financial markets & corporate strategy. Prentice Hall.

Home. 2018. Sky plc. [Online]. Available at: https://www.skygroup.sky/corporate/about-sky [Retrieved on 14^th April 2018].  

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Morningstar. 2018. Sky plc. [Online]. Available at: https://financials.morningstar.com/cash-flow/cf.html?t=SKY&region=gbr&culture=en-US&platform=sal [Retrieved on 14^th April 2018].