The FA
The FA i.e. The Football Association refers to the English football’s governing body, which was established in 1863. Ebenezer Morley is considered the father of The Association. The activities of the company include overseeing, promotion and development of the game at different levels like The FA Cup and England International Teams. The activities also include broadcast and media rights, sponsorship, licensing, merchandising along with sales of tickets (The Bloomberg, 2017).
Financial Position of the FA
Current position with respect to financials of the company as on 31st July 2015 provided an overview of that the company is continuously striving to generate commercial revenues from the core activities as well as assets. In addition, it aims to optimize the investment (refers to figure 1) (The FA., 2015).
Figure 1: Direct Investment into Football
Source: The FA (2015)
The company manages its finances based on short-medium and long-term outlook with the aim to make it sure that the company is not exposed to external risks and factors that it is not able to control effectively and efficiently. The financial statements are prepared under Financial Reporting Standard 102 (FRS 102). Figure 2 identifies the turnover situation of the company in 2015 and 2014 with the percentage changes. The results corroborated that the overall turnover in 2015 was slightly less than 2014 due to lack of turnover in categories other than broadcasting (refers to figure 2) (The FA., 2015).
Figure 2: Breakdown of Turnover in 2015 and 2014
Source: The FA (2015)
Ratio Analysis
Current Ratio
Interpretation
The current ratio provides a notion that the company has the ability to fulfill its day to day operations due to high level liquidity (Courtney, Briggs & Courtney, 2004) as its current assets are more than current liabilities. The key reason is the cash at bank and cash in hand. In addition, the company’s cash position is stronger in 2015 than 2014.
Net Working Capital
Net working capital is the ratio that measures the ability of the company to meet its current obligations with the help of current assets and how much excess or deficiency of cash the company has.
Net Working Capital = Current Assets-Current Liabilities
Interpretation
The ration provides an overview of the company’s ability to meet its daily cash obligations. The evaluation indicated that the company has excess cash in 2015 than 2015 and the overall situation is satisfactory.
Net Profit Margin
This ration provides an understanding of the percentage of profits of sales (Gibson, 2007). For instance, if a company’s profit is 6%, it means its profit is 6% of sales.
Net Profit Margin = Net Income or Profit/Net Sales
Interpretation
The net profit margin ration indicates that the company earned loss in 2015 as it was not able to utilize its sales to earn profits. On the other hand, in 2014 the net profit margin was 8.43%. The main reason of the loss in 2015 includes higher operating expenses and financial costs in 2015 than 2014.
Debt to Equity
The ratio identifies the relative portion of company’s equity and debt used to finance the assets of the company. It is also known as financial leverage (Chandra, 2011).
Debt to Equity = Total Liabilities/Shareholder’s Equity
Interpretation
The debt to equity ratio indicates the financial leverage of the company. In 2015, the company’s financial leverage is slightly higher than 2014 i.e. 4.45 times. It means the company’s debt obligations are higher than shareholder’s equity i.e. the company used debt financing to invest in the business. The higher financial leverage indicates lack of shareholder’s equity i.e. less ability meet debt obligations. The key reason is the lower level of shareholder’s equity in 2015 i.e. 117, 115 and more long-term liabilities.
Return on Assets (ROA)
Return on assets is the measurement of the return on investment. It is used to evaluate the efficiency of the management in using the assets to generate income (Böhm, 2008).
Return on Assets (ROA) = Net Sales/Average Assets
*There is no information about opening and closing assets that’s why total assets are used instead of average assets.
Interpretation
The ROA analysis provides an overview of the company’s position of generating profits from utilization of sales. The analysis indicates that the company generated less profit from sales in 2015 than 2014. Overall, the company’s is not efficient in utilizing the assets in generating return. The main reason is the lack of current asserts than fixed assets.
Times Interest Earned
The ration measures the number of times interest expense in converted into income. It indicates if the company is able to pay interest expense through profits it generated.
Times Interest Earned = EBIT / Interest Expense
EBIT = Earnings before Interest and Taxes
Interpretation
The analysis of the times interest earned ratio provides a notion that the company is less able to pay its interest through generated profits in 2015 than 2014. As in 2015, it is able to pay its interest expense 3.01 times than 3.37 times in 2014. Overall, the situation is satisfactory as the company can pay its interest expense through generated profits.
Debt Ratio
This ratio measures the portion of the company assets that is financed by the debt. Debt refers to the obligations to third parties (Anil, 2007).
Debt Ratio = Total Liabilities/Total Assets
Interpretation
The analysis of the debt ratio identified that the company’s 81.64% assets are financed by debt in 2015. In addition, the company financed more assets through debt in 2015 than 2014 as in 2014 the company’s financing of assets by debt was 80.75%. It also indicates that the company prefers debt financing than equity financing.
Financial Health of the FA in comparison to its biggest Competitor Premier League
Sale (2015) provided a notion that the FA’s 261 million pounds profit in 2014 was just the peanuts as compared to Premier League. In 2014, the company’s turnover was 332 million pounds with gross profit of 261 million pounds. On the other hand, Premier League’s profit was 5.1 billion pounds generated through domestic TV rights in three years. Figure 3 identifies the breakdown of the financial position of the Premier League in relation to each club. The financial figures corroborates that the financial position of Premier League is stronger than FA (The Football Association).
Figure 3: Club by Club Guide to Premier League’s Financial Health
Source: Harris (2015)
Limitations of Financial Ratios as a Tool of Financial Analysis
The ratio analysis is a popular tool to ascertain the financial position of the organization. However, it also has some limitations. For example, each ratio is not the exact indication of liquidity, leverage and profitability. It is due to the fact that the factors other than financial figures like profits, sales, and debt play key role in determining the financial position of the company. For example, in relation to ROA of FA there may be other factors like depreciation method and amortization of intangible assets that affected the increase or decrease of return on assets. In addition, different accounting procedures also impact the calculation of ratios and their results. It can be understood by the fact that the company stated to use FRS 102, whereas previously the company used GAAP. Both systems are linked to different standards of inventory and other financials’ calculation. Furthermore, profitability ratios are linked to dividends and appreciation of the market price of stock. Lower profitability does not necessarily mean decrease in profits due to sales, but might be due to depreciation in stock prices. In other words, ratio analysis does not take into consideration the qualitative aspects. The comparison of ratios or financials does not provide an accurate insight of the financial position of firms (Sharan, 2011). It can be understood by the fact that FA’s weak profitability position than Premier League can be due to differences in accounting methods and financing.
Conclusion
It can be concluded from the above discussion that overall financial position of the FA is satisfactory as the company is able to generate enough profits from sales and by utilizing the assets. In addition, the company is able to pay its interest. However, the financial leverage of the company is higher that is the indication of dependence of debt financing and not on the equity financing. Furthermore, the financial position of the company was stronger in 2014 than 2015. Nevertheless, it is also needed to keep into consideration that ratios do not provide accurate analysis of financial position as qualitative data is not considered. Moreover, factors like price changes and inflation are not kept into consideration. In addition, the company changes accounting guideline system. Hence, there is a need to use both qualitative and quantitative data to analyze the financial position of the company instead of depending on the ratios.
References
Anil, C. (2007) Fundamentals of Accounting and Financial Analysis (For UPTU). India: Pearson Education India.
Böhm, A. (2008) Interpretation of key figures in financial analysis. USA: GRIN Verlag.
Chandra, P. (2011) Financial management. India: Tata McGraw-Hill Education.
Courtney, M., Briggs, D., & Courtney, B. (2004) Health care financial management. USA: Elsevier Australia.
Gibson, C. (2008) Financial reporting and analysis: Using financial accounting information. USA: Cengage Learning.
Harris, N. (2015) Club-by-club guide to the Premier League's financial health: Find out what state your club is in with our graphic. [Online] Available from: http://www.dailymail.co.uk/sport/football/article-3016432/Club-club-guide-Premier-League-s-financial-health.html#ixzz4Vh8VVaVj [Accessed January 14, 2017]
Sale, C. (2015) The FA's £261million profit is just peanuts compared to Premier League mega deal [Online] Available from: http://www.dailymail.co.uk/sport/football/article-2956205/The-FA-s-261million-profit-just-peanuts-compared-Premier-League-mega-deal.html#ixzz4Vh8nVGYU [Accessed January 14, 2017]
Sharan, V. (2011) Fundamentals of Financial Management. India: Pearson Education India.
The Bloomberg. (2017) The Football Association Limited [Online] Available from: http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=5566672 [Accessed January 14, 2017]
The FA. (2015) Annual Report. [Online] Available from: http://www.thefa.com/-/media/files/pdf/the-fa-2015-16/fa-financial-report-2015.ashx [Accessed January 14, 2017]
