Introduction

This report seeks to carry out an analysis of the financial performance and position of Hornby

PLC and Games workshop PLC 2016 and 2017.In order to do so, ratio analysis of the two

companies will be carried out. Ratio analysis is a technique used in analyzing the performance

of the company by analyzing its financial statement. Ratio analysis will be used to identify trends

in the companies which will allow the investor to identify any performance changes of the two

companies over time. For this report, the key ratios which will be used include sales and

profitability ratio, Cash Flow Performance and Liquidity Position ratio, Efficiency ratios,

Gearing ratio and Share Price Movements.

About Hornby PLC and Games workshop PLC

Hornby PLC is a British company which operates in the Model railway components industry.

The company was founded in 1901 and is currently listed in the London Stock Exchange. The

company deals with the Model Railways, Train Sets, Locomotives and accessories. The

company has been experiencing financial troubles and declining financial results from the year

2017. However, takeover from PAM (Phoenix Asset Management) has helped steer the company

around

Games workshop PLC is a British company which operates in the Miniature war gaming. The

company was founded in 1975 and is currently listed in the London Stock Exchange and is a

constituent of the FTSE 250 Index. The company develops and publishes miniature war-games

such as The Lord of the Rings Strategy Battle Game and the tabletop war-games Warhammer

Age of Sigmar.
An analysis of Sales and Profitability

Gross profit margin and Return on Capital employed will be used to determine the sales and

profitability of Hornby PLC and Games workshop PLC.

Gross profit margin

The gross profit margin is a profitability ratio which is used to measure the how much of a dollar

of revenue the company is left with after paying its cost of goods

2017 2016 Change

Hornby PLC 38.4% 39.0% 0.6%
Games workshop PLC 72% 68.3% 4.07%

The gross profit margin for Hornby PLC shows us that the percentage revenue left over after

paying for the direct costs of manufacture for the year 2017 was 38.4% while that for 2016 was

39.0% which shows a 0.6% decline in the year. The reason for this decline in gross profit margin

for Hornby is that 38% (2016: 39%) there was a reduction on the planned stock of the product

lines that is discontinued and the termination of concessions as a form of distribution channel.

A higher gross profit margin is preferable as seen in the case of Games workshop PLC. The

percentage revenue left over after paying for the direct costs of manufacture for the year 2017

was 72% while that for 2016 was 68.3% which shows a 4.0% decline in one year. The reason for

this increase can be linked to the increase in revenue from subsequent product release.

ROCE
Return on Capital employed (ROCE) is a profitability ratio which measures on the performance

of the return on capital employed in the company to generate profits.

Profit before Interest and Tax

Capital Employed

2017 2016 Change

Hornby PLC -32.0% -32.8% 0.8%
Games workshop PLC 61.1% 42.3% 18.8%

Investors prefer a higher ratio as it shows that the company is able to use its capital efficiently.

The Return on Capital employed (ROCE) for Hornby PLC for 2017 was -32.0% while that for

2016 was -32.8%. This shows a significant improvement of 0.8% . The increase in ROCE is

good as it indicates that the company has been able to use its capital well . The increase can be

linked to the reduction of product lines by the business and focus is put on lines which are

profitable and can generate high profit margins. The company is able to carry out a capital

allocation process which is aligned to brand delivery targets and brand strategies.

Games workshop PLC had a ROCE of 61.1% in 2017 and 42.3% in 2016, an increase of 18.8%.

The increase was good and was driven by the increase in operating income before royalty

income. This was slightly offset by the increase on the average capital employed in the company

Cash Flow Performance and Liquidity Position

The ratios which will be used to show the cashflow performance and the liquidity position is the

current ratio and the quick ratio.

Current Ratio

The current ratio is a liquidity ratio which determines the ability of the company to pay back its

debt when they are due and in a short-term.

A low current ratio indicates an overtrading that means that the company is not able to pay their
suppliers as they fall due. On the other hand, a high ratio suggests that the firm is not making full
use of its current assets for instance cash is sitting in the bank.

Current Assets
Current Liabilities

2017 2016 change

Hornby PLC
Games workshop
PLC

HORNY PLC recorded a current ratio of 1.48:1 in 2017, a -0.78:1 decrease compared to 2016‘s
2.26:1. On the other hand, the current ratio in 2017 was 1.82:1 a 0.44:1 increase in 2016. This
decrease is not a good thing as it shows that the company’s assets decreased. Nevertheless, the
increase in 2016 was a good thing as it meant that the company had more liquid assets which
enable it to pay its debt compared to 2017. Nevertheless, HORNY PLC shows a good trend in its
current ratio as it has a ratio which is above 1 indicating that it is liquid and is able to pay its
debts and current liabilities using its assets. A ratio below 1 is not good as it means that the firm
has more liabilities compared to its asset and is not able to pay its debts using its current assets.

Quick Ratio
This ratio measures how well a company can meet its short-term financial liabilities. Despite it is
a stricter test of liquidity as it excludes the effect of inventory from current assets. Higher quick
ratios are more favourable for companies because it shows there are more quick assets than
current liabilities.

Current Assets - Inventory

 Current Liabilities

2017 2016 change

Hornby PLC
Games workshop
PLC

HORNY PLC shows a fluctuating quick ratio where in 2017 it was 1.26:1 while in 2016 it was
1.67:1 showing an increase of 0.41:1 while in 2017 it was 1.02:1 a decrease of -0.65:1. The
declining quick ratio is not a good thing as t shows the firm’s quick assets are declining, a trends
which is observed with the firm’s current assets. However, the increase in quick ratio is a good
thing as higher quick ratios are good as they show that HORNY PLC has more quick assets
which can be converted to pay its debts compared to its current liabilities. A quick ratio of 0.65,
1.67, and 1.26 in 2017, 2016 and 2017 respectively shows that the firm has 0.65, 1.67 and 1.26
times more quick assets compared to its current liabilities and the firm is able to pay its debts
without selling its long term assets.
Efficiency
Asset Turnover
The asset turnover ratio measures how efficiently assets of business generate sales. A
high asset turnover means that the company is generating a lot of sales, but to do this, it may
have to keep its prices down and so accept a low profit.

Sales
Total Assets less Current Liabilities

2017 2016
Asset Turnover 1.10 times 1.04 times
Change -0.06 times

HORNY PLC’s asset turnover shows declining trend. In the year 2017, its asset turnover was
1.10 times while in 2016, 1.04 times having a decrease of 0.06. On the other hand, in 2017 the
asset turnover was 0.92 which was a decline of 0.12 when compared to the year 2016. A
declining asset ratio is a good thing as it shows that the firm is able to generate sales using more
assets. Asset turnover ratio indicates the revenue and sales which have been generated by the
assets in the firm and therefore and asset turnover ratio shows that the net sales of the firm are
equal to of 0.92, 1.04 and 1.10 the average total asset of the firm in the years 2017, 2016 and
2017 respectively.

Receivables Days
Receivables days is the average number of days it takes receivables to pay the business. The
lower this period, the better as money tied up in receivables is not earning any profit for the
business and might even be costing the business, in terms of overdraft interest or even lost
deposit interest.

Receivables*365
Sales

2017 2016
Receivables Days 51 days 51 days
Change 0

The company shows a stagnant and increasing days in its receivable days in 2017 and 2016,
HORNY PLC had a receivable days of 51 days while in 2017 it was 61 days an increase of 10
days. This means that HORNY PLC is able to collect its debts after 51 days in 2017 and 2016
and 61 days in 2017. A higher ratio is a good thing as t means that the company operates on cash
while a low one shows that it has bad credit policies and poor collecting processes policies.

Payables Days
This ratio indicates the average number of days it takes a business to clear its suppliers. The
lower the payables days the more worst because it illustrates that the company is not making full
use of available credit terms. On the other hand, if the period is excessive it may indicate
difficulty in paying suppliers, loss of settlement discounts and worse still - possible loss of
supplier goodwill.

Payables * 365
Cost of Sales

2017 2016
Payables Days 76 days 78 days
Change 2 days

HORNY PLC shows an increasing trend in its payable day’s ratio. In 2017, its payable ratio
was 76 days where in 2016 it increased by 2 days making it 78 days and in 2017, it was 106 days
showing an increase of 28 days. Such payable days mean that the firm takes 76 days in 2017, 78
days in 2016 and 106 days in 2017 to pay its invoice to creditors. Generally the increasing trend
in payable days is not a good thing as it means that the firm delays in paying its creditor up to the
last day possible to enable it to limit its cash conversion cycle. Therefore, a low payable days is a
good thing as shows that the firm has an effective work capital management.

Inventory Days
Inventory Days show the number of days’ goods remain in inventory. The shorter the time period
involved the more efficient the firm is as it shows money is not tied up needlessly in inventory
when it could be invested more profitably.

Inventory * 365
Cost of Sales

2017 2016 2017

Inventory Days 62 days 61 days 64 days
Change -1 days 3 days
HORNY PLC shows a fluctuating trend in its inventory days. In 2017, its inventory days was 62
days while in 2016 61 days showing a decline of 1 day while in 2017 it was 64 days showing an
increase of 3 days. The declining trend in 2016 is a good show as it means that the firm was able
to increase its cash flow ad limit its inventory costs. This means that shorter days are more
preferable as it means that the firm’s inventory is liquid and its inventory is moving fast. The 62
days, 61 days and 64 days are the days the firm took so as to convert its inventory into the cost of
goods sold and cash.

Inventory Turnover
This ratio shows how many times over the business has sold the value of its stocks during the
year. A higher ratio is preferable as it shows the firm is able to tie up money for less time in
stocks. Additionally, a quicker stock turnover also means that the firm gets to make its profit
quicker which indicated to be more competitive.

Cost of Sales
Inventory

2017 2016 2017

Inventory Turnover 5.91 times 5.94 times 5.71 times
Change -0.03 times -0.23 times

HORNY PLC shows a fluctuating trend in its inventory turnover in the course of the three years.
In 2017, its inventory turnover was 5.91 while in 2016 it was 5.94 attaining an increase of 0.03
while in 2017, the number decreased by 0.23 making its inventory turnover value to be 5.71.
A decrease in inventory turnover like the one for 2016 is not a good indicators as it shows a
decrease in the sale of inventory while the increase in 2017 is good as it means that inventory
sales were more. This shows that a higher inventory is preferred compared to lower one as a
higher one means that the company fulfils its customer orders on time and its fast in selling its
inventory.
Working Capital
The working capital ratio measures a firm's ability to pay off its current liabilities with current
assets. A higher ratio is preferable as it shows the firm is able to able to expand its operations.

Receivables Days
Inventory Days
Payables Days

2017 2016
Working Capital 37 days 34 days
Change -3 days

HORNY PLC shows a declining trend in its working capital. In 2017, the company recorded a
Woking capital of 37 days while in 2016 34 days showing a decline of 3 days. This trends was
also seen in 2017 where the working capital days was 19 days a huge decline of 15 days
compared to the previous years. The decrease in Working capital is not a good sign as it shows
that the company is over lagging and it’s struggling to grow and even maintain its sales and it
should collect its revenue more quickly.

Funding Structure
Gearing
The gearing ratio measures the proportion of a company's borrowed funds to its equity. A high
geared is a high percentage of Loan Capital as a Proportion of total capital which means that the
company will have higher interest payments and a requirement to make regular payments. A low
geared indicate a low percentage of Loan Capital as a Proportion of total capital.

Debt
Debt + Equity

2017 2016 2017

Gearing 32.10% 34.70% 38.46%
 Change 2.60% 3.76%

HORNY PLC shows an increasing trend in its gearing ratio where in 2017, it recorded a gearing
ratio of 32.10 where in 2016 it was 34.70 showing an increase of 2.60 and 2017 it was 38.46
showing an increase of 3.76. This increasing gearing ratio is not a good sign as it means that
HORNY PLC has acquired more debts which is as a result of increased demand and to meets its
productivity requirement. The gearing ratio values shows that HORNY PLC borrowed 32.10 %
of its equity in 2017, 34.70% in 2016 and 38.46 % in 2017

Interest Cover
The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a
company can pay interest on outstanding debt. In other words, it measures the margin of safety a
company has for paying interest during a given period, which a company needs in order to
survive future (and perhaps unforeseeable) financial hardship should it arise. An interest
coverage ratio of more than 1 is preferable as it shows that the firm is making enough money to
pay its interest obligations and is left with some additional earnings to make its principle
payments.

Profit before Interest and Tax

Net Interest

2017 2016 2017

Interest Cover 0.42 times 3.45 times 3.54 times
Change 3.03 times 0.09 times

HORNY PLC Company shows an increasing trend in its interest coverage ratio. In 2017, the
firm recorded an interest coverage ratio of 0.42 while in 2016 3.45 experiencing an increase of
3.03. This trend was also witnessed in 2017 where the firm recorded an interest of 3.54 an
increase of 0.09 compared to the previous year. The increasing trend is a good indicator as it
shows that the firm is able to increase its cash and pay its interests and principle payments. It
also means that the company’s profitability has greatly increased and HORNY PLC is no longer
at a risk of being defaulted.

An interest coverage ratio of 0.42, 3.45 and 3.54 is the number of times the firm makes earnings
when compared to its current interest payments in 2017, 2016 and 2017 respectively. An interest
coverage ratio of above 1 is preferable as it is an indicator that the company is making enough
money which will enable it to pay its interest obligation and even remain with some more
earnings to make its principle payments.

Earnings per share (EPS)

Earnings per Share (EPS) shows the amount of net income that the firm earned per share of its
outstanding stock.

Profit after Interest and Tax

# or shares

2017 2016 2017

Earnings per share 0.41€ 0.79€ 0.89€
(EPS)
Change 0.38€ 0.10€

HORNY PLC shows an increasing trend in its Earnings per share(EPS) where in 2017 it was
0.41 and 0.79 in 2016 showing an increase of 0.38 €. This trends continues in 2017 where
HORNY PLC recorded an EPS of 0.89 an increase of 0.10 compared to the previous years. The
increasing EPS is a good sign especially for investors as it shows that the stock price of HORNY
PLC has been increasing.
A higher EPS is preferable to investors when compared to a lower one as it is a sign of
increased profitability in the firm which is distributed to the shareholders. HORNY PLC’s EPS
shows that for every euro of income the shareholders would receive 0.41 cents Euro in 2017,
0.79 cents Euro in 2016 and 0.89 cents Euro in 2017.
Price Earnings (PE)
The price Earnings ratio is used in measuring the current share price in the firm when it’s
compared to it’s per share earnings. It shows the amount in Euros an investor is expected to
invest in the company so as to get one euro of the earnings in the company.

Market price per share

EPS

2017 2016 2017

Price Earnings (PE) 0.45 times 25.22 times 29.97 times
Change 24.77 times 5.75 times

HORNY PLC shows an increasing trend in its price earnings ratio. In 2017, the firm recorded a
PE of 0.45 and in 2016 25.22 times showing an increase of 24.77 while in 2017, it was 29.97
recording an increase of 5.75 times. This shows that the investors are willing to invest 0.45,
25.22 and 24.77 euros in the firm for every euro of earnings. A higher PE is good as it shows
that the firm has an expected future growth which leads to increased Earnings the other hand,
Lower EPS is not a good thing as it shows that the firm has a poor performance at the moment
and in the future.

Dividend Cover
Dividend coverage ratio shows the number of times the company is in the position to pay its
dividends to shareholders from the profits made in that accounting year.

EPS
Dividend per share
 2017 2016 2017
Dividend Cover 0.65 times 1.26 times 1.43 times
Change 0.61 times 0.17 times

HORNY PLC shows an increasing trends in its dividend cover. In 2017 the firm recorded a
divined cover of 0.65 times and in 2016 1.26 times recording an increase of 0.61 times. This
trend increase in 2017 by 0.17 times to have an EPS of 1.43 times. The increasing trend in the
dividend coverage ratio is a good thing as it shows that the firm is able to retain increased
proportions of its earnings which enables it to finance its require nets and also led to an increase
on the firm’s dividend pay-outs in the future.

The dividend cover of 0.65, 1.26 and 1.43 means that the firm has enough earnings to pay
dividends which amount to 0.65, 1.26 and 1.43 times the present dividends pay-out in the
country. Nevertheless, the company has a dividend pay-out ratio of less than 1.5 which is not a
good thing as it shows that HORNY PLC is not able to maintain its current dividend level when
there are variations of profits in the future.

Share Price Movements

Conclusion