Investment And Corporate Impression Management Analysis Of A Company (Case Study Sample)

Investment and corporate impression management analysis of Entertainment One Ltd.
Table of ContentsPart A- Investment AnalysisIntroduction……………………………......……………………………………..……. 3-6Limitations………………………….………………………………………..………… 6Ratio analysis……………………………………….………………………..………. 6-12Profitability analysis Efficiency analysisLiquidity analysisInvestor analysisConclusion……………………..…………………………………………………..… 12Part B- Corporate impression managementTheoretical framework……………………………….……………………………. 12-13Application of theoretical framework……………………………………..……. 13-14Conclusion……………………………………………………………………..……. 14-15ReferencesAppendices
Part A- Investment analysis
1 Introduction
This report is drafted to advise a client on investing in £500,000 in Entertainment One (eOne), which is a Canadian multinational company involved in the distribution of media and entertainment content. The business model of the company is presented below.
Figure 1- Business model of eOne (eOne Annual report, 2016)
The company serves its customers through three divisions- Television, Family and Film. The contribution by each division is as below.
Figure 2- Division-wise Revenue and EBIDTA contribution for eOne (eOne annual report, 2016)
The market overview for each division is presented below.
Figure 3- Market overview for television division (eOne annual report, 2016)
Figure 4- Market overview for family division (eOne annual report, 2016)
Figure 5- Market overview for film division (eOne annual report, 2016)
The company has multiple business interests based on which the competitors are identified from the media sector.
Table 1- Competitors of eOne (Morningstar.com, 2016; Digitallook.com, 2016)
In the above figure, the following parameters for the competitors are analysed- Revenue, revenue growth%, share price, P/E (Price earnings ratio) and market capitalization. Of the peers, eOne demonstrated the best revenue growth over the observation period. In addition, based on the P/E ratio as on 1st November, 2016, the shares of eOne are most attractive for an investor.
2 Limitations
There are certain limitations associated with this report, mainly with identifying competitors for eOne. Since the company has multiple interests, it is difficult to identify true competitors for the company. However, based on similarity the competitors were identified.
3 Ratio analysis
Using the financial statements (Income statement, Balance sheet and Cash Flow statement) of the company for fast five years (refer appendices), financial ratios are calculated and presented in this section. For the formulas used for the ratio calculation, refer appendices as well.
1 Profitability analysis
left220Figure 6- Profitability analysis
It can be observed from the above figure, that company performed well over the observation period except for 2013. Despite the gross margin in 2013 being comparable to other years, several on-off costs increased the operating costs. The first one-off cost is the provision of £5.0m payable to the executive directors as part of an out-performance incentive plan, which was conditional on the shares achieving a 180-day volume-weighted average price of £2.25 per share. This plan is in existence from 2007, but based on the improved expected earnings, a provision was to settle the obligation of this payable and a related social security of £0.2m. The second one-off cost is due to a write-down of £1.6m because of several store closures due to selling off of HMV group and Blockbuster. The third one-off cost was the payment of £m 3.1 as legal and advisory costs. The company places importance on inorganic growth and incurred acquisition cost of £1m. These one-off costs of £9.8m led to a loss-making year over the observation period. From 2014 onwards, the company improved its performance, apart from a small fall in 2016 at the net income margin level, which could be attributed to the increased interest expenses for the debt taken in 2015 (discussed in this report later) and tax credit of £8.1m for one-off items, £4.9m for previous year current tax and deferred- tax adjustments and £1.7m for non-recurring items, which increased the income tax charge in 2016 by £5m than that in 2015.
2 Efficiency analysis
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Figure 7- Cash conversion and operating cycle
A desirable situation for a company is that it receives the payments from its customers at earliest and pays to its suppliers at late as possible. From the above figure, it can be observed that the above is true only for 2012 and 2013, after that DSO is higher than DPO and is reflected in the positive operating cycle. If the inventory is also considered, it is found that a significant amount of cash is trapped in inventory, which increases the cash conversion cycle. The company needs to reduce the time it needs to produce the content (inventory).
Figure 8- Asset utilization
From the above figure, it can be observed that the assets utilization efficiency is reducing over the observation period. The asset utilization should be as higher as possible, but asset turnover is less than ‘1’ over the entire observation period, which needs to be improved. However, the fixed asset turnover is very high, which could be attributed to fixed assets being small in comparison to the total assets. The company has more goodwill and intangible assets (content, copyright) than fixed assets by virtue of being in the entertainment industry.
3 Liquidity analysis
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Figure 9- Liquidity analysis
From the above table, it can be observed that the company is maintaining constant current, quick and cash ratios over the observation period. Of these ratios, current and quick ratios are above the minimum desired level of ‘1’ i.e. current assets are more than the current liabilities. However, the cash ratio is very low which is a red flag i.e. the company does not have enough cash to fulfil its current liabilities. On analysis of the interest coverage it is found that the company is generating sufficient operating income to furnish the interest expense, which is a good sign.
Figure 10- Long-term liquidity (solvency) analysis
On analysing the long-term liquidity (solvency) it is found that the company maintained D/E< 1 throughout the observation period except for 2015, when the both short-term and long-term debt were taken. The company took credit facilities from various banks to finance the content production for an interim time, as seen earlier the DSO is higher than the DPO for the company, and inventory is present as well, which means the company needs external financing to operate. The company took long-term loan from banks as well to finance its inorganic growth.
4 Investor analysis
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Figure 11- Earnings per share (EPS) analysis
The EPS as seen from the above figure showed a similar trend as net income- Since the company made loss in 2013, so the EPS was 0. The net income decreased from 2015 to 2016, the EPS also followed the trend.
Figure 12- Dividend policy analysis
The dividend declared by the company in 2012 and 2013 was very less both in absolute term and as a percentage of the share price (dividend yield). It increased in 2014, decreased in 2015 (despite the earnings increasing) and increased in 2016 (despite the earnings decreasing). This contradictory occurrence in 2015 and 2016 could be attributed to the dividend expectations of the retail investors, who despite a poor performance expect dividends.
Figure 13- P/E analysis
Due to loss in 2013, the P/E was negative hence it is shown as ‘0’. However, high P/E throughout the observation period reduces the attractiveness for the investors.
4 Conclusion
Based on the ratio analysis, it is inferred that the company performed well over the observation period, but it had low cash-ratio, high cash-conversion cycle and poor asset-turnover. The company needs to reduce the DSO, which will solve the first two problems. The asset-turnover will improve with higher profits. Based on the dividend and P/E analysis alone the investment can be questioned, but in consideration with the revenue growth and P/E comparison with the peers, the investment is overall recommended.
Part B- Corporate impression management
1 Theoretical framework
The management of a company considers disclosures as a medium to sometime exploit the information asymmetry between itself and other users of the report (Merkl-Davies & Brennan, 2007) or sometime bridge it, by changing the users’ perception about the financial performa...