Financial analysis of Goals Soccer Centres and its potential for an IPO

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Section A

  1. Main activities of Goals Soccer Centres plc:
  • Operating outdoor soccer centres.
  • Providing sports venues for clients to experience 5-a-side football through “next generation” facilities
  • Providing bar & vending services, birthday parties, corporate events and sponsorship.

Key features of the company’s strategy:

  • Driving higher returns by operational excellence
  • Providing a greater customer experience and product innovation to build a strong brand
  • Concentrating on creating shareholders’ sustainable value
  • Focusing on reducing debt
  1. Criteria for listing on AIM:
  • Company should be a public company
  • Shareholders do not have any limitation to transfer their shares
  • The published accounts must be consistency with International Accounting Standards or Generally Accepted Accounting Principles
  • Company needs to appoint nomad and broker that their company has been already listed in AIM.

Advantages for listing on AIM:

  • Do not require a market capitalization
  • Do not require to make a statement on the effectiveness of internal control
  • Cheaper to be AIM due to the prospectus produced is less detailed
  • Providing a balanced regulatory environment for companies
  • Owning an international investor base with a wide range of institutional and retail investors and covers diversified industries and countries
  • Providing expert advisers to help and support the companies on trading
  • Providing a cheaper and easier way for companies to IPO
  • Making a positive effect on future acquisitions

Therefore, as a growing company, AIM is the most suitable market for Goals Soccer Centres plc to be listed on.

  1. Placing is the act to help new company or company which want to issue shares to the public to find a single buyer or institutions. It shares “placed” by sponsor.

Advantages: Since it does not require brokers to assist, it can save money and it can save time with a minimum of regulatory paperwork.Also, it provides a simple method to raise money.

Disadvantage: It provides new buyers to buy shares at a discount which may be unfair for the existing shareholders. Also, the new shareholders will have the right to vote which will affect the decision-making of the company.

Annual growth

2012

£000

2011

£000

2010

£000

Annualised percentage increase (%)

Revenue

=6.81%

=9.49%

=5.98%

(3√6.81-

9.49)-1

=10.47%

Operating profit

=3.30%

=9.32%

=

(3√3.30-

9.32)-1

=29.25%

Basic earnings per share

=13.48%

=28.18%

=

(3√13.48-

28.18)-1

=21.79%

Total dividend per share

=-3%

=0%

=3%

(3√3-0)-1

=0%

Working:

2012

2011

2010

Basic earnings per share

=15.98p

=14p

=11p

Total dividend per share

=$0.0179 per share

=$0.0185 per share

=$0.0185 per share

2012

£000

2011

£000

2010

£000

Gross profit margin

=

= 89.37%

= 89.14%

=88.75%

Operating profit margin

=

=34.73%

=35.91%

=35.96%

Net profit margin

=

=24.18%

=22.56%

=19.08%

On the past 3 year performance, gross profit margin has maintained a slightly increase. The percentage increase in sales was 9.49% in 2011 and it fell to 6.81% in 2012, this may attribute to the adverse weather.

For operating profit margin, it shows a slightly decrease in these years. It may be affected by the adverse weather too. Also, the increase (2012: 55.13%; 2011:10.41%) in administrative expense may cause to the decrease on operating profit margin.

The net profit margin also showed an upward trend. The reason may be due to the decrease of financial expense and income tax. The decreasing percentage on financial expense was 6.2% in 2011 and 18.1% in 2012.

Earnings per share are kept on increasing from 11p in 2010 to 15.98p in 2012. However, the annual growth rate is decline during the period. The reason for this may attribute to the fall of net profit (2012:14.46%; 2011:29.48%) and the rise in the number of ordinary shares.

Dividends per share have no significant fluctuation. The annualised percentage increase remains unchanged during the period.

For the compound annual growth rate, there is a negative result for all ratios. The company did not perform well in recent years. This may due to the weather condition.

  1. Exceptional items are some special or abnormal activities arising from the business. It is required to represent on the income statement or balance sheet and disclosed the separate items into before exceptional items, exceptional items and the total figures in the financial statements. As these items are exceptional, we do not assess them in our calculations. Also, the exceptional items of £7.4m have a significant impact that it reduced the overall profit for the year.

f) Cash conversion cycle

2012

2011

Days Inventory Outstanding

=

=75 days

= 84 days

Days Sales Outstanding

=

= 8 days

= 7 days

Days Payable Outstanding =

30 days ( Refer to 2012 Annual Report P.13)

47 days ( Refer to 2012 Annual Report P.13)

Cash Conversion Cycle

= DIO+DSO-DPO

75+8-30

= 53 days

84+7-47

= 44 days

g)

2012

2011

Capital gearing ratio:

=48%

=50%

Income gearing ratio:

= 15.7%

=20%

h) Financial strengths:

  • The profit maintains an upward trend for each year.
  • The increase of earnings per share and the stable dividend per share may attract potential shareholders. (Earnings per share is 11p in 2010, it rose to 15.58p in 2012.)
  • The reducing of average purchases outstanding days (2011: 47 days; 2012: 30 days) and the reduction of debt reflected the improvement of cash flow capacity.

Financial weaknesses:

  • The annual growth rate of revenue has decreased from 9.49% in 2011 to 6.81% in 2012 which may affect by the weather condition or economic factors.
  • The higher gearing ratio of 48% may make the company more difficult to get long-term loans.
  • The negative amount of £1,378,000 showed in cash flow statements represent that cash is flowing out. Cash from operating activities cannot sufficient to cover the cash used in investing activities and financing activities.
  • The financial figures are affected by exceptional items significantly.
  1. Future opportunities of the company:
  • Increasing the average EBITDA per centre.
  • Replacing Umbro and increasing the number of brand partners through discussions with potential brand partners.
  • Co-operating with relevant brand to extend brand reach and appeal

through new strategic complementary partnerships.

Risks:

  • Credit risk: Risk of financial loss to the company which trade receivables may write off as bad debts. According to the past 4 years, it showed an increasing amount on trade receivable. For example, the amount of trade receivable has increased by £157,000 and £508,000 on cash and cash equivalents in 2012. It is expected that the credit risk will become higher in future.
  • Liquidity risk: Risk that the company is unable to meet their financial obligations. Comparing the bank overdraft and other financial liabilities in 2011 and 2012, it showed an increasing amount of about £1m which caused to a higher liquidity risk.
  • Market risk: Risk that the changes in interest rates and exchange rates which will affect company’s income or value of financial instruments.

j) (i) P / E ratio = =

= 13.82 times

(ii) The dividend yield =

=

= 0.85%

k) (i) Net asset value per share

=

=

= 105.54p

The company will use this method to view the sum of value of its net assets. When comparing to the market price, we need to calculate the share value from the figures in balance sheet.

(ii) Dividend discount model:

Po=

=

= 20.72p

Working:

Risk-free rate = 2.743%

Beta = 0.38

Market return =

= 18.78%

Ke = Risk-free rate + Beta (Market return – Risk-free rate)

= 0.02743 + 0.38 (0.1878 – 0.02743)

= 8.84%

D1 =Do (1+g)

= 1.175 (1+0.03)

= 1.21

l)

Absolute share performance shows the prices of stock whether gaining or losing, to calculate:

= 107.29%

Section B

Introduction

Goals Soccer Centres plc runs the ‘next generation’ outdoor 5-a-side soccer centres. There are 43 centres in the UK and one in USA. The product areas are including football, bar & vending services, birthday parties, corporate events and sponsorship.

The objective of the company is creating a successful 5-a-side brand. It committed to provide a number of high quality venues and friendly service for client to have a special and wonderful experience on 5-a-side football.

Historical Operating Performance

Goals Soccer Centres plc was set up in 1987 with its first branch. Now, it grew up to 44 centres. The company has expanded rapidly and became the substantial brand in UK. Since the popularity of football in UK, 5-a-side football has become one of favorite sport for British. Goals has capitalized this opportunity and exploited the potential market demand to grow and develop.

Although there are some impacts from adverse weather like snow-affected period, the revenue maintained an increasing trend in recent year. The demand of 5-a-side football has not declined. It is expected that the demand of 5-a-side football will not decrease in the future and the company will get many potential chance and opportunities to improve and develop.

Companys Financial Health

In view of the financial statements of the company, the non-current liabilities have reduced in 2012. Although it has increased from £60,634,000 in 2010 to £62,831,000 in 2011 which may attribute to the further borrowings and loans, the debt has reduced to £50.2m due to the strategy of debt reduction. Also, the revenue of the company has increased rapidly. The total revenues are £27,804,000, £30,443,000 and £32,516,000 in 2010, 2011 and 2012 respectively. This may be caused by the new centres.

Although the revenue kept increasing in recent years, the annualized percentage increase of revenue showed a negative figure of -10.47% which dropped from 9.49% in 2011 to 6.81% in 2012. The company should focus on improving returns.

Moreover, the equity of the company was continuing increased in past 3 years. The amount is increased from £46,118,000 to £53,877,000. The factors may be due to the increase of share premium by £2,578,000 in 2012 and retained earnings of £5,849,000 in 2011 etc.

Even though the capital gearing ratio decreased from 50% to 48% in 2012, the rate was still remain higher for lenders. It may make more difficult to borrow money in the future.

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