This report will critically analyse the financial and non-financial performance and overall financial health of Bodypower sports PLC by using current market information and different ratios. The report has been conducted for the year ended 30 September 2008. The studies consistently compare and evaluate the financial position of the proposed company to the previous years of the same company and by external source. SWOT analysis have been analysed in order to identify future prospects of company. Bodypower sports PLC is engaged in fitness equipment retailing in UK. The company overall financial performance is good but not satisfactory in comparison to past available data and competitor. The profit margin of the company has been decreased because of the recession in UK economy, so company needs effective strategies and policies to rebuild its image in the competitive market. The report also contains some recommendations for the proposed company.
Bodypower Sports PLC, formerly known as Bodypower Sports Limited, is a British private company engaged in the retail distribution of fitness equipment in the United Kingdom. Bodypower Sports PLC has been trading since 1994 and is the largest supplier of specialist fitness equipment and has the largest showrooms in the United Kingdom. The company offers branded fitness equipment such as treadmills, elliptical trainers, rowing machines, exercise bikes, upper body trainers, steppers, vibration training, and accessories. It also offers gym equipment, boxing equipment, table tennis tables, trampolines, commercial and sport equipment. In addition, the company provides exclusive popular fitness brands from the United States such as Bodysolid, Vectra, Powertec, and Octane Fitness.
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Bodypower sports PLC offers the widest choice of quality brands under one roof and at reasonable prices with delivery across the UK in the fastest possible time.
Analyse and evaluate the financial & non-financial business performance of Bodypower sports PLC for the period ended Sep. 2008.
Critically analyse the performance, position and overall financial health of Bodypower sports PLC using accounting statements and current market information.
Financial analysis of the Bodypower sports PLC annual reports by using different ratios.
Discuss financial concepts and their impact upon corporate reporting on the financial and non-financial performance of Bodypower sports PLC.
To identify the future performance of the Bodypower sports PLC, on the basis of historic and current information.
To analyse the performance of Bodypower sports PLC in comparison to another company (i.e. Life fitness (UK) limited)
Financial analysis of company annual report:
Atrill, P. And McLaney, E. (2006, p.168) stated that "Financial ratios provide a quick and relatively simple means of assessing the financial health of a business"
Appendix 7 shows the P/L account and financial statement of Bodypower sports PLC for the years 2006-2008. According to Atrill, P. And McLaney, E. (2005, p.25) "the objective of the major accounting statements is to provide a picture of the overall financial position and performance of the business".
Atrill, P. And McLaney, E. (2005, p.197) stated that "Financial ratios can be used to examine various aspects of financial position and performance and are widely used for planning and control purposes. They can be very helpful to managers in a wide variety of decision areas, such as profit planning, pricing, working-capital management, financial structure and dividend policy". (Appendix 8 shows the formulas of used ratios).
This ratio used to identify the return on capital employed of the business. Atrill, P. And McLaney, E. (2005, p.199) writes that "Businesses generally exist with the primary purpose of creating wealth for their owners. Profitability ratios provide an insight to the degree of success in achieving this purpose".
As ROCE express the relationship between the net profit generated during a period and the average long-term capital invested in the business during that period. Here we can see the decreasing trend in ROCE ratio.
Now the question is that why profit has been decreased over the last three years?
Firstly the Bodypower sports PLC uses loan finance and have to pay against these loans i.e. shareholder funds increased by £ 1889 thousand over the period of last three years. (Source: www.fame.bvdep.com). Inflation is the second factor which results in high cost of production and hence decrease in profit margin. Thirdly, depreciation of the equipments in stock results in decreasing ratio. On the other hand recession in the U.K. has cut down the spending power of the general masses. All these factors results to decrease in profit margin of the bodypower sports PLC. i.e. net profit margin of the proposed company was 11% in 2006 and decreased to 10.10 % in 2008. (Source: www.fame.bvdep.com). Hence the Company has been able to borrow at a lower rate of interest than its rate of ROCE.
Always on Time
Marked to Standard
"Ratios may be used to measure the efficiency with which particular resources have been used within the business. These ratios are also referred to as activity ratios". Atrill, P. And McLaney, E. (2005, p.199).
Atrill, P. And McLaney, E. (2005, p.212) stated that "The sales revenue to capital employed ratio (or asset turnover ratio) examines how effectively the assets of the business are being used to generate sales revenue".
Net assets turnover (efficiency ratio)
Net assets turnover ratio was 4.11% in the year 2006 but later the ratio decreased to 3.36 % (2007), again in 2008 it decreased upto 2.09% which is approx. twice than 2006 ratio. Less sales revenue was generated for each £ 1 of capital employed since 2006.
Why assets turnover has been decreased over the last three years?
Current assets used during the year 2006 were £ 3374 thousand (2007: £4650 thousand) and in the year 2008 assets reduced to £ 3664 thousand (source: www.fame.bvdep.com). This decrease in current assets results decrease in production and hence results in fall of efficiency ratio.
According to Atrill, P. and McLaney, E. (2005, p.216) the current ratio compares the liquid assets (that is, cash and those assets held that will soon be turned into cash) of the business with the current liabilities.
Investorglossary (2009) report says that "Current ratio is balance-sheet financial performance measure of company liquidity. Current ratio of more than 1.0 means, that a company's short term assets exceed its short term liabilities".
current ratio for BodyS.jpg
Current ratio was 1.26 times (2006) and has been increased to 1.52 times (2007), but again drop down to 1.02 times (2008). All ratios over the last three years were more than 1.0 % which means that company`s short term assets exceed its short term liabilities. Which is a good sign, but the ratios are not stable and fluctuate over the period of last three years.
Why liquidity ratio keeps on fluctuating over the last three years?
Bodypower Sports offers "Buy now pay later" scheme to its customers for 6 to 36 months which means that customers can buy fitness equipments with just 10% of deposit (source: www.Fitness-Superstore.co.uk), so due to economic recession some customer uses this option and some purchases on cash, hence this creates fluctuations in the ratio but strong cash flow (i.e. increase from 178 thousand ( 2006) to 1341 thousand (2007) means that creditors due will be met easily. (Source: www.fame.bvdep.com)
Atrill, P. and McLaney, E. (2005, p.199). stated that "financial gearing is the relationship between the contribution to financing the business made by the owners of the business and the amount contributed by others, in the form of loans. The level of gearing has an important effect on the degree of risk associated with a business. Gearing is, therefore, something that managers must consider when making financing decisions. Gearing ratios tend to highlight the extent to which the business uses loan finance".
Gearing ratio for BodyS.jpg
Gearing ratio increased more than three times in 2008 (57.37%), in comparison to 2007 (14.71%). The company has increased the borrowing for investment and expansion purpose which is good for the turnover of the company but the only disadvantage is that the company will have to pay high interest on such high borrowings, which will deplete its profit.
Why company has been decreased or increased its borrowing?
The amount of fixed assets was 1947 thousand (2006) and decreased to 1900 thousand (2007) because of decreased in borrowing (gearing ratio) by the company i.e. 23.22% (2006) to 14.71% (2007). But again company has increased its borrowing up to 57.37% and invested on its fixed assets i.e. amount of fixed assets increased from 1900 thousand (2007) to 6960 thousand (2008) (source: www.fame.bvdep.com). This is a significant financial burden on company and can increase the risk of the business becoming insolvent, however most businesses are geared to some extent.
Benchmarking of the Bodypower sports PLC : (External Comparison)
Why we need external comparison?
"In a competitive environment, a business must consider its performance in relation to that of other businesses operating in the same industry. Survival may depend on the ability to achieve comparable levels of performance. Thus a very useful basis for comparing a particular ratio is the ratio achieved by similar businesses during the same period". Atrill, P. And McLaney, E. (2005, p.200).
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Bebbington, J. and others (2001) stated that "the best way to go about understanding company financial reporting numbers is to give them a context by: combining numbers - usually in the form of ratios, looking at any trends through time in these numbers and comparing different companies and/or single companies with the industry to which they belong".
According to Britton, A. and Waterston, C. (2006, p.191) "we need benchmarks against which we can compare current performance, financial status and investment potential".
Four possible benchmarks are:
Past period achievements.
Other businesses' achievements.
Averages of business achievements in the same area.
Now here, first we will analyse the turnover, profit and loss after tax of Bodypower sports PLC in comparison to another company (i.e. Life fitness (UK) Limited) dealing in the same fitness equipments.
Bodypower Sports PLC
Life Fitness (UK) Limited
The turnover of Life Fitness (UK) Limited is more than Bodypower Sports over the last three years.
The first reason is that the Life Fitness (UK) Limited is working in more than 29 countries of the world and has internationally established. It is well renowned by peoples and increasing its business day by day. (Source: www.lifefitness.com). On the other hand Bodypower Sports is working within the U.K only. Secondly the Bodypower Sports PLC offers cheap prices and claims that customer can`t finds the low prices than the price they offer (source: www.fitness-superstore.co.uk). That`s why its turnover value is less than the competitor but still the turnover of Bodypower Sports PLC is increasing at good pace in comparison to its past performance (i.e. from 10,839 thousand (2006) to 14,673 thousand (2008).
Profit and Loss after Tax:
Life Fitness (UK) Limited
Profit of the Life Fitness (UK) Limited has been initially increased in 2007 and then fell down in 2008. The reasons of decreasing profit are high cost of input due to internationally recognized and U.K economic recession. In comparison, the profit of Bodypower Sports has been increased gradually over the period of last three years (i.e. from 835 thousand (2006) to 1,037 thousand (2008)). Overall profit of Life Fitness (UK) Limited is higher than Bodypower Sports but performance of our proposed company is satisfactory compared to competitor because our proposed company is UK based and have only 6 largest showrooms within UK in comparison to Life Fitness (UK) Limited which is working more than 29 countries. (Source: www.lifefitness.com).
Atrill, P. And McLaney, E. (2005, p.200) stated that "In a competitive environment, a business must consider its performance in relation to that of other businesses operating in the same industry. Survival may depend on the ability to achieve comparable levels of performance. Thus a very useful basis for comparing a particular ratio is the ratio achieved by similar businesses during the same period".
ROCE ratio of the Bodypower sports PLC is decreasing over last three years but in case of Life fitness (UK) limited, first it has been increased up to 34.35% (2007) and then fell down to 22.34% (2008). As Life Fitness (UK) Limited is working internationally and have the information of cheep raw material markets, so they can use their resources efficiently. (source: www.lifefitness.com) .Although in the year 2008 the performance of Life Fitness (UK) Limited was not good in comparison to 2007 but its satisfactory than our proposed company.
Bodypower Sports has assets worth £ 10,624 thousand and Life Fitness (UK) Limited has assets of £ 19,912 thousand (source: www.fame.bvdep.com). However the ratios of both companies have been decreasing continuously but performance of Bodypower Sports is good because company is making high turnover while using fewer assets in comparison to Life Fitness (UK) Limited. Our proposed company is utilizing its fewer assets in more efficient way than Life Fitness (UK) Limited.
The ratio of the Life fitness (UK) limited has been increased because of enough liquid assets to pay back its liabilities. (i.e. it has current assets worth £ 19,764 thousand and current liabilities are £ 9,774 thousand in 2008). This ratio for Bodypower Sports is initially increased in 2007 and then decreased because company used less current assets in 2008 compared to 2007 (i.e. current assets were worth £ 4,650 thousand (2007) and £ 3,664 thousand (2008). (Source: www.fame.bvdep.com). However the analysis shows that the performance of Life Fitness (UK) Limited is satisfactory.
Life fitness (UK) limited borrowed more than Bodypower Sports PLC to expend its business which is good for the company because the company performance has been satisfactory in sense of paying its debts back i.e. the ratio decreased from 354.80% (2006) to 80.37% (2008). On the other hand Bodypower sports borrowed 57.37% in 2008 which was 23.22 in the year 2006, this is the alarming sign because increasing gearing ratio will reduce the company profit and company have to pay higher interest rate against its borrowings.
From the above we are able to conclude that Life Fitness (UK) Limited performance is satisfactory than our proposed company as it has international chain and wide market to expend its business.
Balance Scorecard (Non-Financial):
Balance scorecard institute (2009) report says that the balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and non-profit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals.
There are four perspectives of balance scorecard. Bodypower sports PLC should follow these perspectives in order to gain target achievements.
Are Bodypower Sports PLC follows perspectives of balance score card?
In order to achieve balance score card perspectives Bodypower Sports PLC is efficiently working to increase its performance. As customers are important assets of a firm, the Bodypower Sports PLC offering great customer services in order to get their satisfaction. (i.e. company offers: quality products, low prices, next day delivery services, various methods to place order, appropriate advice to their customers, suitable replacements, printed instructional poster, online order facility, equipment fixing with expertise, 30 days return option, buy now pay later scheme over £400 orders and free online gym planner etc. (source: www.fitness-superstore.co.uk). Company is expanding business in rural Scotland, Ireland and all over the U.K. in order to gain high returns (source: www.fitness-superstore.co.uk/testimonials). However, all over financial performance of the company hit by the economic recession in UK but still cash flow has been satisfactory (i.e. £ 178000 thousand (2006) and £ 13,41000 thousand (2007). (source: www.fame.bvdep.com).
A stakeholder is any entity with a declared or conceivable interest or stake in a policy
concern. The range of stakeholders relevant to consider for analysis varies according to the complexity of the reform area targeted. World bank (2009) reports that Stakeholder Analysis (SA) is a methodology used to facilitate institutional and policy reform processes by accounting for and often incorporating the needs of those who have a 'stake' or an interest in the reforms under consideration.
Bodypower sports PLC has been adopted some strategies towards its stakeholders as follows:
Company offers good quality products with guarantee to the customers as much as possible according to their influence power. In turn customers are satisfied with the company services. (source: www.fitness-superstore.co.uk/testimonials).
Company offers ''back to base'' warranty for less expensive strength to its customers. (source: www.fitness-superstore.co.uk).
Company offers better environment and training to staff members to make sure that workers have unique knowledge of the features and benefits of gym equipments.
Bodypower sports PLC has only one partner of 1% (i.e. PD WALKER) in ownership and PAUL WALKER is the ultimate owner of the company (i.e. 99%). (source: www.fame.bvdep.com).
So the company is trying to achieve higher return on investment in order to satisfy its stakeholders.
Impact of the change in accounting policies of the company:
UK GAAP is stands for 'united kingdom generally accepted accounting principles'. It is a widely accepted framework of accounting rules, standards and procedures. Bodypower sports PLC is using the UK GAAP as accounting standard. SORP's is stand for statements of Recommended Practice. These are the recommendations on accounting practice for the industries.
What will be the impact if accounting standards and conventions change?
It will lead to change in the valuation of the assets, change in future forecasting of a company and the like. So, it will make difficult to compare the company performance with other companies' data because of change in accounting methods. The company cannot evaluate and analyse its performance under change accounting standard within the U.K. The same will apply for Bodypower Sprots PLC and all the companies which are supposed to follow the UK GAAP standards and SORP`s.
In order to comprehend the meaning fully let`s take the example of this report i.e. in this report we have used the company data which has been calculated according to the UK GAAP, we compared this data with another company which is following the same accounting standard. Now if the Bodypower sports PLC decided to change its accounting method for the next year it will be not possible to compare that values with company past performance and reports. Also it will be difficult for the stakeholders to identify the company performance in relation to other companies which are using UK GAAP accounting standard.
Bodypower sports PLC should invest on Innovation and R & D (Research and development).
Bodypower sports PLC should introduce new and latest machines in the competitive market.
The overall performance of Bodypower sports PLC is going down, so company should focus on its marketing mix strategies.
Bodypower sports PLC should focus on customer satisfaction and should try to build its brand image.
Bodypower sports PLC should efficiently utilize its assets for increase its production and lower the cost.