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This report is aimed to present a comprehensive analysis regarding the financial situation of Michael Page international PLC. Vertical and horizontal analysis, together with ratio interpretations are incorporated in the report, based on 5-year financial accounts until 2008. Industry's average is also employed to facilitate the analysis.
2. Industry background
Michael Page, as a specialist recruitment consultancy, works closely with the recruitment markets, providing services on behalf of clients seeking for temporary as well as permanent job positions. Concretely, the responsibility of a recruitment consultant is to attract qualified candidates and match them to job positions with client companies. In most cases, recruitment consultancies also afford advices to their clients and candidates concerning training requirements, salary levels, as well as career opportunities (Arch, 2009).
As an increasing awareness and acceptance for businesses to use specialist recruitment services, the specialist recruitment industry has been witnessed a promising development during the past two decades, especially in those countries with mature recruitment markets. However, due to the nature of the industry being driven by the economic cycle and business confidence, the overall industry has suffered severely from the economic recession in late 2007 and 2008. At present, as a result of freezing recruitment activities with the purpose of cutting cost and surviving the recession, the industry has become much small than before and is dominated by those very large companies, including Michael Page International PLC, Hays PLC and Spring Group PLC.
3. Company's information
Michael Page international PLC, with headcounter located in London, is a world-leading specialist recruitment consultancy, with more than 32-year expertise in placement of candidates in job positions, whether permanent, temporary, contract or interim. It operates in four geographic segments around the world with business clients ranging from global multi-nationals to medium and small enterprises. As to December 12th, 2008, the group has its operation in 163 offices within 28 countries worldwide, with approximately 5000 people working for it. Grown entirely organically, Michael Page has become one of the best-known consultancy companies with a cast-iron reputation on its consultative approach.
4. Ratio interpretations
4.1 Liquidity of short-term assets and related debt-paying ability
Generally, an entity will pay for its current liability by cash generated from current assets. This, in turn, mirrors its debt-paying ability, which can be fairly prominent for a firm to operate continuously instead of going bankruptcy as a result of failure to meet its short-term obligations.
Michael Page, with its operation in the service sector, does not have inventories as current assets. Thus the analysis for short-term assets would only focus on the liquidity of gross receivables. Besides, the peer group in the report is published by Infinancials (2010), consisting of 15 companies in the same industry in UK, with peer median applied for comparison with Michael Page.
Firstly, the Day's Sales in Receivables ratio gives an indication of the length of time that receivables have been outstanding at the end of the year as well as its collectability. As to Michael Page, shown in Graph 1, the increase in day's sales in receivables from 72.55 days at the end of 2004 to 84.62 days at the end of 2007 reveals the rising difficulty of the firm in the collection of receivables. But fortunately, a significant decline of the ratio has been witnessed in 2008, ending up with 76.47 days, representing an improvement in the control of receivables. However, the ratio for the company is still much higher than its peer group (41.34), suggesting the fact that Michael Page is on a disadvantageous position in managing its receivables. In addition, accounts receivable turnover ratio has been declining all the way down to 4.91 times in 2008, much lower than its peer group (8.56), reflecting the unfavourable trend concerning the liquidity of receivables.
Nevertheless, a comparison of current asset with current liabilities is still in need to further evaluate the debt-paying ability of the entity.
Given the fact that working capital cannot be utilized in the comparison of firms of different sizes, this report will apply current ratio, considered to be more indicative than working capital, to determine the sort-run solvency of the firm. Generally, higher current ratio suggests higher liquidity and better capacity of using current assets to pay current liabilities. As for Michael Page, shown in Graph 2, current ratio keeps dropping from 1.59 to the bottom of 1.33 in 2006. Surprisingly, this ratio peaked at 1.71 in 2008, higher than its peer group of 1.13. According to Gibson (2009), current ratio needs to be higher if liquidity problems exist with receivables. Thus, it is sensible to assume that the shoot of current ratio in 2008 is in an effort to deal with its liquidity problems in receivables as revealed in the previous analysis, and to be conservative in the environment of economic recession.
Additionally, the sales to working capital ratio gives an indication concerning the efficiency on the use of current assets and liabilities. For Michael Page, this figure bottoms at 8.79 times in 2008, reflecting a less profitable and less efficient use of working capital for the year 2008 relative to prior years. But this ratio is still slightly higher than its peer group (7.87), suggesting its success in maintaining an advantageous position in the industry.
Moreover, Cash flow ratios are also capable of indicating a firm's ability to meet its current maturities of debt, such as operating cash flow/ current maturities of long-term debt and current notes payable ratio. For Michael, this ratio has improved slightly in 2008, but still fairly low compared with other firms in the industry.
To conclude, Michael Page's condition regarding the liquidity of receivables and short-term debt-paying ability should be given more consideration for further improvement.
4.2 Long-term debt paying ability
A firm's long-term debt-paying ability reflects its ability to generate profits to cover interest payments and meet long-term obligations.
For Michael Page, as shown in Graph 3, its times interest earned ratio has been declining over these 5 years from 106.6 to 33.4 times. However, this ratio is supposed to be relatively high and stable over years as an indication of adequate funds for interests. Thus, Michael page, with its unfavourable records for times interest earned ratio, may be confronted with an unpleasing situation of higher required rates when obtaining additional funds.
Additionally, debt ratio expresses the proportion of assets financed by creditors, reflecting the extent creditors are protected in case of insolvency. For Michael Page, as Graph 4 shows, its debt ratio dropped to its lowest point in 2008 at 50.73%, compared with the peer group of 65.86%. This could be an impressive progress Michael Page has made in 2008 since the lower is the ratio, the better position is the firm on in the sense of long-term debt-paying ability and overall risk.
Moreover, debt/equity ratio of Michael Page fell to 102.96% in 2008, with peer group being 214.92%, further justifying the conclusion that the firm's long-term debt-paying ability is improving and above the industry average level. Besides, the debt to tangible net worth ratio also descended to its lowest point in 2008 (110.20%), documenting better debt position for the firm.
In terms of cash flow ratios, the cash flow/ total debt ratio for Michael Page has gone up to more than 60% in 2008, also indicating the firm's stronger ability to cover total debt with the yearly operating cash flow.
To conclude, Michael Page may be on a position of disadvantage with regard to its capacity of borrowing funds and protecting its long-term funds suppliers. Yet, on the other hand, Michael Page does have made substantial progress in terms of capital structure in 2008, with improved debt position, along with stronger borrowing capacity.
Profitability analysis is of vital concern to shareholders, creditors as well as managers. A commonly used profit measure is the net profit margin, which gives an indication of how effective the firm is at cost control. For Michael Page, as Graph 5 shows, its net profit margin had experienced a desirable trend from 2004 to 2007, followed by a sudden drop to 10.01% in 2008. Nevertheless, its profit margin is still considered to be much higher than the industry average level (1.5%).
Besides, return on assets ratio, which applies balance sheet average accounts in computation, evaluates the firm's profitability by measuring its ability of utilizing its assets to create profits. As to Michael Page, despite the maintenance of this measure above 30% for the first three years, it falls down to 26.23% in 2008, yet still far exceeding industry average (6.36%), showing the absolute advantage of Michael Page with regard to profitability and efficiency of managing assets.
Likewise, return of equity ratio, also calculated based on balance sheet average accounts, is another crucial ratio for analyzing a firm's profitability. In detail, as shown in Graph 6, the ROE ratio for the entity increased dramatically from 2005 to 2007, with a sharp shift in 2008, bottoming at 61.12%. Yet, despite the descant, this level still far surpasses the peer group by more than 3 times, further justifying the advantage of Michael Page in earning ability.
Therefore, an obvious conclusion can be drawn that Michael Page is holding an absolute advantage in the respect of profitability when compared with its peers in the industry. In spite of the immaterial regression in 2008, there is no reason to doubt its overall earning ability and asset management efficiency.
4.4 Investment decisions ratio
Analysis particularly concerning investors is also worth studying. In terms of financial leverage, the firm stabilized at a particular level of 1.01 for three year, until increased moderately to 1.03 in 2008. This could be a very low degree of financial leverage, indicating a relatively lower risk from the viewpoint of stockholders. As for percentage of earnings retained and dividend payout ratio, Michael Page remained at a comparatively stable level with several immaterial fluctuations during the period. Its percentage of earnings retained sustained above 70% while its dividend payout ratio is generally around 20%, which is considered to be a typical level of growing firms.
Moreover, the book value per share for Michael Page has increased significantly from 16.94 in 2004 to 65.42 in 2008, reflecting the organic growth of the firm. Referring to the latest share price of the firm, it can be seen that Michael Page is selling materially above its book value, suggesting market confidence on its potential to development.
For investors, several cash flow ratios can be applied to facilitate analysis with regard to the performance of Michael Page. In detail, operating cash flow/ cash dividends ratio has been computed for five years, with a relatively high figure of 4.83 ending at 2008. This expresses material coverage of cash dividends, although this ratio was even higher in 2007.
To conclude, from the perspective of investors, Michael Page is a company worthy considering when investing, and its performance reflected from all these ratios is rather convincing that it is a firm with promising potential.
5. Vertical analysis:sizes. A common-size balance sheet conveys all accounts as a percentage of total assets while a common-size income statement expresses all figures as a percentage of net sales. Similarly, applying vertical analysis to one firm across several fiscal years is able to give an analyst insight into the composition of the firm's financial statements, regardless of changes in the size of the firm over the period.
In the case of Michael Page international PLC from 2004 to 2008, vertical analysis has implied several key points concerning the structure of the firm's financial position as well as operational activities. Besides, most of items in the financial statements for the company is at a level of million, which affords readers of this report a rough idea regarding the size of the firm.
From the perspective of income statements, it is evident that cost of goods sold as a percentage of net sales decreases steadily from 51.44% in 2004 to 42.51% in 2007, followed by a slight increase in 2008. Consequently, gross profit as well as net income, in the proportion of net sales, has experienced the exactly opposite trend during this 5-year period. It is worth mentioning that cost of goods here for this service company consists of salary cost for temporary employees and costs incurred on behalf of clients, mainly advertising costs. Thus, the tendency of less percentage of sales consumed by costs can be an optimistic indicator of higher efficiency and profitability of the firm, with 2008 to be an exception.
In terms of balance sheet, the outcome of vertical analysis is regarded to be relatively more remarkable and valuable, since a comprehensive study concerning the composition of the firm's financial position can be facilitated by this analysis. Specifically, for Michael Page, as shown in Graph 7, the common-size balance sheet presents a steady increase in the percent of total liabilities accompanied by an undoubted decrease in the proportion of total equity during the period of 2004 to 2007, followed by a dramatic shift in 2008, when liability and equity are nearly in equal portions. This tendency suggests that the firm tends to rely more on debt instead of common equity when financing their assets.
Furthermore, the portion of current asset in total assets is experiencing an upward trend with several minor fluctuations during the process, indicating the fact that the firm is placing more emphasis on its liquidity. Specifically, this increasing tendency is primarily attributed to the growth of cash as a percentage of assets, accompanied by the proportion of gross receivable staying at a relatively stable level.
Likewise, the proportion of liabilities that are short-term obligations is rising as well, consistent with the firm's objective of higher liquidity. Interestingly, when looking insight to the composition of the firm's current liability, it is worth noticing that the proportion of accounts payable to total assets is declining all the way down from 48% in 2004 to 32% in 2008, which contradicts to the tendency of total current liability. However, it is the growth of short term loans, consisting of bank overdrafts and bank loans that lead to the climbing of the portion for current liabilities.
In all, it can be concluded from the vertical analysis that the firm is making progress to optimize its operational activities as well as financial structure continuously during this five-year period. Even though 2008 has brought several abnormal patterns to its overall trend, it can be reasonably attributed to the impact of macro-economic recession in this particular year and the firm is attempting to minimize these external negative influences by perusing its strategy of diversification.
6. Horizontal analysis:
Horizontal analysis is aimed to compare one item in the financial statement over a period of time in order to determine whether an increase or decrease has taken place. Thus, a base year amount must be chosen as a basis of comparison. In the case of Michael Page, figures in 2004 is employed as the basic amounts for studying the change of each items in the financial statement across 5 fiscal years in the form of percentage.
First of all, it is apparent that income statement can be more prominent when doing horizontal analysis since it reflects the operational activities of the firm. For Michael Page, as shown in Graph 8, the strong growth in net sale and gross profit is fairly impressive. Stephen Puckett, the Group Finance Director, explains that two-thirds of these increases in 2008 benefitted from the weakening of sterling, and most were achieved in the first half of the year, when the progressively weaker second half of the economic environment deterioration had not come.
Nevertheless, operating income, after excluding operating expenses from gross profit, has experienced a downward trend in the year of 2008 (361%), compared with 2007 (384%). According to the financial review given by Puckett (2008), the Group's strategy of organic growth has contributed to the operation losses in 2008 as investments are made to open new offices in new countries and grow existing and new businesses. Moreover, he points out that it takes time to train new staff to become fully productive. The net income, on the other hand, after taken both interest expenses and other income into consideration, has been witnessed a similar trend as operating income.
As to balance sheet accounts, total assets, liabilities and equity have all increased dramatically during this 5-year period. In detail, total assets have more than tripled compared with 2004, so have liability and common equity. Notably, the amount of short term loans in 2008 is nearly 20 times as much as that in 2004, suggesting that the group is inclined to borrow more from banks to finance its operation and development. Besides, as mentioned in the firm's annual report, the increasing of gross receivables in 2008 is mainly due to the movement in exchange rate. When applying a constant currency basis, the real receivables are declining during the year, reflecting the reduced activity in 2008 as well as an improvement in debtor days.
In a word, from the horizontal analysis, a clear picture for the development of the company during this 5-year period is obtained. Despite the economic recession in 2008, Michael Page has performed fairly well in its operations as well as developments.
In brief, it can be concluded that Michael Page is operating fairly well with a relatively advantageous position in the industry. Despite its shortcoming in receivables, and the regression arising from the macro-economic recession in 2008, this report tends to believe that by taking appropriate measures to improve its weaknesses, the company will have a promising future.