Ratios help to compare figures from the financial statements and can help firms identify problems (Owen, 2003). The main two financial statements used were the Balance Sheet and Income Statement. However, when inputting the figures from those two sheets, many of the ratios were negative due to the RANK Group making a loss in both 2023 FY and 2021 FY. The negative and positive values for some ratios were not of concern and therefore could be removed, but some needed a negative or positive to explain the growth or decline. However, it was initially hard to determine which ratios should have a negative or positive and which ones it did not matter.
Furthermore, there were values that were calculated, assumed or found in the annual reports. The number of issued ordinary shares were found in the annual report and since COVID-19, they were constant at 468.4 million. However, they were slightly less in 2020, with there only being 390.7 million shares issued. I found another company online, Entain, which is a gambling firm too. For the years 2020, 2021 and 2022, they had approximately 580 million shares issued each year. However, Entain is a much larger company than RANK Group as they span worldwide, which means that RANK Group are proportionally successful with their number of shares for a smaller firm. If this is compared with another industry, like the Healthcare Industry, with the Ramsey Health Care Group, they had proportionally less shares than the RANK Group. They had on average for the 4 years, 2023, 2022, 2021, 2020, about 230 million shares which is nearly half of the RANK Groups. This ultimately means there is more interest in a company like RANK Group, than a healthcare firm.
Additionally, the market price per share was also found in each of the annual reports. However, the market prices were provided in ‘pence’ meaning that a conversion had to be done to ensure uniform units across the ratio calculations. For example, in 2023, it was 76 pence per share which had to be divided by 100 in order to get the amount in pounds. The FY ending in June 2023, had a much less market price per share than 2022, 2021 and 2020 as each of those years had between 1.6 and 1.9 pounds as opposed to 0.76 pounds in 2023. This to some extent could influence how many people and other companies invest in shares in the RANK Group. Although the number of issued shares has remained constant in the FY’s 2023, 2022, and 2021, it would be interesting to see if the number remains constant at the end of 2024 FY or whether it drops due to the drastic decrease in market price per share.
And lastly, the weighted average cost of capital (WACC) was not provided by the RANK Group and therefore the suggested percentage of 10% from the Study Guide was used.
Profitability Ratios
Firstly, the gross profit margin demonstrates how much of the sales contributes to the gross profit. In 2023, for every 1£ of sales, 23.5 pence contributes to the gross profit. 2022 had a higher gross profit margin where approximately 36 pence from every pound of sales contributed to the gross profit. A stark contrast in 2021, where only 7.3 pence from every pound of sales contributed to gross profit. RANK Group identified this sudden decrease due to COVID-19 and the restrictions that limited much of the operation. However, before these restrictions impacted the company, they had a high gross profit margin in 2020, where 42 pence from every pound of sales contributed to profit. The trend across the 4 years is fluctuating currently as there seemed to be an increase in 2022, after COVID-19 but then a decline in the gross profit margin in 2023.
On the other hand, I did some calculations of gross profit margins for Entain. For each of the four years, 2023, 2022, 2021, 2020, there was about 63 pence in every pound of their sales. They did not experience a decline due to COVID, they have maintained about the same margin each year. This does show they must have a much more robust business model. However, Entain also have a much larger online presence across many more countries than just the UK which could have aided in keeping the gross profit and sales up during the pandemic.
Furthermore, comparing to the airline industry, another students ratios on Air New Zealand demonstrated a much prolonged period of decline in comparison to the RANK Group. It is only been in 2023 that Air NZ have been on the improve with a gross profit margin of 20.32% in comparison to 13.47% in 2021. Whereas the RANK Group only had a low gross profit margin in 2021, as they improved immediately in 2022 with it going from 7.3% in 2021 to 35.9% in 2022.
When trying to find an industry benchmark for where the gross profit margin should be for the gambling industry, there was no number provided from a reliable source. There was a suggested amount of 50% from the website, Full Ratio, although this is not peer-reviewed, not scholarly, or a reliable source. Therefore decided not to use this benchmark as there is no evidence to back the figure up either.
Similarly, the other profitability ratio is net profit margin which demonstrates how much per pound of sales contributes to the net profit. In 2021 and 2023, the RANK Group made an overall loss for both those years, therefore making the net profit margins negative. However, in 2020 and 2022, there was a profit so the net profit margin was positive. In 2023, it was -14% meaning that for every pound of sales, there was 14 pence taken from the net profit, therefore 14 pence loss. In 2022, it was a much better year, there was 10 cents added to the net profit for every pound of sales. Contrastingly, 2021 was not a successful year for the company, as shown in the gross profit margin too, where 21.8 pence was lost from the net profit for every pound of sales. However, in 2020, it was a positive net profit margin where for every pound of sales, there was 1.5 pence that contributed to the net profit. This net profit ratio does reflect the net profit for the year so it was expected to have a negative margin in 2023 and 2021. However, 2022 was definitely a much more successful year with both the gross profit margin and net profit margin demonstrating that a higher proportion of the sales contributed to the profit.
The last profitability ratio to consider is the return on assets which demonstrates how much of the assets contribute to the net profit. As the same as the net profit margin, both 2023 and 2023 have negative values due to the losses made in each of those years. In 2023, for every pound that is invested in assets, 12.9 pence contributed to the net profit which was a loss. This was the largest negative return on assets. Since the margin was quite high in the negatives, it means that this year, the assets were not being efficiently turned into net profit. However, in 2022, there is 7.6 pence from every pound of assets returned to net profit. From the four years, this is the greatest return on assets meaning that the RANK Group efficiently used the assets this year. Again, in 2021, it was a negative return on assets due to the net loss created, where 8.4 pence from every pound of assets contributed to the net loss. But then there was a positive return on assets in 2020 where 1 pence out of every pound of assets contributed to the net profit.
I did some further calculations for Entain to compare the return on assets. In 2023, Entain also had a negative return on assets but a much lower percentage, -8.6%, while RANK Group had -12.9%. Therefore, it is not unusual to have a negative return on assets in the gambling industry. However, Entain had a much higher value of assets in comparison to RANK Group. Entain had about £7200 million whereas RANK had £927 million. This did result in Entain having lower percentages for return on assets each year, 0.22%, 3.6%, 1.09%. This meant that the RANK Group had more dependence on their assets to generate profit in comparison to Entain.
Efficiency Ratios
How long is it taking to sell the inventory from the time of purchase to the time of sale.
Days of Inventory demonstrate how efficiently the company is converting their inventory that they have purchased into sales. 2023 proved to be RANK’s most efficient year where they managed to only take 1.5 days from when they purchased the inventory to when it is sold. In 2022 and 2020, it took 2 days to turn the inventory into sales, whilst 2021 was the most inefficient year where it took 2.4 days. The lower the days of inventory ratio, the more optimal as it means the revenue is being generated at a higher rate as sales result in revenue.
If this what to compare to Air NZ, in the air transportation industry, it takes them 8.6 days in 2023, from the purchase of their inventory to when it is sold. 2021, it took Air NZ 15.4 days which is a contrast to RANK’s days of inventory ratio of 2.4 days. However, this difference can be expected between these two contrastingly different inventories as the gambling products and services are much cheaper than the Air NZ products and services and therefore it is expected to have a higher turnover for the gambling industry.
To help with determining if the RANK Group’s days of inventory ratio was acceptable for the gambling industry, I attempted to find an industry standard or recommended value but could not find one. I also had trouble identifying Entain’s inventory and therefore could not do their calculations either to compare.
Additionally, the total asset turnover ratio also shows the firm’s efficiency with how efficiently they can turn their assets into sales. In 2023, for each penny of assets, RANK turned it into 92 pence of sales. It was lower for each other year, especially 2021, where only 38 pence of each pound of assets were turned into sales. The higher the value of the total asset turnover ratio, the more desired because it means the firm is using their assets efficiently towards their sales, and evidently revenue which contributes to the overall profit. In comparison to another gambling company, Entain, their total asset turnover ratio averaged around 50 pence per pound of assets across all 4 years. Therefore, RANK Group having a ratio of 0.92 is evident that they are more efficiently using their assets to generate sales, compared to Entain for 2023. However, Entain’s sales are much higher than RANK Groups, and in proportion to their sales, their assets have much higher value. For example, Entain had £10,850 million of total assets and £4769.6 million of sales. Whereas RANK, had £738 million of total assets and £681 million of sales. While, Entain have higher figures, there is a larger disparaity between the two, while there is not much difference between RANK ‘s sales and total assets which shows that RANK are more efficient at using their assets to generate sales.
Liquidity Ratios
Liquidity ratios, I find to be the most interesting, as they are ultimately concerned with whether the firm can pay their liabilities, which in turn demonstrates if the company is running a viable business. With the current ratio, in 2023, RANK Group had for every pound of liabilities, 43 pence is received in assets, namely cash. This does mean that the firm is spending more money on liabilities than they have of assets. There is a similar pattern in both 2021 and 2020 also, where approximately 46 and 49 pence respectively are received from one pound of liabilities. However, as discovered with the other ratios, 2022 was definitely a better year, where 65 pence was received per pound of liabilities. Although, this still does meant the firm is spending more on liabilities than it has in assets to pay. Therefore, this does show lower liquidity of the RANK Group as they do not have the assets to pay their liabilities off directly. They would have to rely on another source of income to fund the liabilities. After doing some calculations for the current ratio for the Entain firm, they seem to have more liquidity as their current ratios are higher and therefore have more assets to pay their liabilities. For example, in 2023, for every pound of liabilities they had, they had 55 pence in assets. 2022, they had 72 pence in assets to pay a pound of liabilities and then in 2021, and 2020, the current ratio was 0.9, meaning for every pound of liabilities, they had 90 pence. Comparing two companies within the same industry, does demonstrate that RANK have much lower liquidity as they have less assets to offset the liabilities. However, for the RANK Group to survive, they must have another source of cash to pay the remaining liabilities, of what the current assets do not cover. In 2023, the loans and borrowing doubled from 2022 =, meaning that the RANK Group are getting a source of cash from loans, as opposed to current assets. Therefore, as long as the RANK Group can borrow cash, they can survive with a lower current ratio. However, the current ratio has been constant over the recent years which is optimal as the firm can know it is not likely to drastically change, rather hangs around the 0.5 mark.
Quick ratios one and two provide more specific figures with what RANK have available to pay their liabilities. Quick ratio one removes the inventory and prepayment as the company has already used cash to pay for the inventory and therefore that cash is no longer available to use to pay the liabilities. Similarly, prepayments is another instance where the firm has already used the cash to pre-pay an asset, meaning this cash cannot be reversed and then used for liabilities. This reminds me of when I budget at home. After getting paid for the fortnight, I remove any prepayments, like paying for the groceries early even though I am picking them up later, because I cannot get this cash back after I have done the prepayment. This cash that I used for the groceries cannot be used to pay my liabilities for the fortnight, like fuel, and therefore, I only want to know how much I have to cover my liabilities. So, for the RANK group, throughout all four years, the quick ratios one were almost identical to the current ratios, meaning that they did not have many prepayments or inventory to remove from the current assets. For example, in 2023, they still only had 42 pence of assets available to pay the liabilities, instead of 43 pence. However, using quick ratio two, we notice are more drastic change. This is because the receivables, what the firm is expected to be paid, is removed and the ratio now only considers exactly what the firm have in assets at this exact point in time, to pay their liabilities. In 2023, the RANK Group only had 24 pence for every pound of liabilities, that they could use at that specific time to pay their liabilities. In 2022, the firm only had 44 pence in one pound of liabilities. 2021 had only 33 pence and 39 pence in 2020 for each pound of liabilities. After 2022, it showed promises of improving its liquidity as there were more assets available to pay the liabilities. But then in 2023, the short-term liquidity decreased again, but the company borrowed more cash to help pay the current liabilities. I then used another students ratios on Air New Zealand, where their quick ratios were much lower than the RANK Groups. For example, in 2023, quick ratio two for Air NZ was only 0.157 whereas the RANK Group had 0.24. Therefore, the RANK Group has better short-term liquidity than Air NZ as they have more current assets available to them, to pay the liabilities.
Financial Structure Ratios
The financial structure ratios help to explain the lower liquidity ratios. The debt/equity ratio and equity ratio both explain how much of the firm is funded by an external source, like the bank, as opposed to shareholders equity. The debt/equity ratio for the RANK Group is quite high throughout all four years, although it has decreased from 2020. In 2020, for every £1 of equity, for every £1 that a shareholder invests, £1.53 was funded by an external source, debt. This is evident in the financial statements where the RANK Group borrowed £129.10 million in 2020, as opposed to £63.7 in 2023. By 2021, the RANK Group borrowed less, required less from debt, with having a ratio of 138% meaning for each £1 invested by the shareholder, £1.38 was borrowed from the bank. Moreover, in 2022, it is about equal, for every £1 invest from the shareholders equity, £1.02 is sourced from debt or borrowed from the bank. It then increased again slightly in 2023, where £1.24 was borrowed from the bank for every £1 of equity. This explains why the current ratio was averaging around 0.45 throughout 2023, 2021 and 2020 as the company relied on borrowings and loans from the bank to provide the extra cash.
Comparing the debt/equity ratio with Air NZ, the RANK Group was almost half of their ratio. Air NZ had to borrow $3.42NZD in 2023 for every $1 of shareholders equity. 2021 was the worst year for Air NZ where they borrowed $5.06 from the debt/banks, for every $1 of equity. However, comparing to another industry is a challenge because each industry is different, with different liabilities. So, I did some calculations for the Entain firm again, and there debt/equity ratio was similar to the RANK Group. In 2023, it was a little higher where they borrowed £2.89 for every £1 of shareholders equity. But in the other three years, it averaged around £1.40 of debt for £1 of equity which is similar to the RANK Group. This demonstrates that the financial structure of a gambling firm relies somewhat on borrowings and loans, but not as much as other industries. Shareholders equity plays more of a role in gambling firms than it does in the airline industry.
Furthermore, the equity ratio shows how much of the firm is funded by shareholders and how much is funded by debt, like the banks. For example, the RANK Group, in 2023, had an equity ratio of 44.7% meaning that the shareholders funded 44.7% of the firm’s operation. This also means that 55.3% is funded by the debt, like the banks. However, in 2022, 49.6% of the firm was funded by shareholders, leaving only 50.4% to be funded by debt. This ratio is much better than all the other years, 2023, 2021, 2020. In 2020 and 2021, it experienced the same funding as 2023, where 39% and 42% respectively of the firm, was funded by shareholders equity. These figures for the RANK Group are similar to Entain’s equity ratio as they averaged about 40% for 2020, 2021, 2022 and 26% in 2023. Therefore, their financial structure relies more on debt to fund their assets than their shareholder’s equity.
The other financial structure ratio, times interest earned, was a challenging ratio to analyse due to the losses that the RANK Group made in some years. Times interest earned ratio demonstrates how many times the earnings or profit will be able to cover the interest expenses. In 2020, the earnings could only cover the interest expenses once, or just under with a 0.97 ratio. However, 2022, the earnings could pay the interest expenses 5.5 times, with a ratio of 5.57. On the other hand, 2021 and 2023 were not successful in the RANK Group’s earnings could not pay the interest expenses. In 2021, they made a net loss, which resulted in a negative times earned ratio of 7.6. Since the earnings could not be used to pay the interest expenses, they had to borrow more money which is evident in their balance sheet, where they borrowed a total of £117 million in 2021. However, the RANK Group did not borrow or loan much from the banks at all in 2023. They did not raise any more equity than other years either. The times earned ratio for 2023 was even higher at -9.74. Therefore, they had to source the cash to pay the interest expenses from somewhere else. Moreover, comparing this to Air NZ ratios again, it appears to not be unusual to have a negative times earned ratio. For 3 years, Air NZ had negative values, meaning they too could not cover their interest expenses with their earnings. I tried to see if Air NZ had to raise more equity or loan more from the banks but that is not evident in the balance sheet either. So how do companies make interest expense payments when their earnings do not cover it?
Market Ratios
These market ratios are concerned with the impact on shareholders. The first two ratios, earnings per share and dividends per share are key indicators to how much the RANK Group earn per share and then how much of those earnings are paid to the shareholders. However, in 2023 and 2021, there is a negative earnings per share because the firm suffered a loss that year. So, in 2023, out of the 468 million shares, there was a loss of 20 pence attributed to each share. Although, in 2022, there was 14 pence of net profit earned per share. Again in 2021, there was a net loss for the year so there was 15 pence of loss attributed to each share. In these 3 years, no dividends were paid to the shareholders. Since there was a loss in 2021, this explains why no dividends were paid because the RANK Group did not physically have the cash to “hand out”. But then even when they made a net profit in 2022, why didn’t they pay dividends? This may be because they were trying to recover from the previous year and therefore did not want to distribute their earnings to shareholders. Moreover, in 2020, there was 2 pence of net profit earned per share. However, in this year, dividends were paid to the shareholders. In 2020, the shareholders got paid 8 pence per share. Similarly, this produced a dividend yield ratio too which dictates how much the shareholder can expected to be paid, based on what they paid for the share. In 2020, the market price for a share in the RANK Group was £1.83 and the shareholder can be expected to be paid £0.05 or 5 pence of dividends. This is the only year that dividends were paid. Comparing this Air NZ again, they had a similar dividend yield ratio as they only paid dividends one year too. Air NZ only paid dividends in 2023, at 6 cents per share. This does demonstrate that not all firm’s will pay dividends and if they do, they are not very high.
The price earnings ratio dictates how long it will take for the earnings per share to make up the market price per share. For example, in 2020, the earnings per share was £0.02, but there is a market price of £1.83. If we only earn £0.02 per year, it is going to take 76.14 years to earn enough to pay back to the market price of the share which was £1.83 in that year. A more realistic example in 2022, where the price earnings ratio was 12.49. This means that at £0.14 earnings per share, it will only take 12.5 years to get back the money it cost for a share in 2022. It takes less time in 2022 because the market share price is slightly lower than 2020, and the earnings per share are higher. However, there are two negative values for the price earnings ratios in 2023 and 2021. This is because the earnings per share were also negative, meaning a loss was made per share in those two years. Therefore, the money spent on a share in those years, is in a way lost as it is impossible to get the money back when the firm made an overall loss. This is a similar position to Air NZ where they had negative earnings per share across 3 years, resulting in a negative price earnings ratio.
The net asset backing per share ratio does provide more reassurance to shareholders in the firm. This ratio provides the figures to the value of assets that are backing each share. In 2023, for each share, there was only 70 pence of net assets from the firm, backing that share. In 2022, it was a better year of backing where 91 pence of assets were backing each share. 2021, there was 77 pence backing each share and 2020, 94 pence backing each share. 2020, there were much less shares than the other 3 years and therefore there were more assets backing each share as there were less shares to back. However, 2022 was the year with the highest amount of net assets which meant a higher amount was backing each share, compared to 2023 and 2021 where there were the same number of shares issued. Comparing the figures for the RANK Group to Air NZ, their net asset backing per share ratio were below 1 as well, so less than $1NZD backing each share too. However, they did have one year, in 2020, where $1.17NZD of net assets were backing each share. But the RANK Group always had a ratio of less than 1.
The last market ratio, market/book ratio dictates for each £1 of net asset backing each share, the value of the market price per share. For each of the ratios across all 4 years for the RANK Group, it was higher than the market share price. This is because it takes into consideration, the value of the assets which are backing each share. In 2023, for the 70 pence of net assets backing each share, the market price value went up too £1.08 instead of £0.76. 2022, the value also increased slightly after considering the net assets backing the shares, instead of £1.73 market price per share, it went to £1.91. In 2021, it was the highest market/book ratio with the market price rising to £2.19 after taking into account the net asset backing of 77 pence per share. Lastly, 2020 saw a small change, where for 94 pence of net assets backing each share, the market price rose to £1.96 per share. Comparing these figures to Air NZ, they had a similar pattern in relation to their market share price each year, and the slight increase in the market/book ratio. For example, in 2023, Air NZ had a market share price of $0.78NZD and had 62 cents of net assets backing each share. This resulted in a market/book ratio of 1.26 meaning the market share price was worth $1.26NZD after taking into account the net assets backing each share.
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