Additional question 17 solution
Even though Paddy Power's data are in Euro, we can still calculate their financial ratios: here are the basic ratios we have discussed so far.
| Paddy Power plc Profitability |
2000 | 1999 |
|---|---|---|
| Gross profit margin | 87.42% | 100.00% |
| Operating profit margin | -482.58% | -285.20% |
| Net profit margin | -488.22% | -285.20% |
| Retained profit margin | -404.55% | -289.14% |
| Rate of Return | ||
| Return on Capital Employed | -23.83% | -269.22% |
| Return on Total Assets | -24.79% | -134.52% |
| Liquidity | ||
| Current ratio | 7.7 | 1.3 |
| Acid Test (Liquid) Ratio | 7.7 | 1.3 |
| Asset Usage | ||
| Total Asset Turnover | 5.08% | 47.17% |
| Stock Turnover | 0.00 | n/a |
| Debtors' Turnover | 390.19 | 199.91 |
| Creditors' Turnover | 6198.90 | n/a |
The first point must be that Paddy Power plc is hardly very profitable is it? Apart from gross profit, Paddy Power plc has only recorded losses - big losses, too, as the ratios clearly demonstrate.
A possible reason for such a poor performance in 2000 probably that it has undergone a period of rapid growth. Take a look at its balance sheet and you will see that it has grown from £653,000 to £40,335,000. At the same time turnover has increased from £605,000 to £2,376,000 whereas operating expenses have gone through the roof, so to speak!
We assume the Paddy Power has major redevelopment plans as it still has much of the cash it raised in a share issue in 2000: in cash and investments.
Paddy Power's rates of return ratios were a disaster in 1999 and whilst they aren't perfect yet, they are improving. Because of the share issue and not having spent that cash yet, the current and acid test ratios are huge for 2000. Notice they are the same since the business does not have any stocks. This cash and investment mountain has had its impact on total asset turnover too as that has dived from 48% to 5% from 1999 to 2000.
Stock turnover is zero as they have no stocks and we would need more information concerning debtors and creditors to justify the massive payments periods we have found. We don't have this additional information but clearly the figures quoted in the balance sheet are not the trade debtors and creditors' figures.
Taking the five year, horizontal, data into account now we can get a better idea of how Paddy Power plc has come to be in the position it is now it.
It is clear from the profitability ratios that we calculated, see the table below, that from 1999 onwards, Paddy Power plc has been going through a period of adjustment, as until then it seemed to be in control of its profitability at least. The graph we have drawn for Paddy Power plc confirms this overall view of its profitability.
Net asset turnover, on the other hand, whilst as volatile as profitability, has maintained a good level. This is also shown on the graph below.
| Paddy Power plc Profitability and Net Asset Turnover Ratios |
2001 | 2000 | 1999 | 1998 | 1997 |
|---|---|---|---|---|---|
| operating profit margin | 1.85% | 2.93% | 2.61% | 2.88% | 2.89% |
| profit before tax margin | 1.97% | 3.02% | 2.62% | 2.89% | 2.92% |
| profit after tax margin | 1.59% | 2.21% | 1.84% | 1.85% | 1.76% |
| Net asset turnover | 15.00 | 13.91 | 16.64 | 13.70 | 14.51 |
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