Telecity Group Plc Financal Statement Analysis

Submitted in fulfillment of assignment 1 of Financial and Management Accounting course Telecity Group plc Background Founded in 1998 with the establishing of the first data centre in Manchester, Telecity Group plc is operating a carrier-neutral data centre in Europe to support digital economy. It is a combination of TeleCity Limited, Redbus Interhouse Limited and Globix Holdings (UK) Limited. As a leading provider of data centre services, Telecity Group plc is listed in London Stock Exchange.In the meanwhile, it is is a constituent of the FTSE 250, FTSE techMARK 100 and FTSE4 Good indices. Driven by the rapidly increasing of digital economy, Telecity Group has been targeting to build secure, resilient and highly-connected colocation environments for the IT and telecoms equipment, to which customers can outsource their telecoms, web and IT infrastructures. For this purpose, Telecity Goup has launched the demand-driven data expansion programme, which is expanding its data center capaci ty through Europe.This European-based programme is expected to increase customer power capacity, which will in turn bust company economic of scale. Furthermore, as an Information Technology Company, Telecity Group has been highly relying on high and new technology to attract new customers and increase profits. Thus, much effort has been put into company’s ability to innovate new products and services in terms of data accessibility, security and specialty. Focusing on evaluating the implementation of its growth strategy, this paper will analyse it is financial statement base on the basic financial ratios.Ratios Analysis Introduction This section will evaluate Telecity Group plc’s financial ratios in detail. Other than looking at the past and present performance trends of the Group, this essay will also discover the company’s financial performance in comparison to Datacenter industry overall. Consequently, company management team will be able to determine the shor t term forecast of future performance. Furthermore, the analysis in this section can give guidance to investors by providing data and giving realistic view of Telecity Group’s inancial position and comparison to the industry. Profitability Ratios Given the important role profit plays as financing both dividends to shareholders and retained earnings, it is the main measure of financial performance. Figure 1 Profitability Ratios (GPM- Gross profit margin, OPM- Operational profit margin) As can be seen from figure 2, the gross profit was dramatically increased from 52% to 56 % through year 2010, and there was impressively improvement for year 2011.This can be explained by company’s successfully implementation of its growth strategy. On one side, driven by the high demanding of digital economy, the company has been focusing on increasing earnings by expanding data centre capacity and adopting new technology. On the other hand, along with the growth there is high cost. Howe ver, the even higher revenue growth still made the growth of gross profit margin. Operation profit was slightly decrease in year 2011, which implies high administrative costs in 2011. This is mainly because of a total amount of ? ,510,000 provisions respect of certain leases and the acquisition with Data Electronics and UK Grid, the costs of which were accounted in operational exceptional items in consolidated income statement. Figure 2 Profitability Ratios (PreTPM- Pre-tax profit margin, PostTPM- Post-tax profit margin) The pre-tax profit margin has also significantly improved from near 23. 5 % to about 25 % in 2011. One of reasons of this improvement is the gains on foreign exchange. The most important reason should be the write off of costs incurred on refinancing, which was an ? 00m five-year financing agreement with Barclays, HSBC, Lloyds Banking Group and RBS from last year. Unlike PreTMP, post-tax profit margin has dropped impressively to about 17. 6 %. This may be mainly bec ause of the dramatically increment in both current tax and deferred tax. Figure 3 Profitability Ratios (ROCE- Returns on capital employed, ROE- Returns on equity) Figure 3 shows that The Telecity Group’s average ROE is comparable to industry ratio which is 7. 1% up to year 2010. However, in terms of growth, the trend is dramatically going down from 2009, which is despite the fact that both total equity and profit after tax have been improved.However, the growth of profit was not in pace with the equity. In fact, this makes sense when take into account the company’s expansion strategy, which has been being successfully implemented by setting up new data centres across Europe. A big money has been invested in this expansion program, which in turn provided the company high potential turn-over. In general, financial analysts consider return on equity ratios in the 15-20% range as representing attractive levels of investment quality. In this sense, the company’s perf ormance is healthy with regards to efficiency of profitability.ROCE is one of Telecity Group key performance indicator, which is added to evaluate company’s strategy of focusing earnings return from investment. ROCE was decreased during year 2011, which was due to the company’s capacity expansion programme and acquisitions’ effect. Even though, the company’s performance in terms of generating returns is healthy in comparison with industry average rate at about 8%. Liquidity Rations Liquidity ratios are to measure a company's ability to pay off its short-term financial obligations (Atrill and McLaney, 2011).Figure 4 Liquidity Ratios In theory, the higher current ratio is better as it clearly identifies the company’s ability to pay off short debts fund its on-going operations. (Investpedia, 2009) In the case of Telecity Group, its average current ratio shows that the current assets are not able to cover its current liabilities. This is mainly because the company has invested a big money into company’s capacity expansion program and acquisition, which are holding most of company’s capital. However, the average rate is comparable to the industry as a whole at 0. 8. Trade receivable days are healthy between 25 and 40 days over the year from 2009 to 2011, there is even a decrease from 40 days to 35 days in year 2011. This is due to the demanding digital economy market. Financial Gearing Financial gearing happens when business is financed in a way of borrowing (Atrill and McLaney, 2011). The analysis of gearing ratios is to evaluate the business’s level of gearing, which is the key factor of assessing risk. Figure 5 Gearing Rations (D/E- Debts to equity, ND/E- Net debt to equity)Figure 5 shows that gross debt to equity has increased from about 30% to over 60% in year 2011 after a slightly decreasing in year 2010, which indicates Telecity Group is highly geared in 2011. This is because the significantly increase of non-current borrowing for company’s capacity expansion program and the two acquisitions. Net debt to equity is concerned with company cash to repay the borrowings. It has impressively increased to more than 60% as well demonstrating that risk exists at Telecity Group’s failure. Figure 6 Gearing Ratios (IC- Interest covre, NIC- Net interest cover) Interest cover ratio measures the amount of operating profit available to cover interest payable(Atrill and McLaney, 2011)†. As can be seen from figure 6, gross interest cover has fallen from 11 % to 10. 4 % in 2011. In terms of net interest cover which takes into account finance income, the cover ratios were slightly increased. Overall, the figures are showing that Telecity Group has the strong ability to service its debt. Cash flow analysis CFPS is concerned with the company ability of generating cash. Therefore, it is commonly referred by analysts for more accurate measure of a company's financial situation.Figure 7 Cash flow ratios (EPS- Earnings per share) The CFPS has increased from 37 pence in 2009 to 60 pence in 2011. The EPS is averagely higher then CFPS as we would commonly expected. Both EPS and CFPS have increased over the two years. The main reasons for the increase and the difference between CFPS and EP as follows: 1. Movement in foreigner exchange 2. Movement in trade receivables and trade payables 3. Depreciation charge 4. Cost of exceptional items To sum up, the net cash flow from operating activities has significantly improved by 25 % to over ? 120million. Over ? 00 million was spent on investment activities, which include capacity expansion program and acquisition activities. Investment analysis â€Å"Investment ratios are designed to help shareholder to assess the returns on their investment† (Atrill and McLaney, 2011). Earnings per share have risen from 19p to 21p in 2011, which is basically because of the increasing profit margin over the year. Conclusion As can be s een from above, the Telecity Group plc has gone through a stable healthy financial year with regards the implementation of its growth strategy. Telecity Group’s profitability stayed stable and healthy in the near two years.The low profit increment was due to the company’s expansion and acquisition strategy. Given the fact that data centre services is demanding in digital economy, Teleicty Group’s successfully expansion and acquisition will in turn make big returns. Liquidity is poor in terms of ability to cover its current liabilities. However, given the industry ratio being 0. 58, it is comparable healthy in the market. Furthermore, the short trade receivable days imply the high market demands in the data centre industry. Company’s gearing has risen to extremely high level due to its growth strategy.From investor’s perspective, there would be risk of investing in the case of company’s failure. However, take into the consideration of the cha racters of data centre industry, which are demanding the high capacity, connectivity and flexible services, Telecity group are in no way to failure as it has achieved successful implementation of its business across Europe and gained the potential of attracting new contract with exiting as well as new customers. Overall, the Telecity has been seeking the best practise within the data centre industry as a leading provider of premium carrier-neutral data centres.As the result of its successful capacity expansion and acquisitions, the further high turnover is inevitably. Appendix 1 Profitability| Gross Profit Margin| =| Gross Profit/Revenue%| ? | ? | 2009| =| 88,727| /| 169,383| %| =| 52. 4%| 2010| =| 109,773| /| 196,397| %| =| 55. 9%| 2011| =| 134,701| /| 239,818| %| =| 56. 2%| ?| Operating Profit Margin| =| Operating profit/Revenue%| | ? | 2009| ? | 39,102| /| 169,383| %| =| 23. 1%| 2010| =| 55,173| /| 196,397| %| =| 28. 1%| 2011| =| 65,359| /| 239,818| %| =| 27. 3%| ?| Pre-tax profi t Margin| =| Profit before tax/Revenue%| ? | ? | 2009| =| 38120| /| 169,383| %| =| 22. %| 2010| =| 45,941| /| 196,397| %| =| 23. 4%| 2011| =| 59,438| /| 239,818| %| =| 24. 8%| ?| ? | ? | ? | ? | ? | ? | ? | Post-tax profit Margin| =| Profit after tax/Revenue%? | ? | 2009| =| 34722| /| 169,383| %| =| 20. 5%| 2010| =| 38,031| /| 196,397| %| =| 19. 4%| 2011| =| 42,641| /| 239,818| %| =| 17. 8%| | Return on Capital Employed| =| Operating Profit/Total Capital employed| ? | ? | 2009| =| 39,102| /| (80,467+218,931)| %| =| 13. 1%| 2010| =| 55,173| /| (80654+257,545)| %| =| 16. 3%| 2011| =| 65,359| /| (183,451+298,027)| %| =| 13. 6%| | Return on Equity| =| Profit after Tax| /| Equity| %| ? ? | 2009| =| 34722| /| 218,931| %| =| 15. 9%| 2010| =| 38,031| /| 257,545| %| =| 14. 8%| 2011| =| 42,641| /| 298,027| %| =| 14. 3%| Liquidity| Current Ratio| =| current Assets/Current Liabilities | 2009| =| 51,623| /| 82,961| =| 0. 6 | ? | ? | 2010| =| 46,501| /| 82,474| =| 0. 6 | ? | ? | 2011| =| 48,398| /| 103,283| =| 0. 5 | ? | ? | ?| Trade payable days| =| Trade payables/Cost of Revenue*365| 2009| =| 47,089| /| 80,656| *| 365| =| 213days| 2010| =| 47,085| /| 86,624| *| 365| =| 198days | 2011| =| 57,935| /| 105,117| *| 365| =| 201days | ?| Trade receivable days| =| Trade receivable /Revenue? | 009| =| (19,483-6,975)| /| 169,383| *| 365| =| 27days| 2010| =| (22,139-746)| /| 196,397| *| 365| =| 40days| 2011| =| (26,365-3,560)| /| 239,818| *| 365| =| 35days| Gearing| Debt to equity| =| Non-current borrowings/Equity%| 2009| =| 80,467| /| 218,931| %| =| 36. 8%| 2010| =| 80,654| /| 257,545| %| =| 31. 3%| 2011| =| 183,451| /| 298,027| %| =| 61. 6%| ?| Net debt to equity| =| Borrowings less cash/Total Equity%? | 2009| =| (80,467-32,140)| /| 218,931| %| =| 22. 1%| 2010| =| (80,654-24,362)| /| 257,545| %| =| 21. 9%| 2011| =| (183,451-22,033)| /| 298,027| %| =| 54. 2%| | Interest Cover| =| Operating profit/Interest expense ? 2009| =| 39,102| /| 3788| =| 10. 3| ? | 2010| =| 55,173| /| 5,017| =| 11| ? | 2011| =| 65,359| /| 6,300| =| 10. 4| ? | ?| ? | ? | ? | ? | ? | ? | ? | Net Interest cover| =| Operating profit/Net Interest expense| *Net interest expense=Finance expense-interest? | 2009| =| 39,102| /| (3788-117)| =| 10. 7| ? | 2010| =| 55,173| /| (5017-11)| =| 11. 0 | ? | 2011| ? | 65,359| /| (6300-103)| =| 10. 5 | ? | Cash Flow| Cash flow per share| =| Net cash flow from operating activities/Number of equity share issued| 2009| =| 74,017| /| 198,092| =| 0. 37365| =| 37. 4p| 2010| =| 96,380| /| 198,092| =| 0. 86542| =| 48. 7p| 2011| =| 120,554| /| 198,892| =| 0. 606128| =| 60. 6p| Investment| Earnings Per Share| ? | ? | 2010| =| 19. 0p| 2011| =| 21. 1p| References Atrill, P. and McLaney,P. (2011) Accounting and Finance for Non-Specialists. 7th. ed. Essex: Pearson Education Limited. Telecity Group plc Annual report and accounts 2011 Data centres at the heart of the digital economy, 2011 TelecityGroup. Telecity Group plc Annual report and accounts 2010 Data centres at t he heart of the digital economy, 2010 TelecityGroup. http://www. investopedia. com/terms/c/currentratio. asp, Investopedia.