A Review of Ladbrokes and William Hills Accounts for 2007 -2008 Terms of Reference Ladbrokes and William Hill

are both large betting shop chains. In order to assess which of these two businesses would be most suitable for investment I have studied their published accounts for the years 2007 and 2008. I have laid out my findings below, starting first with Ladbrokes. I will assess each business based upon the following criteria; Profitability; Liquidity; Gearing; Interest Cover; Debtor Turnover; Asset Turnover; ROCE; Earnings per Share; and finally an analysis of their cash flow statement to assess their cash position and the primary sources of finance that they have used. Following on from the analysis of Ladbrokes are the details for William Hills accounts. Once I have demonstrated my findings from this I will continue on to explain what it is that these findings mean and how they can be used to assess which of the two businesses is best suited for investment. Finally I will make a recommendation as to which one you should invest in in the future, based upon my findings. Introduction When making an investment in any business it is always important to ensure that it is a sound one. In order to achieve this, an analysis of the businesses accounts can be undertaken. This will provide an accurate reflection of how the business is performing at the time of the accounts publication, but in order to gain a clearer understanding it will be necessary to analyse more than just this years accounts. By looking at the previous years accounts as well it will be possible to draw a comparison between the two and determine whether the business has improved or declined over the previous twelve months, thus giving an indication of where the business may be heading in the future. In order to make this determination there are several areas of the businesses performance that can be examined, and these have been detailed below. For the sake of simplicity, I have detailed my findings one business at a time, and then continued on to explain what it is that these findings indicate in terms of the strengths and weaknesses of each business, and the inferences that we may draw from them, followed by my recommendation for your investment. Ladbrokes Profitability

Profitability is a term used to refer to the businesses ability to generate profits. This can be worked out based on either their gross profits, or their net profits, which are profits after all deductions have been made. Looking at the accounts for Ladbrokes for 2008, they had a gross profit margin of 2.3%. In 2007 they had a gross profit margin of 3.2%. This shows that the gross profit margin for Ladbrokes has decreased since the previous year. Looking at Ladbrokes Net profits, it can be seen that in 2007 they had a net profit margin of 2.02%, this had decreased by 2008 to just 1.3%, which is a very low profit margin, especially for such a large, well established business. Based upon these findings it can be said that Ladbrokes already low profitability has decreased further in the 12 months between the two sets of accounts.

Liquidity Liquidity refers to the businesses ability to cover its debts. A high liquidity ratio would indicate that the business is capable of covering its debts, whereas a low one would indicate that the business would be unable to pay their debts if they were to be called in. The liquidity ratio can be worked out by comparing the businesses total current assets to its total current liabilities. In the case of Ladbrokes, they can be seen to have had a liquidity ratio of 0.36 in 2007, and 0.31 in 2008. This demonstrates that the businesses liquidity has decreased over the 12 months and that as it stands at the time of the 2008 accounts, for every pound that Ladbrokes owed, they would only be able to cover 31 pence of the debt, making the business highly illiquid. Gearing The gearing ratio denotes the percentage of the capital employed by the business that is financed by borrowing and debt. It can be ascertained by dividing the borrowings of the business by its net worth and multiplying the result by 100. In the case of Ladbrokes this works out to be 43% in 2007 and 48% in 2008, indicating that there has been an increase in the capital employed that has been financed by borrowing over the 12 month period.

Interest Cover Interest cover, as the name implies denotes how many times the business is able to cover the interest that they are charged on any borrowings they have. It is calculated by dividing the profit (before interest and tax) by the interest that they are charged, and it works out that 2

Ladbrokes were able to cover their interest 6.1 times in 2007 and 4.8 times in 2008. This means that, whilst they are still more than capable of covering the interest on their borrowings, they are less able than they were 12 months previously. Debtor Turnover This refers to the businesses ability to collect on any debts that they are owed. In 2007 Ladbrokes had a debtor turnover of 3.4 days, meaning that it took them, on average, 3.4 days to collect their debts. By 2008 this had decreased to 2.4 days, indicating that their debtor turnover had in fact improved over the 12 months and is in fact very good when taking into consideration the fact that it is often around 30 days for a lot of businesses. Asset turnover This ratio measures how effectively the business utilises its assets a high asset turnover usually being indicative of a low profit margin and vice versa. In 2007 Ladbrokes asset turnover was 0.494, and in 2008 this had increased dramatically to 76.50, which would suggest that their profit margin had decreased, as has been confirmed by the profitability ratios. Return on Capital Employed (ROCE) In 2007 Ladbrokes were operating with a return on capital employed of 0.9098:1, and this had changed in 2008 to 0.8095:1, demonstrating a decrease over the year on the previous year. Earnings per Share For Ladbrokes the earnings per share demonstrated a slight decrease between 2007 -2008 to a figure of 30.82. Analysis of the Cash Flow Statement (CFS) An analysis of the cash flow statements for Ladbrokes will enable us to determine their cash position at the end of the financial year. At the end of 2008 Ladbrokes had a final cash position of 25 million in the bank. Whilst this is still a good position for them to be in, it is also a decrease on the previous years final cash position by around 0.9 million. Looking at the cash flow statement also helps to determine the sources of finance that have been used by the business. It shows that one of the principal sources of finance utilised by the business in 2008 was a 527.4 million bank loan. Whilst this is a large amount for the business to be borrowing, and could indicate financial troubles, it also demonstrates that the 3

bank was happy to loan the finance to them, showing a confidence in the success of the business. They also owe a 1.3 million overdraft to their bank; this however is a dramatic decrease on the previous years figure of 11.6 million. In order to gain further finance they have also carried out a rights issue, releasing more shares in the business. Whilst a rights issue is a reliable source of finance, it demonstrates a need for funds and if it carries these out too regularly then the shares may become unpopular. Another significant source of finance for the business is from their lease payments. In 2007 these stood at 54.6 million and this figure only increased in 2008 to the sum of 57.5 million, making it a significant contributor to their incoming finance. William Hill Below are the findings from carrying out the same calculations based upon the accounts of William Hill. Profitability William Hills gross profit margin for 2007 worked out to be 82%. In 2008 this figure changed to 83%, which whilst it is a very small increase, it indicates that their profitability has remained roughly the same. When examining their Net profits, this is confirmed by the fact that the 2008 figure had not changed and remained at the 29% that it was the year before. Liquidity William Hills accounts indicate that in 2007 they had a liquidity ratio of 0.72. In 2008 this had decreased to 0.51. Meaning that for each pound they owe they are only able to cover 51 pence. This indicates that the business is in fact illiquid, and has become more so since 2007.

Gearing Based upon 2007s accounts, William Hill had a gearing ratio of 567%. By 2008 this had decreased, but still remained incredibly high at 354%.

Interest Cover In 2007 the business was able to cover the interest on its borrowings 3.1 times, in 2008 this remained the same. Debtor Turnover In 2007 it took the business an average of 13 days to collect on its debts, which is an acceptable term when considering, as stated previously, the usual amount of time at 30 days. This improved slightly in 2008 to 12 days. Asset Turnover It works out that in 2007 the business had an asset turnover rate of 3.48. In 2008 this figure had changed slightly to 3.45, demonstrating a slight decrease in their asset turnover and as such, likely an increase in their profit margins. Return on Capital Employed (ROCE) William Hill, in 2007 had return on capital employed ratio of 0.4911:1 and whilst there was an increase in 2008 to 0.4913:1, this is only very slight and as such demonstrates that they are performing more or less the same as the previous year in this area. Earnings Per Share For William Hill, the 2008 figure for their earnings per share equates to 31.84, a small decrease on the previous years figure. Analysis of the Cash Flow Statement (CFS) William Hills final cash position, as determined by looking at the cash flow statement, in 2008 showed a 9% increase on the previous years figure. Using it to determine the sources of finance used by the business, it can be seen that one of the principal sources used is retained profit, whilst this is not something that can always be relied on, it is one of the cheapest forms of finance and demonstrates their own confidence in the business. They also have a bank loan of 1.068 million which has been given to them at a rate that is normally only offered to other banks, again demonstrating confidence in the business, this time on the part of the bank from which the loan was obtained.

It is also of note that whilst they do hold an overdraft facility of 5 million, they are not using it to finance the business, indicating that they have access to more funds than they are actually using and this suggests that they are financially sound.

What does this mean? Looking firstly at the profitability of each company, Ladbrokes profit margin for 2008 had decreased on 2007s already low figure, to just 2.3%. If this fall in profitability were to continue then the gross profit margin would decrease further in the following year. When comparing this with William Hills, which had increased to 83% - a trend which would see the profit margins continue to rise, it becomes obvious that William Hill is a much more profitable business. Similarly, Ladbrokes Net profit margin of 1.3%, a decrease on the previous years, seems very small when compared with William Hills which stood at 83%. Again, this demonstrates clearly that William Hill is by far the more profitable of the two companies. It does however beg the question as to why Ladbrokes profitability is so low, as a betting shop, being a service business, should not have a high cost of sales. It is possible that royalties paid out by Ladbrokes to the manufacturers of their betting machines could account for some of this as these would increase the overall cost of sales figure. When comparing the liquidity of the businesses, it is important to note that both Ladbrokes and William Hill are illiquid; there is not enough cash available within either business for them to cover their debts if they were to be called in. Both of them have also declined further into illiquidity between 2007 and 2008. However, of the two William Hill would again present a better option. For every pound sterling that they owe, they would be able to cover 51 pence. Ladbrokes would only be able to cover 31 pence for every pound sterling. This illiquidity could be due to a number of factors. It could possibly be due to recent reinvestment in the business, perhaps through expansion, which would certainly explain William Hills high profit margin if they are now operating out of more branches and as such accessing new markets. The next comparison I will draw is between the gearing ratios. Of all the capital employed by Ladbrokes in 2008, 48% was financed by borrowings. This figure is much lower than that of William Hill, which stands in 2008 at 354%. This demonstrates that whilst Ladbrokes were able to cover more than half of their capital employed themselves, William Hill had to borrow more than three and a half times their capital employed, inferring that they needed to borrow

money to cover other things as well. However, it is of note that whilst William Hill has a much higher gearing ratio, theirs had decreased on the previous year and Ladbrokes had increased. Both businesses are able to cover the interest they are charged on their borrowings, however, Ladbrokes is able to cover it more times over than William Hill. This could be due to the fact that William Hill is far more heavily geared, as higher borrowings would mean a higher interest payment. With reference to the debtor turnover, both businesses demonstrate that they are able to collect their debts in a timely fashion, and they have both improved in 2008 compared to the previous year. Ladbrokes however is quicker at collecting their debts with a turnover rate of 2.4 days in 2008, compared to William Hills 12 days. The asset turnover of Ladbrokes in 2007 was very low at 0.494, but in 2008 this increased dramatically to 76.5, and an adverse effect on their profit margins can be seen. This again could be attributed to the use of gambling machines within their premises. If a change took place in that year resulting in a large number of machines being purchased or hired then this would increase their asset turnover. Alternatively, if they sold, purchased or leased new premises this too would increase the asset turnover. William Hills asset turnover rate changed little between 2007 2008, decreasing slightly to 3.45, a much lower rate than Ladbrokes. Also of note is the ROCE figure for each company. In this area, Ladbrokes is outperforming William Hill with a return on capital employed ratio of 0.8095:1 in 2008, compared to William Hills which stood at 0.4913:1. However, whilst Ladbrokes do have a higher return rate, theirs had declined on the previous year whereas William Hills had increased, albeit only slightly. Recommendation Based on these findings, I would recommend that, should you choose to invest your money in either of these businesses, William Hill presents the better option. I say this based upon the fact that it is far more profitable, and as such likely to have a higher dividend yield. Also, whilst their gearing ratio is much higher than Ladbrokes, William Hill are still better able to cover their debts, making them a safer option for investment than Ladbrokes. Between 2007 2008 it also improved in most of the areas that I have compared the companies in, whereas Ladbrokes had seen a pattern of decline across these areas. If these changes are any indication of the patterns that will emerge with the publication of 2009s accounts, then it

would appear that whilst William Hill is seeing growth as a business, Ladbrokes on the other hand is seeing decline making William Hill my choice of recommendation for your investment.

Appendix

Profitabilty Gross Profit Margin Ladbrokes (Gross Profit Sales) x 100 2008: (470.8 14,879.5) x 100 2007: (378.2 16,647.7) x 100 William Hill 2008: (797.5 963.7) x 100 2007: (763.2 933.6) x 100 = 83 = 82 = 3.2 = 2.3

Net Profit Margin Ladbrokes

(Net Profit Sales) x 100 2008: (217.6 16647.7) x 100 2007: (300.6 14879.5) x 100 = 1.3 = 2.02 = 29 = 29

William Hill

2008: (278.6 963.7) x 100 2007: (267.8 933.6) x 100

Liquidity Liquidity Ratio Ladbrokes Current Assets Current Liabilities 2008: 251.3 818.3 2007: 205.3 561.5 William Hill 2008: 108.6 212.6 2007: 107.5 148.5 Gearing Gearing Ratio Ladbrokes (Borrowings Net Worth) x 100 2008: (1119.5 2315) x 100 2007: (987.3 2313.1) x 100 = 48 = 43 = 0.31 = 0.36 = 0.51 = 0.72

William Hill

2008: (1265.7 357.6) x 100 2007: (1321.1 233.1) x 100

= 354 = 567

Interest Cover (PBIT = Profit before Interest and Tax) PBIT Interest Charged Ladbrokes 2008: 323.9 67.4 2007: 420.7 69.2 William Hill 2008: 278.6 89.5 2007: 267.8 87.6 Debtor Turnover (Debtors Sales) x 365 Ladbrokes 2008: (109.8 16,647.7) x 365 2007: (138.5 14,879.5) x 365 William Hill: 2008: (31.6 963.7) x 365 2007: (32.3 933.6) x 365 Return on Capital Employed (ROCE) Gross Profit (Fixed and current assets current liabilities) Ladbrokes 2008: 378.2 (1034.2 + 251.3 8.8.3) 2007: 470.8 (873.7 + 205.3 561.5) William Hill 2008: 797.5 (1727.3 + 108.6 212.6) 2007: 763.2 (1595.2 + 107.5 148.5) = 0.8095 = 0.9098 = 0.4913 = 0.4911 = 12 = 13 = 2.4 = 3.4 = 4.8 = 6.1 = 3.1 = 3.1

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