The sage report discusses the financial performance of the Sage Group as a whole for the financial year 2007. The group has a significant presence in 20 countries worldwide, providing services to 5.8m customers to help managing their businesses more efficiently and effectively through the provision of their products and quality services.
Sage is one of the efficient leading and prominent worldwide supplier of business management software to SMEs. It is the leading supplier in chosen market segments concentrating primarily on customers whose business has less than 500 employees.
Main highlights are:
- Group Revenue rose to 1157.60m showing a growth of 23.73% over the last year with organic growth of 7%.
- Operating profit rose to 255.30m showing an increase of 8.27%.
- Dividend per share rose by 95% to 7p per share from the last year figure of 3.59p.
- New customers gained during the year were 40,000 & 12,000 new contracts received.
- Net cash generated was 220.2m from their operating activities compared with the last year of 192.8m.
- Earnings per share increased to 11.85pfor financial year 2007.
Sage group is one of the most leading suppliers of business management software to 5.8 million customers worldwide. It found in 1981; the core business of software group sage is the development and distribution of accounting, salary check management software for different type of businesses. From small setup to large the organisations, the company is giving opportunity to makes it easier to handle their business processes.
Research and analysis Objectives
The purpose of this report is the detailed analysis of the current financial position and the future prediction of the sage group from the investment point of view.
An investor is more interested in the profitability, liquidity and return on investment, its rapid growth and growth in market share, its current financial position and future prospects of the company and management competency and strategies.
As the purpose of the report is to make an analysis from investor's point of view, so I focused on the following aspects as primary objectives of my report.
- Analyses of the current position the Sage Group.
- Review of the changes and reasons for them.
- Future of the company.
- Whether the company is worthwhile from investors point of view
In order to achieve these objectives I will carry out the detailed ratio analysis of the financial position and growth of the company such as.
- Liquidity ratios.
- Profitability and return ratios.
- Investment ratios.
- Long term solvency, gearing and leverage ratios.
Methods of Analysis
The basic and common methods of analysis of a company about its financial position are as follows;
- Investor analysis;
- Trend (vertical analysis);
- Horizontal Analysis; &
- Ratios Analysis.
This method is a comparison of an entity's performance over a particular period of time to that of a similar entity. Comparisons are only effective, if the companies operate at same level and in same market. Even if the companies are similar, Competitor Company might have not performed to its full capacity.
Trend Analysis or Vertical Analysis
This is where the company's performance is compared in a period of time. This can identify the trends e.g. revenue or profitability growth as well as decline or seasonality.
The ratio analysis is classified into four categories;
Liquidity means a "liquid asset" is one which can be easily converted into cash at a market value. It helps in financing and investing decisions of the company. It actually measures the short term solvency of a company, it includes following;
- Current ratio is current assets/current liabilities. Ideally it is thought that it should be between 1.0 - 1.5, but it can vary depending upon the sector.
- Quick ratio expresses the proportion of current asset minus(less) stock to current liabilities. This is expected to be Parity so that liabilities (short-term) can be met.
- Debtor's days is the number of days taken by trade debtors to make a payment
- Creditor's day is the numbers of days given by creditors to give them payment.
Profitability and Return:
- Gross and net profit margins show the relationship between the profit & turnover (sales).
Comparing the gross profit margins will show the efficiency, whereas net profit margin indicates its overheads and administration have been well-managed.
- Returns can be indicated by Return on Capital Employed (ROCE) or Return on Shareholders' Funds (ROSF), this is more commonly demonstrated as earning per share (EPS) or dividend yield. ROCE is a ratio with two elements, profit margin multiplied by asset turnover. This ratio gives a more comprehensive view of trading performance.
Long-term Solvency, Gearing and Leverage:
- Gearing shows the long-term debt in relation to shareholder's funds. Highly geared companies are much more risky in their financial position, because interest payments have to be met, regardless of profitability and because of this reason further financing might be difficult and expensive to obtain. However interest payments are the payments in which tax - deduction making debt cheaper than equity. Equally, a company with low gearing may have an inefficient capital structure because equity is more expensive.
- Debt ratio comprises of total debts to total assets, which is mostly important for the companies with high proportions of liabilities in their balance sheet.
- Interest cover indicates if the company is in position to manage its interest demands and positions how many times a company can repay the interest of its current earnings.
- Price earning (PE) is highly used investor ratio. It is the ratio of current share price to the EPS. High price ratio indicates strong confidence in the company.
- Dividend yield is "the yield a company pays out to its shareholders in form of dividends". This ratio is more useful for investors who are looking for a steady dividend income rather than just capital growth.
TREND & RATIO ANALYSIS OF SAGE GROUP
Sage Group's performance over the last three years is steady as its published accounts show an increase in its revenue, operating profit, its cash and Asset growth.
PROFITABILITY & RETURN
The revenue has grown from FY2005 (759.60m) to FY2006 (935.60m) by 23.17% and a further increase of 23.73% in FY2006 (935.60m) to FY2007 (1157.60m).
North America Region was the one highest contributing towards Revenue of 508.10m this year compared to last year of 361.5m showing an increase of over 40%, with Mainland Europe on 2nd place showing an increase of around 50m i.e. 16.44% over the year 2006.
Gross profit of the company is nearly the same compared to last year. In FY2006, it was 91.41% and this year it is nearly the same figure as the last year. i.e. 91.04%. it has increased by 23.23% from FY2007 (855.20m) to FY2008 (1053.90m).
The pre-tax profit has grown from FY2005 (193.60m) to FY2006 (221.20m) by14.26% and a further increase of just around by 1%from FY2006 to FY2007.
The highest operating profit came from the Region of Mainland Europe showing a percentage increase of 20.89% over FY2006 giving a net increased figure of 12.3m.
Return on Capital Employed (ROCE)
ROCE has increased from 15.09% in FY2006 to 17.35% in FY2007 which shows a steady increase from investor's point of view.
Gearing of the group for YR2006 was 35.45%, which dropped to 30.70% in FY2007. The low gearing ratio shows that the company is enrich in its funds to meet its long-term liabilities. The company is in less financial risk. Furthermore decrease in the gearing and an increase in the profit shows that company is in strong financial position.
Return on Shareholder's Funds (ROSF)
ROSF for FY2006 was 15.61% which dropped just by 0.90% to 14.67% for FY2007. It is due to the increase in shareholder's funds even though the profitability has improved over the last year but it is not in line with the increase in funds.
Current ratio of the company for the current year was 0.524. For the FY2007, it was 0.543. It is because of slight decrease in cash & cash equivalents from 81.4m to 64.3m & payables were increased by 9.9m over the previous year. As compared to the threshold of 1:1, it is well behind the standard which means the company might be unable to pay its debt on time. In, practice the comfortably in excess of 1 should be expected but it can be varied depending on the types of businesses.
Quick Ratio / Acid Test Ratio
The quick ratio of the group for the current year is 0.514 compared to last year of 0.553 for the same reason as mentioned in current ratio.
Receivable conversion period for the current period is 61 days (60.81 days), compared to the last year of 72 days (72.21 days). It shows the improvement of cash collections over the last year to increase the liquidity.
Payable conversion period for the current period is 352 days compared to the last year of 432 days. Once again the longer the period of creditor's days, the longer will be the liquidity resources availability.
Earnings Per Share (EPS)
EPS have slightly increased by 0.04p from 11.81p to 11.85p which shows the increased profits over the previous period. It can also be seen through increased payment of dividends to shareholders worth 49.0m compared to last year of 39.1m.
Price Earnings ratio for the current year is 18.7 compared to last year which was 21.3. The higher the P/E ratio suggests the investors expect high earning growth in future. P/E Ratio can't itself give the whole picture until compared with the other company in the market or industry average.
Dividend Per Share (DPS)
Dividend per share for the current year was 7.0p compared to last year of 3.59p, showing an increase of 95% over last year. Increase in dividend per share means that the company's management believes that growth can be sustained for foreseeable future.
Dividend Yield & Dividend Cover
Dividend yield for the current period is 2.8% for the current year compared to last year of 1.4% which is doubled. The higher is the yield, the more desirable among investors.
Dividend cover of the company for the current period is 1.693X for the current period compared to the last year of 3.2X. A ratio of 2X is considered to be safe in industry as the company can well afford the dividend.
LONG TERM SOLVENCY, GEARING & LEVERAGE
Gearing of the group for YR2006 was 35.45%, which dropped to 30.70% in FY2007. The low gearing ratio shows that the company has sufficient funds to meet its long-term liabilities. The company is in less financial risk. Furthermore decrease in the gearing and an increase in the profit shows that company is in strong financial position.
Debt Ratio (Leverage)
Debt ratio for the current year is 0.5241 compared to the last year of 0.5578. A ratio less than 1 indicates that the group has more assets than its debts representing the low level of risk attached to the group.
Interest Cover for the current period is 7.98X compared to the last year of 13.77X which is still quite high to cover its interest costs.
The group has shown growth in all the sectors of economy. It has been producing consistent results over the years. The revenue has increased significantly over the last few years. The company has healthy operating profits for the current period. Compared to the last periods, its progress is not as good as it was in the past few periods.
Overall the group has performed well against the benchmarks set by the company and was in line with the group's forecasts set. Another key thing observed the customer satisfaction & renewal level for the group was above 80% for the year 2007.
It has low gearing which represents the low financial risk and group's ability to meet its obligations in case of emergency. Its ROCE has increased which again is good from investor's perspective. The group is paying dividends consistently over the past few years which again attract the shareholders & investors. Debt ratio of the company is 0.52 which indicates that the assets of the company are nearly doubled to its liabilities which once again are an indication of low financial risk.