Digitalization is a common trend that continues to affect various industries across the globe. The accounting sector is one of the industries that have directly been impacted by the technological revolution in the current age. The technological advancements have led to the rise of accounting software market across the globe as most companies aim at digitalizing their accounting practices. The popularity of accounting software across the globe has been influenced by the benefits linked to the programs. For instance, their high level of efficiency has made them preferable by many businesses because they accurately keep track of how money flows within the business. Many companies are currently considering the accounting software as better solution for managing their accounts because they collectively manage all the modules of the business. Lastly, the accounting software have been embraced in recent times because they reduce the human resource utilized by the companies (Global accounting software market (2021 to 2026), 2021). The minimization of human resources contributes to better utilization of capital and available resources within various organizations.
The growth of the accounting software market has been significant in the past years and has a high growth potential. For instance, statistics show that it was valued at USD 12.01 billion in 2020 but is expected to grow to about USD 19.59 billion by 2026 (Global accounting software market (2021 to 2026), 2021). The innovations being made from time to time are responsible for the popularity of the accounting software in various geographical markets. One recent innovation that is being linked to the growth of the industry at the current time is the cloud-based options for accounting software solutions. Therefore, many organizations have centred their operations towards creating software that utilize these innovations to automate, archive, and integrate human resource systems to optimize accounting objectives. The recent pandemic has played a significant role in the rise in demand of the accounting software. The pandemic prompted most organizations to operate remotely as a way of reducing the spread of the virus. The change in operations increased the demand for the accounting software as the companies strived to maintain high standards of financial affairs.
Sage is one of the companies that have established in the industry over the past years. The company began as a small enterprise back in 1981 and has since recorded significant growth over the years. Currently, it has more than 11,000 employees with its operation spanning through various regions of the world serving more than 20 countries (Sage Group plc, 2022). The company remains a market leader for payment, payroll, integrated accounting systems. Through its operation, the company has supported many entrepreneurs in different parts of the world. As a leader in the industry, Sage strives to offer its customers support, innovation, and expertise to improve their experience when using the accounting software.
However, despite the fact that Sage considers itself a leader in the market there are other companies which have invested significant effort towards enhancing customers experience in the market. Xero is one of the companies that is focusing on creating accounting software to help small businesses grow across the world. The company runs online accounting software that enables the customers to connect with their banks, contacts, and advisors in a timely fashion. Unlike the former, Xero was founded in 2006 although it has managed to be the leading cloud accounting market in the United Kingdom, Australia, and New Zealand (Xero, 2022). Therefore, it is important to assess the performance of Sage in the accounting software market in comparison to other companies such as Xero to determine its performance in the industry.
Since it commenced its operation decades ago, it is possible to establish how Sage has been performing over the past years. To gain an in-depth understanding of its performance, it is important to consider how profitable the company has been in comparison to the other companies and the industry as a whole. Some of the pertinent indicators worth assessing when analysing the performance of the company include: return on capital employed (ROCE), Gross profit, and operating profit. The ROCE is a profitability ratio that measures how effective the company utilizes its capital on a long-term basis. To calculate Sage’s ROCE, the formula below is employed.
ROCE= Operating Profit ÷ capital employed (Equity + long term debt)
|
Year |
Sage’s operating profit |
Sage’s capital employed |
ROCE |
Xero’s operating profit |
Xero’s capital employed |
ROCE |
|
2021 |
$510.376 |
$2545 |
20.05% |
$ 22.1 |
$1600 |
1.38% |
|
2020 |
$515.464 |
$3346 |
15.40% |
$8.7 |
$907.9 |
0.96% |
|
2019 |
$487.661 |
$2741 |
17.79% |
$ 32.7 |
$782.3 |
4.09% |
Table 1: ROCE (“Sage group financial statements 2010-2022 | SGPYY,” 2022; “Xero (XRO.AX) stock price, revenue, and financials,” 2022).
From table 1 above it is clear that Sage has been recording a higher ROCE for the past three years compared to its competitor Xero. The higher ROCE value for Sage implies that the company is in a position to plough back a significant amount of the profit made back to the company for the benefit of the stakeholders. The capital that has been invested back into the company has a higher rate of return which enables the investors to have a higher income per share. Therefore, the ROCE data indicate that Sage has a higher chance of successful growth in comparison to Xero.
The other fundamental financial metric for evaluating the performance of Sage is the gross profit. Table 2 below gives a summary of the company’s gross profit in comparison to that of Xero.
|
Year |
Sage gross profit |
Sage revenue |
% Sage gross profit |
Xero gross profit |
Xero revenue |
% Xero gross profit |
|
2021 |
$2346.635 |
$2526 |
92.87% |
$848.8 |
$848.8 |
100% |
|
2020 |
$2267.274 |
$2428 |
93.38% |
$720.8 |
$718.2 |
100.27% |
|
2019 |
$2295.327 |
$2471 |
92.89% |
$552.8 |
$552.8 |
100% |
Note: values expressed in million USD
Table 2: Gross Profit for past 3 years (“Sage group financial statements 2010-2022 | SGPYY,” 2022; “Xero (XRO.AX) stock price, revenue, and financials,” 2022).
Based on the gross profit, it is clear that Sage has had a steady performance over the past few years compared to some of its competitors in the industry such as Xero. Its gross profit is higher than that of Xero although they both maintain an upward trend which signifies better performance of the market in the future. The high gross profit for Sage implies that the organization has more cash which it can utilize to pay for various costs such as the one-time expenses and interest as well as the indirect costs. The fact that the gross profit for Sage almost triples that of Xero is a direct indication that its performance greatly overwhelms that of its competitor in the global market. However, it is evident that the performance of the companies in the industry is high because they both record very high gross profit percentages. Currently, the data reveals that both companies are in a position to make reasonable profit on their sales if they keep their overhead costs in control. Therefore, similar to the industry, both the two companies are enjoying a steady performance in the past years.
The company’s operating profit is the other metric that is significant in giving insight into the performance of Sage in the accounting software market. Table 3 below highlights the operating profits for Sage and Xero companies for the past three years.
|
Year |
Sage operating profit |
Sage revenue |
% Sage operating profit |
Xero operating profit |
Xero revenue |
% Xero operating profit |
|
2021 |
$510.376 |
$2526 |
20.20% |
$ 22.1 |
$848.8 |
2.60% |
|
2020 |
$515.464 |
$2428 |
21.23% |
$8.7 |
$718.2 |
1.21% |
|
2019 |
$487.661 |
$2471 |
19.73% |
$ 32.7 |
$552.8 |
5.92% |
Table 3: Operating Profit (“Sage group financial statements 2010-2022 | SGPYY,” 2022; “Xero (XRO.AX) stock price, revenue, and financials,” 2022).
The data on operating profit clearly shows that Sage company has a better performance in the industry compared to its competitors such as Xero. The high operating profit is an indication that Sage company has enough money from its operations to carter for all the related costs that are incurred in the maintenance of the business. The higher operating percentage in the past three years reveals that the performance of Sage has been much better compared to that of Xero. Sage is able to create more value for its shareholders compared to its counterpart Xero. The high operating profit percentage of Sage is also a clear indication that it is less threatened by financial problems which may result in foreseeable losses in the future. Therefore, based on the three ratios it is crystal clear that the performance of Sage is higher than that of Xero. Sage’s performance is at par with that of the industry hence making it a global competitor in the lucrative industry.
For investors to make prudent investments decisions in the accounting software markets there are a number of factors that they have to consider. These factors which include financial ratios are important in giving a clear projection of the gains or expected losses that the company is likely to make in the future. Therefore, to determine whether to invest in either Sage or Xero at the current market situation, it is important to evaluate the profitability, opportunities, and risks that both companies are exposed to. Some of the key financial ratios that should be considered by the investors include Gearing, P/E Ratio, and Share price.
Gearing is a representation of the company’s debt to its equity. It is an important ration because it represents the company’s financial leverage. Table 4 below illustrates Sage and Xero’s gearing for the past three years.
|
Year |
Sage long term debt |
Sage long term debt + Equity |
% Sage gearing |
Xero long term debt |
Xero long term debt + Equity |
% Xero gearing |
|
2021 |
$1025 |
$2545 |
40.28% |
$ 854.1 |
$1600 |
53.38% |
|
2020 |
$1238 |
$3346 |
37.00% |
$485.5 |
$907.9 |
53.48% |
|
2019 |
$821 |
$2741 |
29.95% |
$ 429.0 |
$783.3 |
54.77% |
Table 4: Gearing data
From the results presented above, it is evident that Sage has a lower gearing percentage compared to its counterpart Xero. The results imply that from an investors point of view Sage is more lucrative as an investment option compared to Xero. There are many advantages that are linked to low gearing. For instance, having a lower gearing, Sage may only be lowly affected by changes in interest rates. For example, when the interest rates go up, then the impact will be less felt by Sage compared to Zero. Sage has a lesser risk of liquidation compared to Xero because for the past three years it has had a lower gearing which implies it has lower risk of facing liquidation as a result of not failing to pay off its interests.
However, it may not be wise to make an investment decision purely based on the gearing information because not all debt is bad debt. Xero may be having a higher debt that is actually instrumental for the performance of the company. However, Xero is at a higher risk of liquidation if it is not in a position to meet its interest obligations. Investors aiming at giving loans to either of the two companies will be keen on the gearing data. Currently, such an investor will understand that Xero is already paying higher interest charges compared to Sage. Therefore, such investors may be inclined towards funding Sage because it is more likely to payback the long in the future. The investor will likely loan Sage because it has a lower exposure to risk of insolvency.
P/E RATIO
The price to earning ratio is a key ratio that is used to value an organization that analyses its current share price with respect to the earnings per share. It is a good measure for assessing a company’s ability to maintain the contemporary dividends.
Table 5 below shows the earning per share ratio of sage and Xero for the past three years.
|
Year |
Sage Share Price |
Sage Latest EPS |
P/E ratio |
Xero’s P/E ratio |
|
2021 |
$270 |
$1.26 |
21429% |
7440.8% |
|
2020 |
$273 |
$1.44 |
14849% |
10986.3% |
|
2019 |
$272 |
$1.24 |
21935% |
0% |
The data reveals that the ration for Sage are higher than those of Xero. Financially speaking, this implies that Sage is in a better position to maintain its current levels of dividends compared to Xero. However, an investment making a general conclusion from the PE ratio alone may argue that Sage stock price is high in comparison to its earnings and therefore overvalued. However, the same assumption may imply that Xero’s existing stocks price are low in comparison to earnings. Nevertheless, it is important to understand that a higher PE ratio may not entirely mean that a particular stock is overvalued.
Factually, the accounting software industry has a high growth potential that most of the investors understand and appreciate. As a result, the investors anticipate higher growth from the industry hence they are willing to pay high stock prices for the companies in the industry. However, because Sage’s PE ratio are higher than that of Xero it may imply that most investors are willing to pay more for the former. It may be wise to consider Sage as a better investment option to Xero although they both have a high potential owing to the fact that they are in a vibrant industry.
For an investor considering investing in the software accounting market, share price data is one of the most significant considerations. Share price for companies are highly dynamic because of factors inclined to the operating industry, specific events, organizations specific events, and political stability among other reasons.
Chart 1: Comparison of Sage and Xero Stock (“Stock comparison,” 2022)
When compared on a short-term basis Xero’s shares appear to be higher than those of Sage group. The visual presentation shows that both companies have had a steady upward trend in terms of their share price. However, in the past few months the price value of Xero has been slightly higher. The variation is as a result of a number of factors although they are all instrumental in giving a clear vision of the trend. The trends recorded by Sage are steady and upward at most times. However, despite Xero’s share being higher its share price keeps on fluctuating despite the fact that it maintains an upward trend.
In conclusion, despite the two companies operating in the same industry, Sage is a better investment option based on the financial ratios analysed. Therefore, more investors are likely to consider it instead of Xero. However, it is important to recall that despite the fact that Sage looks more lucrative, Xero also has a good potential for growth and profitability. Therefore, investing in the industry may be profitable as the companies in the industry continuously show their worth in terms of growth and profitability to the investors.
Sustainability has become an instrumental aspect for most stakeholders in the current business world. It simply refers to the act of engaging in business activities without having a negative impact on the community, environment, or the society as a whole. However, in most cases sustainability can be perceived from two dimensions. Firstly, the impact which the organization has on the society and secondly, the impact it has on the environment. In terms of environmental conservation, Sage is actively championing for environmental conservation and management in its operations. In the past, the company has pledged a NetZero by 2040 across all its supply chain and other operations. It is also focused on reducing its carbon footprint by 50% by the year 2030 (Sage, 2022). Since sage is a solution provider to millions of companies across the globe, its efforts towards environmental friendliness will greatly be reflected across the globe. Additionally, Sage has mainly been serving SMEs which are mainly complaint with environmental conservation and management standards which implies that it has both direct and indirect impacts on environmental well-being.
The company has developed Sage foundation which is a five-year strategic plan geared towards three strategic pillars. They include addressing economic gaps by supporting under privileged groups, fostering digital growth by enhancing innovation, progress and enterprise, and addressing climate change by empowering sustainable business models around the globe. Sage appreciates the fact that the emergence of businesses in various parts of the world is a significant strategy of addressing economic challenges in different parts of the globe. Sage acknowledges the fact that most start-ups are affected by the challenge of lack of skills confidence and financial support to capitalize on some of the challenges that they fair in their respective markets (Sage, 2022). Therefore, through the sage foundation the organization aims to support starts in the less privileged societies as a way of addressing economic inequality across the globe.
According to the current global trends digital transformation is at the helm of dictating the direction in which the world takes. Again, Sage appreciates this fact and therefore strives to champion for digitally enabled business models through the foundation. Therefore, it is important to appreciate the fact that the company is much more inclined towards sustainability. Its focus towards overall well-being shows that it cares for the interest of all its stakeholders. It is important to understand and appreciate the efforts that different companies put towards sustainability because they reveal the overall intentions of the company.
It is important to consider investing in a company that is environmentally and economically conscious. Such companies are likely to make decisions that are safe for everyone in the society and community at large. Organizations that are not sustainable are likely to attract various lawsuits which may have a significant negative impact on the performance of the organization hence leading to losses by the stakeholders. Sage initiatives towards sustainability are commendable and worth appreciating. While considering investing in it and any other company in the industry such as Xero, sustainability should be an instrumental aspect to consider.
Conclusion
Evidently, investing in Sage company is a wise business idea. From the analysis conducted it is clear that Sage is excelling from different dimensions. In terms of performance, it is performing better than Xero which is in the same industry. In terms of the investors financial check points, it is clear that the company is in a better position compared to Xero. It has significant efforts and initiatives towards sustainability which makes it even more appealing as an investment option. From these three perspectives it is true to support any investor who is considering investing in Sage Group.
Additionally, the company operates in a highly vibrant market that is likely to expand in the future and make more profits to the investors. The current age is an age of technological innovation. Digitalization is paving its way into various parts of the globe. Therefore, small and medium size companies in various parts of the world are supposed to focus on how to be digitalized. Therefore, the fact that Sage offers a solution in terms of accounting practices to these companies is an indication that it will greatly impact the performance of various companies in the future hence creating more market for its products.
The company is operating on a global scale which implies that it has a great room for growth and expansion. It is also likely to overcome competition by expanding its operation in new markets which are yet to be explored. Therefore, Sage is a company which is likely to create more value for its investors. It is indeed a good idea to invest in Sage today or anytime in the near future.
References
Global accounting software market (2021 to 2026) – Growth, trends, COVID-19 impact, and forecasts. (2021, March 19). GlobeNewswire News Room. Retrieved March 1, 2022, from https://www.globenewswire.com/fr/news-release/2021/04/19/2212296/28124/en/Global-Accounting-Software-Market-2021-to-2026-Growth-Trends-COVID-19-Impact-and-Forecasts.html
Sage group financial statements 2010-2022 | SGPYY. (2022). Macrotrends | The Long Term Perspective on Markets. Retrieved March 2, 2022, from https://www.macrotrends.net/stocks/charts/SGPYY/sage-group/financial-statements
Sage Group plc. (2022). About us | Sage UK. Sage Canada – Software & Solutions for Every Business. Retrieved March 1, 2022, from https://www.sage.com/en-gb/about-us/
Sage. (2022). Sage launches sustainability & society strategy ‘Knocking down barriers’ tackling economic inequality and the climate crisis. Sage Canada – Software & Solutions for Every Business. https://www.sage.com/investors/investor-downloads/press-releases/2021/06/sage-launches-sustainability-and-society-strategy-knocking-down-barriers/#:~:text=Sage%20will%20play%20its%20part,(SMEs)%20around%20the%20world
Stock comparison. (2022). TipRanks | Stock Market Research, News and Analyst Forecast. https://www.tipranks.com/compare-stocks/custom?ticker=SGPYY&ticker=XROLF
Xero (XRO.AX) stock price, revenue, and financials. (2022). Craft.co. Retrieved March 2, 2022, from https://craft.co/xero/metrics
Xero. (2022). We help small businesses thrive worldwide. Retrieved March 1, 2022, from https://www.xero.com/au/about/
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