Task 1
Critically evaluate the effectiveness of management commentary, such as Strategic Reports, in helping users to get a better and clearer understanding of an entity’s past performance and future prospects.
Task 2
Critically analyse, from an investors viewpoint, Cineworld’s revenue generated, profit or loss earned and earnings per share.
The strategic report is prepared for Cineworld Group plc. The utility of strategic reports can be explained in relation to Cineworld Group plc. Cineworld Group plc is a group of cinema chain, which operates in Ireland, United Kingdom and Jersey. The cinema chain group is lead by Anthony Bloom, Chairman of the group and Moshe Greidinger, Chief Executive of the group and is headquartered in London in United Kingdom. Thus, taking this company into account the usage of strategic reports is explained from annual reports of the company for the year 2013. As per the strategic reports presented by the Directors of the company for the financial year 2013, the principal activities of the business are explained and reviewed. The main strategy of the company is to give the customers the prime importance, provide them with a great experience, and improve the overall efficiencies and effectiveness and to maintain the growth of the estate. The revenue of the Group, which includes the Picturehouse brand, is £406.1 million in the financial year 2013, the net profit before tax of the Group, which includes the Picturehouse brand, is £30.9 million in the financial year 2013 and the EPS of the Group is 22.6 p in the financial year 2013 (Cineworld-plc.production.investis.com, 2015).
The Financial Reporting Council aims to promote the quality of corporate reporting and governance. FRC strongly believes that the entities should be encouraged to prepare a good quality strategic report. This strategic report will provide the stakeholders with a meaningful and holistic picture of the entity’s business strategy, model, performance, development, future prospects and position. Stakeholders generally include the owners, shareholders, investors, creditors, suppliers and the public in general, who are essential for the entity to achieve its aims and objectives (Adair, 2011).
The strategic report is prepared as per the guidance of the FRC. The purpose of the strategic report is to provide the shareholders with specific information about the company, which will help the shareholders, analyze the performance of the directors of the company related to exercising their duty of achieving successful outcome for the company. In the strategic report, the collective view of the directors is reflected. The financial statements are complemented by the information available in the strategic report. Strategic report complements the financial report by providing the information about the entity’s business and its performance, development and overall financial position, which generally are not reported in the financial statements. This information available in the strategic reports help the shareholders evaluate the past results and based on it they assess the future prospects. The strategic reports also help in providing more information about the amounts recorded in the financial statements and provide explanation about the events and conditions, which will shape the information given in the financial reports (Barrow, 2011).
The annual report and more importantly the strategic report should contain the information, which is important for the shareholders. So, when the financial information whose misrepresentation or omission can adversely affect the financial decisions of the shareholders then that is known as the material information. In this context, the concept of materiality can be explained on basis of its magnitude. The materiality is assessed for the strategic report and the review should be made annually to ensure that the information given in the strategic report have the materiality in relation to the constant change in the economic and social environment (Berk and DeMarzo, 2011).
The communication principles of the strategic report are important in the sense because it helps in guiding the qualitative characteristics. The qualitative characteristics given in the strategic reports of the company are-
It should be balanced, fair and understandable.
It should show the negative and positive aspects of the performance, position, development, future prospects and results of the company.
The information given in the strategic reports should be unbiased and open. This will prevent the misleading of information to the shareholders.
The report should be simple and understandable. This means that the report should consist of simple languages and all financial jargons should be minimized as possible (Bratton and Brudney, 2012).
In order to improve its presentation the report may include the use of graphical, pictorial and tabular methods to represent the financial information better.
The strategic report should be concise as well as comprehensive.
Comprehensiveness generally focuses on including that information in the strategic reports, which will help the shareholders understand the financial performance and position of the company. It suggests that it is not necessary to include all the information and instead stock to the relevant information (Brealey, Myers and Marcus, 2012).
Conciseness on the other hand focuses on including and providing all the information through efficient communication methods.
The orientation in the strategic report should be more forward looking.
The information provided in the strategic report should be in context to the entity’s performance.
The disclosures of the information should be made in connection to the regulatory requirements and the information’s nature.
In addition, the presentation and structure of the strategic reports should be assessed annually in order to maintain that the objectives of the company could be meeting in an effective and efficient manner.
The annual report and its content should also be annually reviewed for maintaining continuous relevance (Cineworldplc.com, 2015).
The total revenue of the Group, which includes the Picturehouse brand, is £406.1 million in the financial year 2013, which is 13.2% higher than that of £358.7 million in 2012. The total revenue or sales revenue is calculated for the past 52 weeks.
The total earnings before interest, tax, depreciation and amortization or EBITDA of the Group, which includes the Picturehouse brand, is £72.3 million, which is 8.1% higher than that of £66.9 million in 2012. The total EBITDA is calculated for the past 52 weeks.
The adjusted pro-forma profit before tax of the Group is £44.7 million in the financial year 2013, which is 10.4% higher than that of £40.5 million in 2012. Pro-forma profit before tax is calculated for the past 52 weeks (Hargreaves Lansdown, 2015).
The net profit before tax of the Group, which includes the Picturehouse brand, is £30.9 million in the financial year 2013, which is 19.3% lower than that of £38.3 million in 2012. The net profit before tax is calculated for the past 52 weeks (Hillier, 2013).
The market share of the box office of the Group in Ireland and UK is 27.4% in 2013, which is higher than of 26.4% in 2012. The market share of Cineworld Cinemas’ increased by 0.7 percentage points i.e. in 2012 it was 24.7% and in 2013, it was 25.4%.
As per the pro‑forma basis, the Group admissions increased by 1.4% as compared to 2012.
The average ticket price per admission increased to 3.2% i.e. in 2013 it became £5.43 as compared to £5.26 in 2012. The average retail spends per person also increased in 2013 to £1.83 as compared to £1.73 in 2012.
As per the right issue a dividend of full year of 10.1p per share, it shows a growth of 6.3% in the cash dividend. Those shareholders whose rights constitute as the rights issue part made on 14 February 2014 enjoy this benefit (Hirt, Block and Danielsen, 2011).
In addition, it opened nine new cinema halls in Wembley, ten new cinema halls in Gloucester Quay and reopened the Glasgow IMAX Science Centre as the new Cineworld Cinema.
Previously the Group opened two new Starbucks outlets and in the year 2013, it opened nine more Starbucks outlets, which brought the total to 11 such outlets.
On 10 January 2014, the Cineworld Group made an agreement with the Cinema City International N.V. or “CCI”, related to some cinema assets, which was finally completed on 27 February 2014 (Holden, 2012).
Some of the competitors of CineWorld are Vue, Showcase, Empire, Odeon and Others. As per the total revenues earned by all the cinema halls, a pie chart is prepared. The total revenue earned by Cineword in 2013 is 29%, Vue in 2013 is 17%, Showcase in 2013 is 12%, Empire in 2013 is 20%, and Odeon in 2013 is 22%.
As per the strategic reports, the success of the entertainment industry and more precisely of the Cineworld Group is based on good cinema slate in the coming years. Although in 2014 no £50m-plus films is slated for release but it has a quite a few good movies from famous franchisees, which is likely to generate the revenue according to that of 2013. Also major cinema hall chains in Ireland and UK are now using digital projection facility to its viewers. Cinema chain groups specially the Cineworld Group Plc. are seeking to increase their annual return from investment by increasing their flexibility in digital advertising, film scheduling and digital projection, which provides a wider opportunity by event cinema.
The future prospects of Cineworld Group Plc. can be achieved by using its effective business model (Jordan, Westerfield and Ross, 2011).
As per the business model, the films offered in the cinema for the viewers should be of better quality.
As per the business model, the customers are delivered with better services by offering comfortable, clean, proper running facilities in a well-placed location.
As per the business model, the Group is also generating revenue from other sources like screen advertising and retail sales.
As per the business model, the Group also aims to provide better movie viewing experience to its customers to ensure repeat visits. This could be done by delivering a variety of films, retail offering as per the customers’ tastes and a good quality venue. Along with this, the group also provide membership initiatives and schemes to help in repeat visits (Fridson and Alvarez, 2011).
The above business model can help Cineworld achieve its organizational and business objectives.
The study mainly focuses on the strategic report of the Cineworld Group. In the strategic report of the company, the stakeholders are provided with a meaningful and holistic picture of the entity’s business strategy, model, performance, development, future prospects and position. Stakeholders of the company include the owners, shareholders, investors, creditors, suppliers and the public in general, who are essential for the entity to achieve its aims and objectives. Some of the highlights of the strategic report of the Cineworld Group includes the The total revenue of the Group, which includes the Picturehouse brand, is £406.1 million in the financial year 2013, which is 13.2% higher than that of £358.7 million in 2012. The net profit before tax of the Group, which includes the Picturehouse brand, is £30.9 million in the financial year 2013, which is 19.3% lower than that of £38.3 million in 2012. The market share of the box office of the Group in Ireland and UK is 27.4% in 2013, which is higher than of 26.4% in 2012. The average ticket price per admission increased to 3.2% i.e. in 2013 it became £5.43 as compared to £5.26 in 2012. As per the right issue a dividend of full year of 10.1p per share, it shows a growth of 6.3% in the cash dividend. Along with the financial performance of the company, its financial prospects of the company are also discussed.
The income statement of Cineworld is prepared and its detailed analysis is done. For analyzing the income statement of the company, Cineworld Group PLC., the accounting ratios is analyzed. From the ratio analysis, it can be understood that the operating income margin is increasing in 2013 as compared to 2012 and all other ratios are showing a decrease in the profitability and coverage position of the company group from 2012 to 2013 due to the increase in its operational expenses (Ross, Westerfield and Jordan, 2013).
Therefore, the Group believes that although £50 million films will not be released in 2014, but some good movies from big franchisees will be released in 2014. This will help the company make huge revenue from its ticket sales, retail sales and screen advertising. The adjusted pro-forma diluted earnings per share or EPS of the Group is 22.6 p in the financial year 2013, which is 7.1% higher than that of 21.1 p in 2012. Pro-forma diluted earnings per share or EPS is calculated for the past 52 weeks. The diluted earnings per share or EPS of the Group are 13.8 p in the financial year 2013, which is 27.4% lower than that of 19 p in 2012. Diluted earnings per share or EPS are calculated for the past 52 weeks (Taillard, 2013).
The income statement of a company is known as the Statement of Profit or Loss and other Comprehensive Income. An income statement is the type of financial statement, which is used to show the total sales revenue earned by the company and the total expenses incurred in the carrying out the production process. The difference between the total revenue and the total cost is known as the net income earned during the financial year (Libby, Libby and Short, 2011).
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|||||
|
|
Period Ending |
26-Dec-13 |
27-Dec-12 |
|
Total Revenue |
406.1 |
358.7 |
|
Cost of sales |
-293.3 |
-263.9 |
|
Gross Profit |
112.8 |
94.8 |
|
Other operating income |
0.5 |
0.3 |
|
Administrative expenses |
-75.8 |
-51.1 |
|
Operating profit |
37.5 |
44 |
|
Analyzed between: |
||
|
Operating profit before depreciation, impairments, reversals of impairments and amortization, onerous lease and other non-recurring or non-cash property charges, transaction and reorganization costs, defined benefit pension scheme indexation gain, and refinancing costs |
72.3 |
66.9 |
|
• Depreciation and amortization |
-24 |
-21.5 |
|
• Onerous leases and other non-recurring charges |
-0.7 |
-1.6 |
|
• Impairments and reversals of impairments |
-2 |
-0.3 |
|
• Other non-recurring income |
2 |
|
|
• Transaction and reorganization costs |
-8.1 |
-1.1 |
|
• Defined benefit pension scheme past service costs |
-0.4 |
|
|
Finance income |
0.3 |
0.3 |
|
Finance expenses |
-6.8 |
-6.9 |
|
Net change in fair value of cash flow hedges reclassified from equity |
1 |
|
|
Net finance costs |
-6.5 |
-5.6 |
|
Share of loss of jointly controlled entities using equity accounting method, net of tax |
-0.1 |
-0.1 |
|
Profit on ordinary activities before tax |
30.9 |
38.3 |
|
Tax charge on profit on ordinary activities |
-9.9 |
-10.8 |
|
Profit for the period attributable to equity holders of the Company |
21 |
27.5 |
|
Basic earnings per share |
14.0p |
19.2p |
|
Diluted earnings per share |
13.8p |
19.2p |
For measuring the income statement of the company mainly, the profitability ratios are used. Some of the profitability ratios and other accounting ratios used here are-
Gross Profit Ratio- This the ratio between the total gross incomes divided by the total sales revenue. It indicates the total sales percentage available for the cost of production and sales and the profit generated from the deduction of the cost from the sales.
GP Ratio= Gross Income or Profit/ Total Revenue from Sales *100
|
Period Ending |
26-Dec-13 |
27-Dec-12 |
|
Gross Profit |
£ 112.80 |
£ 94.80 |
|
Total Revenue |
£ 406.10 |
£ 358.70 |
|
Gross Profit Ratio |
28% |
26% |
The gross profit ratio of the company shows that with the increase in sales and gross income the gross profit margin has increased from 26% in 2012 to 28% in 2013 (Kensinger, 2011).
Operating Profit Ratio- This the ratio between the total operating incomes divided by the total sales revenue. It indicates the total sales percentage available for the cost of production and operating expenses and the operating profit generated from the deduction of the administrative expenses and addition of the other incomes to the gross profit.
OP Ratio= Gross Income or Profit/ Total Revenue from Sales *100
|
Period Ending |
26-Dec-13 |
27-Dec-12 |
|
Operating Profit |
£ 37.50 |
£ 44.00 |
|
Total Revenue |
£ 406.10 |
£ 358.70 |
|
Operating Profit Ratio |
9.23% |
12.27% |
Unlike, gross profit margin, the operating profit margin is decreasing from 12.27% in 2012 to 9.23% in 2013. The main reason behind this fall in the operating profit margin is the comparatively higher increase in the administrative expenses (Lumby, 2011).
Net Profit Ratio- This the ratio between the total net incomes divided by the total sales revenue. It indicates the profit per sales pound after all the required expenses are subtracted from the sales revenue. The net profit margin is used to measure the actual profit condition of the company.
NP Ratio= Net Income or Profit/ Total Revenue from Sales *100
|
Period Ending |
26-Dec-13 |
27-Dec-12 |
|
Net Profit |
£ 21.00 |
£ 27.50 |
|
Total Revenue |
£ 406.10 |
£ 358.70 |
|
Net Profit Ratio |
5.17% |
7.67% |
Like, the operating profit margin the net profit margin is also decreasing from 7.67% in 2012 to 5.17% in 2013. The main reduction in the net profit margin is because there is an increase in the overall value of all the expenses required to bear the sales operation (McGuigan and Moyer, 2012).
Earnings per share- The net earnings per share are used to show the net profit after taxes on each of the outstanding shares of the company’s common stocks. If the company instead of common stock has preferred stock then the preferred dividends should be subtracted from the net profit. As in this case, the earnings per share of the company group are available from the income statement given in the annual reports. Thus, the basic and diluted earnings per share are-
EPS= Net Profit/ Total number of shares which are outstanding
|
Period Ending |
26-Dec-13 |
27-Dec-12 |
|
Basic earnings per share |
14.0p |
19.2p |
|
Diluted earnings per share |
13.8p |
19.2p |
AS from the above table, the EPS of the group is decreasing from 2012 to 2013. In 2012, the basic EPS was 19.2 p, which decreased to 14 p in 2013, and the diluted EPS was 19.2 p, which decreased to 13.8 p in 2013. The main reason behind the decrease in the EPS is the fall in the net profit of the Group for the year 2013 due to a high increase in the expenses (Moles, 2011).
Interest Coverage Ratio- This kind of ratio is used to indicate the ability of the company to cover the interest that will be needed to be paid on the debt taken by the Group. The interest coverage ratio is useful to measure the efficiency of the company to pay its interest expenses from its profit.
Interest Coverage Ratio=EBIT/ Interest Expenses
|
Period Ending |
26-Dec-13 |
27-Dec-12 |
|
EBIT |
£ 37.50 |
£ 44.00 |
|
Interest Expenses |
£ 6.80 |
£ 6.90 |
|
Interest Coverage Ratio |
5.514705882 |
6.376811594 |
The interest coverage ratio of the Group has decreased from 6.38 times in 2012 to 5.51 times in 2013. The decrease in the interest coverage ratio is in connection with the decrease in the net profit of the company. A decreasing interest coverage ratio means that company is finding it difficult to cover its interest expenses from its net income for the year (Parrino, Kidwell and Bates, 2012).
Return on Equity- The ROE is used to measure the profit percentage that the company group will earn on the shareholders’ equity. If preferred stock is the source of equity then the dividend is subtracted from the net profit.
ROE=NPAT or net profit after tax/ Shareholders’ Equity
|
Period Ending |
26-Dec-13 |
27-Dec-12 |
|
Net Profit |
£ 21.00 |
£ 27.50 |
|
Shareholders’ Equity |
£ 193.90 |
£ 188.60 |
|
ROE |
11% |
15% |
The ROE of the company in 2013 was 11% and in 2012, it was 15%. The ROE of the group has decreased from 2012 to 2013, which resulted in less earnings of the company from its stockholders’ equity (Ramsden, 2011).
Return on Assets- The ROA is used to measure the profit percentage that the company group will earn on the total assets. The total assets include the current assets and the fixed assets.
ROA=NPAT or net profit after tax/ Total Assets
|
Period Ending |
31-Dec-13 |
31-Dec-12 |
|
Net Profit |
£ 21.00 |
£ 27.50 |
|
Total Assets |
£ 486.90 |
£ 477.80 |
|
ROA |
4% |
6% |
The ROA of the company in 2013 was 4% and in 2012, it was 6%. The ROE of the group has decreased from 2012 to 2013, which resulted in less earnings of the company from its total assets (Robin, 2011).
Conclusion
The profitability position of the company is explained using the profitability ratios, which shows that the company is successful in maintaining a stable profit growth. Some of the ratios used here are Gross Profit Ratio, operating profit ratio, net profit ratio, earnings per share, ROE and ROA. From the annual reports of Cineworld Group PLC, the income statements are considered for analyzing the Group’s profitable structure and its overall financial performance. The income statements of the Group are analyzed by using the accounting ratios (Jain, Singh and Yadav, 2013).
References
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