1.

Introduction
This report seeks to carry out an analysis of the financial performance and position of Hornby
PLC and Games workshop PLC 2016 and 2017.In order to do so, ratio analysis of the two
companies will be carried out. Ratio analysis is a technique used in analyzing the performance
of the company by analyzing its financial statement. Ratio analysis will be used to identify trends
in the companies which will allow the investor to identify any performance changes of the two
companies over time. For this report, the key ratios which will be used include sales and
profitability ratio, Cash Flow Performance and Liquidity Position ratio, Efficiency ratios,
Gearing ratio and Share Price Movements.
About Hornby PLC and Games workshop PLC
Hornby PLC is a British company which operates in the Model railway components industry.
The company was founded in 1901 and is currently listed in the London Stock Exchange. The
company deals with the Model Railways, Train Sets, Locomotives and accessories. The
company has been experiencing financial troubles and declining financial results from the year
2017. However, takeover from PAM (Phoenix Asset Management) has helped steer the company
around
Games workshop PLC is a British company which operates in the Miniature war gaming. The
company was founded in 1975 and is currently listed in the London Stock Exchange and is a
constituent of the FTSE 250 Index. The company develops and publishes miniature war-games
such as The Lord of the Rings Strategy Battle Game and the tabletop war-games Warhammer
Age of Sigmar.

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 2. An analysis of Sales and
Profitability
Gross profit margin and Return on Capital employed will be used to determine the sales and
profitability of Hornby PLC and Games workshop PLC.
 Gross profit margin
The gross profit margin is a profitability ratio which is used to measure the how much of a dollar
of revenue the company is left with after paying its cost of goods

GP % 2017 2016 Change

Hornby PLC 38.4% 39.0% 0.6%
Games workshop PLC 72% 68.3% 4.07%

The gross profit margin for Hornby PLC shows us that the Hornby Plc
percentage revenue left over after paying for the direct costs of
58
manufacture for the year 2017 was 38.4% while that for 2016
56
was 39.0% which shows a 0.6% decline in the year. The reason
for this decline in gross profit margin for Hornby is that 38% 54
52 Revenue GBP
(2016: 39%) there was a reduction on the planned stock of the Mil
product lines that is discontinued and the termination of 50
concessions as a form of distribution channel. As a part of Turn- 48
around plan, the company’s objective was to rationalize the 46
business. The focus of the European business on the most 44
profitable international model rail brand resulted in revenue loss 42
from international operations falling by GBP 3.9 million (39%) A-2016 B-2017
over the financial year. (Annual Report 2017).
The significant (33%) increase in revenues for Workshop
Workshop Plc
Plc was mainly because of increased “Trade Revenues” that 180
mostly comprises of regions of UK and continental Europe 160
and North America. For Hornby Plc the drop (16%) was 140
because of the reduction in the scale of business in line 120 Revenue GBP
with the turnaround plan (Annual Report 2017). The 100 Mil
revenues increased from all segments in 2017. The 80
increase in revenues was because of increased volumes 60
affected by the sales mix of new and existing product. (34% 40
20
[2] 0
A-2016 B-2017
 from new sales and 66% from existing product). The weakened pound facilitated the
revenue increase discussed above. (https://www.bbc.com/news/uk-england-
nottinghamshire-45019803) . Second factor that contributed to the increased sales was the
71% jump in online sales from UK and continental Europe that skyrocketed the revenues
(https://www.independent.co.uk/news/business/news/games-workshop-sales-profits-
latest-updates-warhammer-2017-a8149201.html).
The region wise revenue analysis over the two years is given below:

Region Wise Sales for Games Workshop

Region Wise Sales forHornby Plc Plc (In 'Million)
(In Million) 2016 2016
2017 2017
Europe (Others) Rest of the World
Italy Asia
Black Library
Spain
Australia And Newzealand
USA UK & Continental Europe
North America
UK
0 10 20 30 40 50 60 70
0 5 10 15 20 25 30 35 40 45

 Other Expenses:
The finance income also deteriorated in 2017 for Games Workshop Plc. This is primarily
because of increased cash balances. The company might have pulled out short term
investments to meet its strategic objective of better cash flow management. Hornby Plc, on
the other hand reduced its overheads by 11%. Sales and marketing costs also decreased
significantly due to lower spend on T.V advertising. Admin costs decreased indicating structural
changes made as a part of turnaround plan. Other operating expenses included foreign exchange
gains and losses and amortization of certain intangible assets also saw a decline ultimately
improving the net profit margins for the year 2017.

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 2017
2016
160
140 120
120 100
Sales
100
Gross Profit 80 Sales
80
Net Profit Gross Profit
60 60
Net Profit
40 40
20
20
0
Hornby Plc Games 0
-20 Workshop Hornby Plc Games
Plc -20 Workshop
Plc

 ROCE
Return on Capital employed (ROCE) is a profitability ratio which measures on the
performance of the return on capital employed in the company to generate profits.
Profit before Interest and Tax
Capital Employed

2017 2016 Change

Hornby PLC -32.0% -32.8% 0.8%
Games workshop PLC 61.1% 42.3% 18.8%

Investors prefer a higher ratio as it shows that the company is able to use its capital
efficiently. The Return on Capital employed (ROCE) for Hornby PLC for 2017 was -
32.0% while that for 2016 was -32.8%. This shows a significant improvement of 0.8%.
The increase in ROCE is good as it indicates that the company has been able to use its
capital well. The increase can be linked to the reduction of product lines by the business
and focus is put on lines which are profitable and can generate high profit margins. The
company is able to carry out a capital allocation process which is aligned to brand
delivery targets and brand strategies.
Games workshop PLC had a ROCE of 61.1% in 2017 and 42.3% in 2016, an increase of
18.8%. The increase was good and was driven by the increase in operating income before
royalty income. This was slightly offset by the increase on the average capital employed
in the company

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3. Cash Flow Performance and Liquidity
Position
 Cash Flow Performance:
By viewing the statement of cash flows, we can evaluate the cash positions of both
entities. Workshop Group performed exceptionally well as compared to HRN Plc. As
we are aware of the concept “Cash Is King” and because of its’ increasingly widely
use in evaluation by analysts, Cash management becomes of critical importance
<SUWARDY, T. (2012). Cash is King.>. It appears as if HRN’s objective of obtaining a
sustainable financial position was being met in 2017 due to better cash
management, however this was mostly due to the Sale of property plant and
equipment (Discussed in Asset Turnover Section) and proceeds from issuance of
ordinary shares. For Workshop Group, managing cash is an integral part of entity’s
objectives and long term growth which can be observed as a scintillating aspect if
we compare the performance with HRN Plc. Increased operating profits in 2017
enabled Games workshop to pay Dividends in 2017, even then the company was
able to increase its cash reserves by 54%.
 Liquidity:
Hornby Plc Workshop Plc
Liquidity/Financial Health 2016 2017 2016 2017
Current Ratio 1.88 2.82 2 1.91
Quick Ratio 0.8 1.39 1.4 1.34
Financial Leverage 1.5 1.25 1.31 1.38

We can see that the current ratios for Workshop group were better than Hornby Plc.
However, Workshop Plc’s current ratio declined in 2017 mainly due to increase in
its current tax liabilities due to increased revenue and

Operating profits in 2017. Another factor responsible for the declined current ratio
was the increase in deferred income in 2017. The company records deferred income
in its balance sheets and the advanced cash received against it. This is another
explanation for the increase in Cash balances in 2017. Another reason for the
increased cash balances in 2017 could be the possible decline in Relievable Days.
However, the total increase in current assets was not so great as compared to the
increase in current liabilities. The current ratio for Hornby Plc improved mainly due
to the payment of their current debt resulting in a decrease in their current

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 liabilities. Hornby’s quick ratio also improved due to reduced inventories in 2016 as
compared to 2017. It was expected that the increased demand will not necessitate
the inventories being written off. The quick ratio for Workshop Plc was somewhat
stable in both years. Although the inventory balance decreased in 2017, the
decrease was not sufficient enough to reduce the overall quick ratio. The quick ratio
(often regarded as “Acid-test”) removes subjectivity of inventories’ translation into
cash. It assesses the firm’s ability to meet its current obligation without relying on
the sales of goods in warehouse.

Liquidity Ratios for 2017

3

2.5

2
Hornby Plc
Workshop Plc
1.5

0.5

0
Current Ratio Quick Ratio Financial Leverage

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4. Efficiency Analysis
 Asset Turnover

Asset Turnover Ratio

Hornby Plc 1.15 1.11
Games Workshop Plc 1.72 2.02

The asset turnover ratio for Gameswork Shop increased due to increased Sales
(Discussed above) and Increase in value of Total Assets. The total asset site increased
mainly due to the increased Cash balances and inventory valuation (both aspects
discussed above in detail). Other factors that further strengthened the asset turnover ratio
were increased values for intangible assets, (mainly due to additions of computer
software and increase capitalization of development of development costs), Trade and
other receivables (More specifically a new element “Loans to Company Shareholders
amounting GBP 1.9m- Non-existent in 2016; classified as Loans to Shareholders under
Resolution 11, Note of AGM). The asset turnover ratio for Hornby declined due to
reduced value of the total asset side in 2017, more specifically Trade and other
receivables and inventories in current asset portion. The trade receivables value declined
due to lower values of fully performing trade receivables that declined by almost 50% in
2017. The prepayments also decreased (44%) in 2017 although the decrease was smaller
than receivables. The non-current asset side also decreased due to lower values of
property plant and equipment, since the group sold land and buildings in 2017. The assets
were held by the subsidiary Hornby Espania S.A., and the intention to sell was made in
2016.
 Working Capital Ratios
Workshop
Hornby Plc
Plc
Efficiency Ratios: 2016 2017 2016 2017
Days Sales Outstanding 68.59 75.51 13.55 10.3
Days Inventory 140.16 145.38 78.8 87.56
Payables Period 55.94 53.11 43.99 41.34
Cash Conversion Cycle 152.81 167.79 48.36 56.51
Receivables Turnover 5.32 4.83 26.94 35.44
Inventory Turnover 2.6 2.51 4.63 4.17

As far as the working capital ratios are concerned, they were somewhat volatile for
both entities. Cash conversion cycles calculates average number of days it takes for a
company to convert its revenues into cash. Although the revenue increased for
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Games Workshop Plc but the correlation with the receivable days was opposite. The
company might have offered early settlement discounts, and improved the
collection over the performance period. The inventory days were also much better
than Hornby Plc basically due to the reduced provision in 2017 as it was expected
that the increased demand will not necessitate the inventories being written off. The
provision was reduced based on the company’s previous 3 year performance and
provisions. Hornby’s funds are mostly tied up in the inventories in the form of
holding costs, delivery costs etc. The average payable days improved for both
companies and this was due to relatively lower values of Cost of sales for both
companies in 2017 as compared to the previous year. The cash conversion cycle for
Workshop was overall better for Workshop Plc than for Hornby. We can say that
Workshop plc outperformed Hornby in the aspect of efficiency as well.

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 5. Funding Structure
 Gearing
The gearing ratio measures the proportion of a company's borrowed funds to its equity. A
high geared is a high percentage of Loan Capital as a Proportion of total capital which means
that the company will have higher interest payments and a requirement to make regular
payments. A low geared indicate a low percentage of Loan Capital as a Proportion of total
capital.

Debt
Debt + Equity

2017 2016 2017

Gearing 32.10% 34.70% 38.46%
Change 2.60% 3.76%

HORN BY PLC PLC shows an increasing trend in its gearing ratio where in 2017, it
recorded a gearing ratio of 32.10 where in 2016 it was 34.70 showing an increase of 2.60
and 2017 it was 38.46 showing an increase of 3.76. This increasing gearing ratio is not a
good sign as it means that HORN BY PLC PLC has acquired more debts which is as a result
of increased demand and to meets its productivity requirement. The gearing ratio values
shows that HORN BY PLC PLC borrowed 32.10 % of its equity in 2017, 34.70% in 2016
and 38.46 % in 2017

 Interest Cover
The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a
company can pay interest on outstanding debt. In other words, it measures the margin of safety
a company has for paying interest during a given period, which a company needs in order to
survive future (and perhaps unforeseeable) financial hardship should it arise. An interest
coverage ratio of more than 1 is preferable as it shows that the firm is making enough money to
pay its interest obligations and is left with some additional earnings to make its principle
payments.

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 Profit before Interest and Tax
Net Interest

2017 2016 2017

Interest Cover 0.42 times 3.45 times 3.54 times
Change 3.03 times 0.09 times

HORN BY PLC PLC Company shows an increasing trend in its interest coverage ratio. In 2017,
the firm recorded an interest coverage ratio of 0.42 while in 2016 3.45 experiencing an increase
of 3.03. This trend was also witnessed in 2017 where the firm recorded an interest of 3.54 an
increase of 0.09 compared to the previous year. The increasing trend is a good indicator as it
shows that the firm is able to increase its cash and pay its interests and principle payments. It
also means that the company’s profitability has greatly increased and HORN BY PLC PLC is no
longer at a risk of being defaulted.

An interest coverage ratio of 0.42, 3.45 and 3.54 is the number of times the firm makes earnings
when compared to its current interest payments in 2017, 2016 and 2017 respectively. An interest
coverage ratio of above 1 is preferable as it is an indicator that the company is making enough
money which will enable it to pay its interest obligation and even remain with some more
earnings to make its principle payments.

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 6. Investor Ratios and Share Price
Movement
Hornby
Plc Workshop Plc
Investor Ratios 2016 2017 2016 2017
Price/Earnings - - 16.75 28.2
Earnings Yield % (98.14) (44.91) 5.97 3.55
Dividend Per Share 0 0 0.45 1.4

 Price/Earnings Ratio:
PE Ratio - Workshop
Price ratios are used to get an idea whether a stock
price is reasonable or not. The use of these ratios
Plc
are mostly intuitive but they accompany a major
caveat i.e. these ratios are merely metrics and are 30
only useful once compared with a suitable bench 25
mark, which can be a competitor, industry or past. 20
It is necessary for the companies to be in earnings 15
position so that a better picture can be observed.
10
Hornby Plc did not yield any earnings in its two
years hinting an alarming situation and a cause of 5
concern for the investors. Workshop Plc did not 0
2016 2017
disappoint its investors after the publication of
its results in 2017. The company, not just only
improved its Price-Earnings ratio, but
Price To Sales Ratio-2017
announced dividends for its investors as well.
The improved ratio is a result of better Workshop 5.45
operational and financial performance and the
massive increase in revenues in the year 2017. Hornby 0.55
It can be reasonably assumed that the earning
position of Workshop Plc was much better than
Hornby Plc in 2017 and in 2016. However, on Industry 2.5
comparison with the industry average of 23.1,
the company’s performance was slightly better
than the industry benchmark but the ratio of 2016 appears to be questionable on
comparison as far as the overall performance is concerned.
<https://www.thebalance.com/financial-ratio-guide-357501>

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 Dividend Per Share
One of the most renowned ratios of investors is the “Dividend per Share”. Mostly investors,
require returns against their investment in the form of dividends. Dividends, give investors
the required confidence on their investments as far as the return is concerned. The ratio is
common in investors that look for quick gains on their principle invested. Since Hornby Plc
did not produce any earning, no dividend was paid. It is unlikely that the company will be
able to pay any dividend soon. However, since the market is not solely composed of
investors requiring dividends, as significant investors aim for capital gains on the disposal
of their investments, using dividends to evaluate a company’s performance might not be
effective if considered in isolation. It is necessary to view dividends, in light of financial
health of the companies for efficacy. Workshop Plc although paid dividends, the fact that
the dividend policy of the company is not stable, should be considered before evaluating
the value of the company. In the current context, we can safely assume that Workshop Plc
would be preferred over Hornby Plc because of its lucrative dividends as evident in the
previous years. However, the chairman has already given the disclaimer on the reliance of
dividends or their growths in the annual report of 2017.
<https://www.thebalance.com/financial-ratio-guide-357501>
 Dividend Yield:
Dividend yield ratio is mostly considered when investor wants to calculate the return in
relation to the earnings of the company. It is obtained by dividend by dividing DPS by EPS.
The dividend yield for Hornby Plc is negative due losses, Workshop performed better as
compared to Hornby Plc however, on comparing it with the industry, it appears as the
company underperformed. The ratio also declined in 2017. The facts can be deciphered
once we view the retention ratios and payout ratios. Although, the earnings increased,
however, the payout ratio was relatively less that resulted in the decrease of dividend yield
ratio in 2017. <https://www.thebalance.com/financial-ratio-guide-357501>

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Share Price Movements

35
30
25
20
Share Price

15
10
5
0

Historical Price Workshop Plc

120
100
80
60
Share Price

40
20
0

Historical Share Price of Horn by Plc

Much of the fundamental analysis discussed above can be verified by technical analysis as
per the above mentioned historical prices. The above graphs show the analysis of share
price of multiple years and It is quite clear that Workshop Plc is moving towards its
maturity and considering the overall fluctuations in the share prices, would be an ideal
investment. Horn by Plc suffered a massive drop in Dec-15. The massive was drop a result
of disruptions from new computer and stock management systems and also by China’s
influence on the supplies. Hornby was never able to recover from that. The price stabilized
from 2016 and has remained constant ever since. Workshop Plc on the other hand, after
successfully achieving forward and backward integration with its suppliers and
wholesalers was able to improve its performance. The technological improvement in its
management system proved to be fruitful. The company’s share price has been subjected to
an increase and attracted several investors. The recent expansion in the Middle East and
regions of New Zealand appears to be the most promising markets. The success of the
company has been attributed to the successful market diversification markets which reflect
the successful achievement of its long term objectives.

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 7. Conclusion
In order to review a potential investment in a company, there are two types of analysis.
First one is Technical analysis which constitutes around 97% of trading worldwide, second
is Fundamental Analysis that comprises of the rest. We were required to analyze the
companies “Hornby Plc” and “Workshop Plc” and recommend which investment will be
able to yield maximum return for an investor.
Our fundamental Analysis of Profitability, Financial Health, Operational performance
shows that Workshop Plc would be more preferred over Hornby Plc. The company’s
reserves are in excellent position. No apparent strategic drift was observed if we compare
the long term objectives of the company with the annual performance. We understand that
Hornby Plc has adopted a turn-around strategy signs of which are evident in the 2 year
performance. However, it would be too soon to conclude if a strategy is likely to work in the
long turn to return the competitive edge back to the company and return it to the point it
was at. The only way, Hornby will be able to perform better is by diversifying to new
markets and new regions. Such a decision is likely to turn the performance around;
however, even then return to the shareholders is likely to get delayed. The company does
not appear to have a dividend policy; hence, even if Hornby does get the attention, it will be
of an investor that is seeking a return in the long term. Workshop Plc would be idea
investment under such circumstances. Although, the company fell short a bit when the
performance was compared with the industry targets, but the technological advancements
and the recent performances of the company suggest that Workshop Plc can become one of
the giants in the industry if the performance is continued. The dividends, although
unstable, are likely to attract more investors. In our opinion, investment should be made in
Workshop Plc. The final decision of the selection depends on the type of investor whether
the investor is risk seeking or risk averse. A risk averse investor would opt would Games
Workshop Plc considering the stability of investment and return in the form of dividends. A
risk seeker might opt for Hornby Plc with the intention to avail capital gains, since the
performance is likely to improve in the short term and will ultimately result in an increased
share price. However, the approach is aggressive and involves a lot of subjectivity.

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