16/17 Financial Decision Making
(Stafford Associates, Ras Al Khaimah)
(FINM036-SUMSD)
Abdullah Said Khalfan Al Kayoomi
MBA Student
S.NO: 16443187
1
Introduction
Before making a decision with respect to making investment in the share of a company
information and news should be gathered and analyzed to understand the prospect of the company
(Brigham & Ehrhardt, 2011). According to Bhat (2012), the investmetn decision in the stock of a
company should be done ont eh understanding of both-historical financial performance and future
financial prospect. Analysis of the financial statements of a company provides a better idea of the
historical financial performance of it, and review of the news in the periodicals, consensus growth
estimates of the analysts team, trend of historical share prices, and future earning prospect provides
a better idea of the future fiancnail prospect of it (Luecke, 2015).
This paper aims at conducting an analysis on the hsitorical and future financial perofmrnac
and propsect of the Auto Trader Group. Auto Trader Group Plc. is an automotive classified
advertising company (Auto Traders, 2017). It was established in 1975 by John Madejski, and Paul
Gibbons (Financial Times, 2017). The headquarter of the company is established in Manchester
of United States (Google Finance, 2017). Auto Trader Group is mainly engaged in the business of
buying & selling of new and used vehicles over internet platform (Auto Traders, 2017). The stock
of the Auto Trader Group is enlisted in the London Stock Exchange Market. It is one of the
companies contained in the FTSE 250 list (Morningstar, 2017). Based on the review of the
historical financial performance and future financial prospect, an investment recommendation will
eb made with respect to the stock of the company.
2
PART I: Historical Financial Performance and Position Analysis
Besides observing figures in the financial statements, ratio analysis is an important tool to
assess the financial performance and position of a company (Brigham & Ehrhardt, 2011). Based
on the profitability ratio analysis the financial performance, and based on the liquidity ratios &
solvency ratios the financial position of the Auto Trader Group can be assessed.
Financial Performance
The total revenue of the Auto Trader Group has been increased over the last five years. The
increase of the revenue of the company is an indication of expanding of the market shares of the
company (figure 1). Net income of the company even though worse in the earlier period but has
increased substantially in the last year after repayment of majority debt obligations (reduction of
interest burden) (Figure 1). The increase of the net income of the company was mainly due to
increase of overall sales, and better management of the operating cost and debt management of the
company. The issue is apparent from the increased trend of the net profit margin of the company
in the last two years (Figure 2). Increase of profit of the company in the last year is an indication
of the recovery of the profitability condition of the Auto Trader Group.
Revenue, Net Income, and EPS of Auto Trader Group
300
250
200
150
100
50
0
2016-03
2015-03
2014-03
2013-03
2012-03
0
Earnings per share
Revenue
Net income
0.02
2012-03
0.01
209
8
0.04
2013-03
0.02
219
20
0.06
0.08
2014-03
0.01
238
10
0.1
2015-03
0.01
256
10
0.12
0.14
2016-03
0.13
282
127
Figure 1: Revenue, Net Income, and EPS of Auto Trader Group
3
Earnings per Share (EPS) of the Auto Trader Group has been increased substantially in
the last year due to reduction of interest cost burden (Figure 1). After listing in the market in 2015,
in 2016 the company has paid first dividend per share of GBP 0.01 (Morningstar, 2017). Return
on Asset (ROA) of the company has been increased substantially in the last year (Figure 2).
Increase of the Return on Asset (ROA) is an indication of the improvement of the assets
management capacity of the company to generate return for the shareholders.
Profitability Ratios of Auto Trader Group
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Net Profit Margin
Return on Assets (ROA)
2012-03
3.83%
1.71%
2013-03
9.13%
3.74%
2014-03
4.20%
2.41%
2015-03
3.91%
2.42%
2016-03
45.04%
31.91%
Figure 2: Profitability Ratios of Auto Trader Group
Financial Position
Total assets of the Auto Trader Group has been increased consistently over the last five
years (Figure 3). This increase of the assets base of the company is an indication of the overall
business expansion of the company. In the earlier period, even though Auto Trader Group has high
reliance on the debt and high negative equity balance in the last year total liability balance of the
company has been decreased substantially and total negative equity balance has been decreased
(Figure 3). Overall leverage condition of the Auto Trader Group has been substantially decreased
over the last year. The decrease of the debt and improvement of the leverage condition of the
company is apparent on the rapid reduction of the long term debt to asset ratio, and total debt ratio
of the company (Figure 4). In 2015, Auto Trader Group has moved for listing in the NYSE market,
4
and raise funds to repay its debts obligations. Overall liquidity condition, even though deteriorated
in the last year as implied from the decrease of the current ratio and quick ratio in the last year, but
still good as implied from the high value of current ratio and quick ratio of the company (Figure
5). The company has high ability to repay its short term debts and obligations when these become
due. The reduction of the debt ratio, and increase of the liquidity ratios are indication of the
improvement of long term viability and solvency of the Auto Trader Group.
Total Assets, Total Liabilities, and Total Equity of Auto Trader
Group
1500
1000
500
0
2012-03
2013-03
2014-03
2015-03
2016-03
-500
-1000
Total assets
Total liabilities
Total stockholders' equity
Figure 3: Total Assets, Total Liabilities, and Total Equity of Auto Trader Group
Solvency Ratios of Auto Trader Group
300.00%
250.00%
200.00%
150.00%
100.00%
50.00%
0.00%
Long-Term Debt Ratio
Total Debt Ratio
2012-03
247.22%
266.88%
2013-03
223.18%
242.06%
2014-03
266.75%
280.96%
2015-03
130.68%
142.75%
2016-03
99.50%
112.81%
Figure 4: Solvency Ratios of Auto Trader Group
5
Liquidity Ratios of Auto Trader Group
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Current Ratio
Quick Ratio
2012-03
1.05
0.96
2013-03
1.58
1.52
2014-03
1.28
1.15
2015-03
1.51
1.17
2016-03
1.19
0.77
Figure 5: Liquidity Ratios of Auto Trader Group
The financial performance and position of the Auto Trader Group has been improved
substantially in the last year after debt repayment policy of the company. Improvement of the
financial performance of the company is implied from the profit measure figures, and profitability
ratios of the company. Improvement of the financial position of the company is implied from the
decrease of overall liabilities, increase of total shareholder’s equity, and improvement of liquidity
& solvency ratios of the company.
6
PART II: Investment Prospect Analysis
The current share price of the Auto Trader Group in the market is GBP 408.32 (Google
Finance, 2017). The current market capitalization of the Auto Trader Group in the market is GBP
3.98 billion (Google Finance, 2017). Over the last year after listing, the stock of the Auto Trader
Group has been consistently increased (Figure 6). A positive trend can be observed from the long
term trend of the price increased can be observed from the historical share price of the company
(Figure 6). Over 2016, the share price of the Auto Trader Group has been increased by 27.34%.
Figure 6: Historical Share Price of Stock of Auto Trader Group (Google Finance, 2017)
The Net Asset Value (NAV) per Share of the Auto Trader Group is GBP 0.398
(Morningstar, 2017). The price/sales ratio of the Auto Trader Group is 13.15 times. The current
Price/ Earnings Ratio of company in the market is 28.54 times. This P/E ratio indicates the
investors are willing to pay GBP 28.54 against per GBP income of the company. As compared to
industry average P/E ratio, the P/E ratio of the Auto Trader Group is higher. From the higher P/E
ratio of the Auto Trader Group, it is implied that the investors are perceiving higher growth
estimate for the Auto Trader Group, and are ready to pay more price for the share of it. Better
7
financial performance of the Auto Trader Group results in posting of its stock as ‘Cheery’ in the
market to the investors. The volume traded of the share has been consistently increased over the
last three years (Figure 7).
Figure 9: Share Volume of Auto Trader Group (Inestors Sonicle, 2017)
Total revenue of the Auto Trader Group revenues for the 2016 was GBP 281.60 million.
In 2016 total revenue of the company has been increased by 10.04% than the prior year. In 2017
and 2018 the revenue of the company are expected to be GBP 310.04 million, and GBP 331.34
million respectively (Financial Times, 2017). The reported EPS of the Auto Trader Group was
GBP 0.1284 in 2016. In the next year two years the EPS of the company are expected to increase
by 15.40%, and 17.46% respectively (Financial Times, 2017). The Yahoo Finance’s analysts have
estimated consensus EPS growth of the Auto Trader Group in the upcoming five years as 18.41%
(Yahoo Finance, 2017). In 2016, DPS (dividend per share) of the Auto Trader Group PLC was
0.02 GBP. The 17 analysts covering the company expect dividends of 0.05 GBP (Growth of
226.67%) for the upcoming year. As per market analysts, the financial performance of the Auto
Trader Group is expected to improve further in the future (Financial Times, 2017).
8
Figure 8: Consensus Revenue Forecast of Auto Trader Group (Financial Times, 2017)
Figure 9: Consensus Earnings Forecast of Auto Trader Group (Financial Times, 2017)
Figure 10: Consensus Dividend Forecast of Auto Trader Group (Financial Times, 2017)
The condition of the auto industry of the UK is expected to be better in the future. Even
with Brexit decision, the sales in the vehicles in the domestic market, and export market was stable.
In 2016, the auto market has experienced growth of 3.9% (Atradious, 2016). Based on the analysis
of the Atradious, the overall credit risk, financing, and business condition of the auto industry of
the UK is very good (Figure 11). By the end of 2020 total market of the automotive market of the
UK is expected to be increased by 22% than the current size of 1.5 million vehicles (Henry, 2015).
9
The number of online users in the worldwide is increasing continuously. People now highly prefer
to shop over the internet. Currently, Auto Trader Group is the largest digital automotive
marketplace in the UK (Auto Traders, 2017). It has created the largest pool of vehicle sellers
(listing more than 437,000 cars each day) (Auto Traders, 2017). Given the high growth prospect
of the industry, and better efficiency of the Auto Trader Group in managing of its financial
resources, the market shares and profitability of the Auto Trader Group is expected to increase in
the upcoming period.
Figure 11: Analysis of the Current Condition and Prospect of the Automobile Industry of UK
(Atradious, 2016)
10
In terms of key financial data and information, the performance of the Auto Trader Group
is better than the average companies in the industry (Figure 12).
Figure 12: Market Information of the Stock of Auto Trader Group (Financial Times, 2017)
Nearly about 34.12% of the total share outstanding of the Auto Trader Group is held by
the institutional investors. The stock of the company has been picked by some world famous
investment banking company (Figure 13). As compared to those of other peer companies the
holding of more shares by the institutional is a good sign for a company in the market. The holding
of more shares of the Auto Trader Group by the institutional investors is an indication of the fact
the institutional investors is perceiving good prospect of the stock and picking up the stock in their
portfolio.
11
Figure 13: Institutional Investor Shareholding of the Auto Trader Group (Financial Times, 2017)
Auto Trader Group has developed strong internal code of conduct & corporate governance
for managing of the internal business operation and employee activates properly. There are explicit
guidelines and principles for philanthropy and environmentally sustainable operation practices of
the organization (Auto Traders, 2017). The expense incurred for corporate social responsibility
(CSR) of the company has been increased over the last three years. The management of the
company always try to uphold of the integrity of the company and running the business in
sustainable manner. The strong internal code of conduct & corporate governance, and active CSR
involvement indicate high accountability of the resources managed by the executives of the
12
company & high transparency in reporting, and good corporate citizenship of the company. The
strong internal code of conduct & corporate governance, and active CSR involvement of the
company make it as a good investment choice to the investors in the market.
As on April 28 2017, the consensus forecast of pool analysts of seventeen research
companies, covering Auto Trader Group, provided option that the stock of the Auto Trader Group
will outperform the market, and provided buy or hold recommendation with respect to stock
investment in Auto Trader Group (Financial Times, 2017). The analysts of the Investors Chronicle
have also provided hold recommendation for the stock of the Auto Trader Group (Atradious,
2016). The Yahoo Finance’s analysts Team provided a strong buy recommendation for stock of
Auto Trader Group (Yahoo Finance, 2017). The 16 analysts, covering the analysis of the stock
Auto Trader Group PLC, have predicted a median target price of the stock of the company of GBP
440.00, high estimate of GBP 530.00 and low estimate of GBP 360.00 (Financial Times, 2017).
Based on the median expected price, the stock price is expected to be increased by 9.70%
(Financial Times, 2017).
Figure 14: Consensus Recommendation for Stock of Auto Trader Group (Financial Times, 2017)
13
Figure 15: Consensus Stock Price Forecast of Auto Trader Group (Financial Times, 2017)
14
Conclusion and Recommendation
Based on the overall financial performance and position analysis of the Auto Trader
Group, it can be said that even though overall financial performance and position of the Auto
Trader Group were not god in the earlier period, the financial performance and position of the
company is recovering. The company has experienced a tremendous growth in the last financial
period. The financial performance and position of the Auto Trader Group is expected to improve
in the upcoming period. The strong internal code of conduct & corporate governance, and active
CSR involvement enables the investors to perceive high transparency in the management of
resources & reporting, and storing corporate citizenship of the company.
Based on the review of the periodicals, consensus growth estimates of the analysts' team,
trend of historical share prices, and future earning prospect, a hold (if already purchased) or buy
recommendation can be made for the stock of Auto Trader Group. A hold or buy recommendation
is justifiable when the investors perceive high prospect of the company.
15
References
Atradious. (2016, October 27). Retrieved April 27, 2017, from Market Monitor Automotive United
Kingdom 2016: https://group.atradius.com/publications/market-monitor-automotiveunited-kingdom-2016.html
Auto Traders. (2017). Retrieved April 30, 2017, from Abut Us: http://about-us.autotrader.co.uk/
Bhat, S. (2012). Financial Management: Principles and Practice. New Delhi: EXCEL BOOKS.
Brigham, E. F., & Ehrhardt, M. C. (2011). Financial Management: Theory and Practice. South
California: South-Western Cengage Learning.
Financial Times. (2017, April 28). Retrieved April 30, 2017, from Auto Trader Group PLC:
https://markets.ft.com/data/equities/tearsheet/profile?s=AUTO:LSE
Google Finance. (2017). Retrieved April 29, 2017, from Auto Trader Group PLC: Summary:
https://www.google.com/finance?cid=882492039568036
Henry, I. (2015). The future of UK automotive manufacturing in 2025 and beyond . Long-Term
forecast paper for The Society of Motor Manufacturers and Traders (SMMT). Retrieved
from The future of UK automotive manufacturing in 2025 and Beyond.
Inestors Sonicle. (2017). Retrieved April 29, 2017, from Auto Trader Group PLC: Stock Analysis:
http://markets.investorschronicle.co.uk/research/Markets/Companies/Summary?s=AUTO
:LSE
Luecke, R. (2015). Finance for Managers. New York: Harvard Business School Publishing.
Morningstar. (2017). Retrieved April 30, 2017, from FTSE 250 Index Shares:
http://www.morningstar.co.uk/uk/equities/indexstockprices.aspx?index=FTSE_250
Morningstar. (2017). Retrieved April 30, 2017, from Auto Trader Group PLC (ATDRF): Income
Statement: http://financials.morningstar.com/income-statement/is.html?t=ATDRF
Morningstar. (2017). Retrieved April 29, 2017, from Auto Trader Group PLC (ATDRF): Balance
Sheet:
http://financials.morningstar.com/balancesheet/bs.html?t=ATDRF®ion=usa&culture=en-US
Yahoo Finance. (2017). Retrieved April 30, 2017, from Auto Trader Group plc (AUTO.L):
Analysts : https://uk.finance.yahoo.com/quote/AUTO.L/analysts?p=AUTO.L
16
Appendices
Appendix 01: Financials of Auto Trade Group Plc.
AUTO TRADER GROUP PLC
BALANCE SHEET
Fiscal year ends in March. GBP in millions except per share data.
Revenue
Gross profit
Operating expenses
Sales, General and administrative
Other operating expenses
Total operating expenses
Operating income
Interest Expense
Other income (expense)
Income before taxes
Provision for income taxes
Net income from continuing operations
Net income from discontinuing ops
Net income
Net income available to common shareholders
Earnings per share
Basic
Diluted
Dividend Per Share
Basic
2012-03
209
209
2013-03
219
219
2014-03
238
238
2015-03
256
256
2016-03
282
282
8
93
101
108
78
-7
23
11
12
-4
8
8
8
102
110
109
85
-1
23
9
14
7
20
20
7
132
139
99
83
-12
4
6
-3
13
10
10
123
16
96
112
170
13
-2
155
28
127
0.01
0.01
0.02
0.02
0.01
0.01
0.01
0.01
0.13
0.13
0
0
0
0
0.01
123
133
78
-44
11
2
8
2
10
10
127
127
17
AUTO TRADER GROUP PLC
BALANCE SHEET
Fiscal year ends in March. GBP in millions except per share data.
Assets
Current assets
Cash
Cash and cash equivalents
Total cash
Receivables
Prepaid expenses
Other current assets
Total current assets
Non-current assets
Property, plant and equipment
Gross property, plant and equipment
Accumulated Depreciation
Net property, plant and equipment
Goodwill
Intangible assets
Deferred income taxes
Other long-term assets
Total non-current assets
Total assets
Liabilities and stockholders' equity
Liabilities
Current liabilities
Accounts payable
Taxes payable
Other current liabilities
Total current liabilities
2012-03
2013-03
2014-03
2015-03
2016-03
49
49
28
7
3
86
110
110
29
6
2
147
13
13
40
7
8
68
22
22
33
16
0
71
10
10
29
22
0
62
25
-19
6
1065
-698
5
5
382
468
22
-17
5
1069
-695
6
4
388
535
19
-14
4
434
-95
5
20
-12
8
433
-103
5
22
-14
7
313
11
4
348
415
343
414
335
398
6
15
62
82
7
16
70
93
7
12
34
53
5
13
29
47
8
26
18
52
18
Non-current liabilities
Long-term debt
Deferred taxes liabilities
Pensions and other benefits
Other long-term liabilities
Total non-current liabilities
Total liabilities
Stockholders' equity
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
1157
1
1
7
1166
1249
1194
1
1107
1
541
1
396
0
7
1202
1295
5
1113
1166
2
544
591
1
397
449
177
177
176
10
1
-1054
95
-780
468
2
-1034
95
-760
535
2
-1023
95
-751
415
144
-789
469
-176
414
971
-1032
-52
398
2012-03
2013-03
2014-03
2015-03
2016-03
1.58
1.28
1.51
1.19
Quick Ratio
Current Assets / Current Liabilities
1.05
(Current Assets - Prepaid Expense - Inventory) / Current
Liabilities
0.96
1.52
1.15
1.17
0.77
Profitability Ratios
Net Profit Margin
Return on Assets (ROA)
Net Profit / Total Revenue
Net Income / Total Assets
3.83%
1.71%
9.13%
3.74%
4.20%
2.41%
3.91%
2.42%
45.04%
31.91%
Leverage Ratios
Long-Term Debt Ratio
Total Debt Ratio
Total Term Debt / Total Assets
Total Debt / Total Assets
247.22%
266.88%
223.18%
242.06%
266.75% 130.68% 99.50%
280.96% 142.75% 112.81%
Appendix 02: Ratios of Auto Trade Group Plc.
Ratios
Liquidity Ratios
Current Ratio
Formula
19
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