10 - How to analyse club accounts 2: ratio analysis
Published online by Cambridge University Press: 20 December 2023
Summary
Ratio analysis involves linking two or more figures from the accounts where they have a logical business relationship. The ratios are then used in comparative analysis on either an historic or peer group basis. When looking at ratios, one need not be concerned about the numbers themselves, they are merely tools and flags to help identify issues about the club's financial position. Instead, we need to ask:
• What does the ratio mean?
• What does a change in the ratio mean?
• What are the causes of the change in the ratio?
• And what are the consequences of the change in the ratio?
An analyst will focus on the “why” and the “so what” elements of a change in a ratio and identify the reasons behind the movement in the figures and their implications for the future, such as the ability to sign players, renew manager contracts, meet wage demands, and so on.
Performance ratios
Performance here means financial performance, not performance on the pitch, but some of the calculations can in fact be linked to on-field performance too. To measure how much profit is generated from each £1 of income we use the following:
Profit margin = Profit/Income × 100
There are other measures of profit too, all used by analysts to get an overall feel for the club's performance. We can have:
• Gross profit margin (not really appropriate for a football club, but if looking at a business linked to the club, such as a sportswear manufacturer, this would be valid);
• Operating profit margin;
• EBIT margin;
• EBITDA margin;
• Profit before tax margin;
• Net profit margin (and any other the analyst chooses to calculate).
When looking at profit margins it makes sense to distinguish between “dirty” profit measures such as operating and net profit ones, which include non-recurring items and “clean” measures such as EBIT and EBITDA where non-recurring items are removed. Table 10.1 shows the data an analyst might extract from the accounts and put into a spreadsheet, which is typically how an analyst would crunch the numbers.
The EBITDA margin for 2019 is calculated as EBITDA profit (£186 million) divided by total income (£627 million) and multiplied by 100 to arrive at a figure of 29.6 per cent. What does this mean?
- Type
- Chapter
- Information
- The Price of FootballUnderstanding Football Club Finance, pp. 139 - 162Publisher: Agenda PublishingPrint publication year: 2021