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BMAN20081 Financial statement analysis

Practice (Additional 2) December 2023

Scenario - As an investor, you have decided to update and widen your understanding of your current shareholdings, with a view to potential divestments. You are a current shareholder in Flutter Entertainment and want to consider the degree to which the company are engaged and committed to ethical practices, as well as analysing financial returns and growth.

With reference to the scenario above, answer ALL of the following 4 questions:

1. Using the Capital IQ database or another reputable database, produce a table to include 10 different ratios, over a five year period. State your source and briefly explain why you chose those ratios. (20 marks) 

2. With reference to the ratios provided in question 1, as well as use of other information from your own research, analyse the company’s current and expected future financial position and ethical practices and clearly explain whether you would keep or sell your investment in the company. (60 marks) 

3. Briefly explain how your understanding of the statutory audit report can influence your analysis. (10 marks) 

4. Briefly reflect on how you have used AI (or not) in your work. (10 marks)

(Total: 100 marks)

Brief notes for answering:

Question 1 – include ratios from each main group, but also consider more investor-specific ratios such as ROE, Sustainable growth, dividend yield etc. If Capital IQ doesn’t provide these, then calculate them manually, but state that you have done so. Put an asterisk (*) against the relevant ratios and then under the table put * = manually calculated as not available from Capital IQ. Or a similar statement.

Question 2 – consider the investor needs as an ethical investor and state any assumptions you make.

This question was set during the pandemic so there were additional risks to consider in relation to sales growth and the growth of online gambling, although Flutter Entertainment was well placed as it had already invested in online platform technology. Generally this is a fast paced industry with a lot of regulation and tax implications which can change quickly and which are outside the company’s control.  With gambling there are also ethical questions to consider, particularly with the pandemic and social isolation for some people. There are low switching costs for customers, and Flutter Entertainment focused a lot at this time on mergers and consolidation but with product diversification in order to consolidate its position in the industry. It also focused on using responsible gambling algorithms.

For the numbers, it was important to relate the ratios to investor needs, and in turn to relate all of this to future prospects. At the time this question was set whilst sales were up profits were down due to increased regulation and taxes.

At first sight a clear recommendation would be disinvestment due to the ethical standpoint (together with uncertainty over future profitability and dividends at the time). However we could turn it around and say recommend holding onto stock in order to pressure Flutter to improve ethical practices, along with strong balance sheet, opportunities for growth and increasing market share with proposed merger. It’s all in the argument! Is it plausible?

Question 3  - Understanding what the audit report can and can’t provide confidence on is useful – it increases our reliance on the financial statements, so inspires confidence and reduces risk, but on the other hand it says nothing about ethical practices and is historical rather than forward looking.

Question 4 – this question stays the same