Research Papers

Financial Statement Analysis and Valuation Example

Manchester United Football Club is a professional club based on Old Trafford, England. The football club competes in the Premier League. The company operates as a limited liability entity incorporated in 2012 under the Companies Law of the Cayman Islands (Manchester United, 2018). It has its principal executive office located in Sir Matt Busby Way, Old Trafford, Manchester M16 ORA, and United Kingdom (Manchester United, 2018). The company has a 140-year heritage and throughout the years has won 66 trophies that enabled it to become one of the world’s leading sports brands with a global community of 659 million followers (Manchester United, 2018). Manchester United is the most successful sports team in the world. The company operates as a single reporting segment which is the operation and management of a professional football team. It reports revenue in three sectors, including broadcasting, commercial, and matchday.

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Manchester United enjoys one of the most influential global brands, providing opportunities for growth and continuous engagement of the followers and online community (Ozanian, 2018). The report presents a financial analysis of Manchester United from the perspective of its revenue, expenses, and operating profit performance. It also analyzes the financial position and liquidity of the entity to establish the financial strength and future status of the company. Furthermore, there is a valuation of the company based on comparable financial analysis and discounted cash flows methods. The assessment aims to establish an accurate value of the company to evaluate the attractiveness of the business for investment purposes.

Financial Performance and Position Analysis

In 2018, Manchester United FC reported £590,022,000 in total revenue. It represented £8,818,000 increase from the previous year (BBC News, 2018). The increase in revenue was primarily due to the rise in revenue in the entire business sector. Manchester United FC generates revenue from three significant sources with commercial revenue constituting the highest revenue share at £276,099,000 in 2018 (Business Wire, 2018). The broadcasting and matchday revenue was reported at £204,137,000 and £109,786,000 respectively (Manchester United, 2018). The high commercial income was due to the full-year contribution from the Adidas agreement. For instance, the retail, merchandising, apparel, and product licensing revenue for fiscal 2017 were £104.0 million, representing a 6.9% increase from the previous year (Manchester United, 2018).

According to the management, the consolidated revenue for fiscal 2018 was £590.0 million, an increase of £8.8 million compared to the previous year (Manchester United, 2018). The increase resulted from the increase in revenue from commercial and broadcasting sectors and the decline in the revenue from matchday sector. The broadcasting revenue for 2018 was £204.1 million, representing £10.0 million from the previous year (Manchester United, 2018). The positive growth in revenue was due to the club finishing runners-up in the Premier League. Moreover, the current shirt sponsorship with General Motors under the brand name, Chevrolet also contributes a significant portion of revenue growth during the year (The Guardian, 2012, Gourley, 2018). The following chart highlights the distribution of the organization’s consolidated revenue in 2018.

The current domestic broadcasting rights contract between The Premier League and Sky Sports and BT Sport worth £5.136 billion for the live local rights also contributed to the company’s significant growth in revenue over the period. The company’s share of income under the Premier League broadcasting rights amounted to £151.6 million in 2017/ 2018 season, contributing to the positive change in revenue (Manchester United, 2018).

Operating Expenses
The operating expenses comprise employee benefits, other operating expenses, depreciation, and amortization. The total operating expenses as June 2018 were £564.0 million, an increase of £52.7 million from the previous year. The increase in operating expenses is an indication of increasing inefficiency in the management of costs. The expenditures on employee benefits for the year were £295.9 million, representing 12.3% over the previous year (Manchester United, 2018). The salary increase for players following the participation in the UEFA competition was a significant contributor to the growth in the business operating expenses. The company amortization costs are primarily due to the registrations of new players. The signing of new players in 2018 was a significant contributor to the high amortization (Manchester United, 2018). Besides, the increase in salaries contributed to the positive changes in the overall administrative costs.

In 2018, the there company reported £138.4 million in amortization expense, representing £14.0 million due to the acquisition of new players during the year (Manchester United, 2018). The exceptional items for the year amounted £1.9 million, which relates to the present value of the additional contributions (Manchester United, 2018). The increase in operating expenses affected the company’s operating profits. For the past three years, Manchester United FC reported an increase in operating costs. The total operating expenses increased from £436.709 million in 2016 to £511.315 million in 2017 (Manchester United, 2018). There was a further increase in the total operating expenses to £564.006 million. An increase in the operating costs lowers the profitability and financial strength of a company due to the reducing effects on income. The following chart summarizes the total operating expenses for the club for the three years of analysis.

Operating Profit
Manchester United FC reported an operating profit of £44.135 million in 2018, a decline from the previous year’s £80.815 million (Manchester United, 2018). The reduction in the benefits is an indication of the business profitability that affected its financial performance during the period. The drastic fall in the operating profit is attributed to the high increase in both the employee benefits and amortization expenses (Forbes, 2018). For instance, the salary for the players contributed a positive change in the employee benefits. Besides, the amortization expenses also recorded an increase due to the signing of new players during the year. Therefore, the decline in operating profit by nearly 50% is an indication of reducing profitability and unstable financial strength of the organization. Figure 3 below reports the company’s operating profit in the fiscal 2017 and 2018. It also reflects the trend in operating income that shows the overall financial performance and position of the football club during the period.

Financial Position
Manchester United has a strong financial position in the industry considering the high value of assets disclosed in the balance sheet. In 2018, the company reported a total asset value of £1,546.386 million, an increase from the previous year’s £1,534.274 million of the prior year (Manchester United, 2018). First, the increase in the total asset value for the period is an indication of an improved financial strength for the business. Manchester United had a stable financial position to withstand the changing economic environment that might affect financial performance and status, both in the short and long-term. The investment property was a significant contributor to the firm’s high asset value. The company reported an increase in the total investment property from £717.544 million in 2017 to £799,640 million in the subsequent year (Manchester United, 2018). The positive change in the amount of investment resulted from the additional acquisitions and investments at Old Trafford.

There was significant growth in the company’s current borrowing from £5.724 million in 2017 to £9.074 million in the subsequent year. The company acquired additional funds from short-term debts during the year to finance the gap in working capital. Besides, the increase in current debts resulted from a significant portion of the long-term debts becoming due to for payment in 2018 (Jackson, 2012). The current liabilities position increased from £414.309 million in 2017 to £464.511 in 2018 (Manchester United, 2018). The increase in the current liabilities balance is an indication of growth in the short-term financial obligations. It reflects a weaker financial position of the company. The situation is likely to affect the performance due to the expected changes in the operating expenses that will support a decline in the overall business profits. Therefore, Manchester United has a strong financial position despite the falling liquidity and increasing leverage position of the entity for the current year as disclosed on the financial statements (Jackson, 2012).

The primary cash requirement for the club arises from the payment of transfer fees in the acquisition of players. It requires substantial cash reserves to support the acquisition or transfer process of players, who are significant assets to the company. The capital expenditure for the improvement of facilities at the Aon Training Complex and Old Trafford is also a substantial requirement for cash. The company spends significant amounts in the operations and management of the facilities, creating major cash requirements. Other requirements include the payment of employee benefit expenses, interest on borrowings, dividends to shareholders, and other operating expenses (The Statista Portal, 2018). The company needs a large cash base to manage high cash requirements.

In 2018, Manchester United paid dividends of $0.09 per share on the Class A and Class B ordinary shares (Manchester United, 2018). Considering the high number of shares held under both categories, the company had high cash expenditures for the dividends. A significant proportion of the company’s cash is generated from the commercial contractual agreements and matchday revenues. Manchester United has a steady flow of money received throughout the year, an indication of a strong liquidity position for the business. The high cash position implies that it has sufficient funds to address the emerging financial needs in the short-term such as employee benefits and transfer fees for players.

The company also generates a substantial amount of cash from advanced receipts such as season tickets that mainly comprise of general admission season and seasonal hospitality tickets. Manchester United receives a significant portion of the money before the end of its financial year for the following season. Besides, since the broadcasting revenue from UEFA and the Premier League are paid periodically throughout the year, it creates a large pool of cash that meets the short-term liquidity needs of the business.

The company liquidity position is evaluated based on the working capital and current ratio. In 2018, the company reported £413.457 million in existing assets and £464.511 in current liabilities (Manchester United, 2018). The working capital for the period was negative at £51.054 million (Manchester United, 2018). The negative working capital is an indication that the company had more current financial obligations concerning the available financial resources. It is also an indication of reduced liquidity and financial position of the company.

The current ratio evaluates the liquidity position of an entity based on its ability to settle short-term financial obligations using the current assets. Based on the 2018 financial data, Manchester United reported a current ratio of 0.89, which is lower than 1. It is an indication of inferior liquidity since the business lacked sufficient financial resources to settle outstanding financial liabilities when they fall due. The low liquidity ratios also reflect a weaker financial position of the entity.

The following chart highlights the current assets and liabilities for the company as disclosed on the 2018 financial statements. The weak liquidity also indicates that Manchester United may lack the necessary funds in the short-term to facilitate the transfer of players and payment of employee benefits in the future. It may require financial resources to support the business operations, affecting the overall financial position of the entity in the future.


Discounted Cash Flow Valuation Method
The assessment of the company using the DCF method assumes a discount factor of 15%, which represents the weighted average cost of capital for the business. Besides, there is an assumption that the business cash flows will have a terminal value multiple of 10 and a constant growth in cash from the operating growth at 5%. The player purchases and acquisition will record a constant growth rate of 5% over the next five years. The analysis shows that the business cash flows will rise over the period to support a strong financial position. By 2021, the total FCF for the business is expected to reach £32,527,000 (Manchester United, 2018). Based on the assumptions and changes in the company FCF, the terminal value is estimated at £516,788,000 by 2011 (Manchester United, 2018). The total cash flows for the business will record a slight decline over the period with the final year reporting a significantly higher discounted ash flows. Therefore, based on the discounted cash flows valuation model, Manchester United had an enterprise value of £328 million with a total equity value of £289 million following the debt adjustment. Both the equity and enterprise value indicates that the company has a high value. However, a higher discount rate would generate a lower equity value and enterprise value. Therefore, based on the discounted cash flows valuation, Manchester United has a substantial amount.

Comparable Transaction Analysis
The relative transaction analysis or multiples method of corporate valuation involves an analysis of the business price based on the performance of a business of a similar nature. The multiples are useful in the calculation of key income statement figures that apply to the business valuation. To establish an accurate value of a company, most recent comparable clubs are utilized. In the assessment of Manchester United using the multiples method, we use Everton GC as a similar organization with an estimated value of £175 million as of 2016. The valuation utilizes revenue, employee benefits, and EBITDA multiples. The analysis shows that the club has arevenue-based multiple of £584 million, which is reasonable considering the high revenue amount that the company reported during the year compared to Everton FC. Using the employee benefits multiple, Manchester United is valued at £214 billion, which is reasonable considering the clubs high wages relative to Everton FC. Finally, using the EBITDA multiple values, Manchester United has a value of £23.15 billion

Valuation Summary
The two valuation methods indicated that Manchester United has an average cost of $452 billion, which is higher. It is an indication that the firm has secure asset value and financial performance.

Conclusion and Recommendations
The financial analysis and subsequent valuation reflect a club with strong revenue and profit performance. The company generates sufficient income from the commercial segment due to the contractual agreements with various sponsors such as Kohler (Dawson, 2018). The high income reflects a robust financial position of the business. Besides, the high operating profit is an indication that the firm is high profitability. With the top income and profit, the club will maintain strong financial performance and attract more investors. The high revenue and profits notwithstanding, Manchester United records high operating costs largely in the employee expenses. The player transfer fees make a significant portion of the company’s operating expenses. The valuation also indicates that the firm has a stronger market value compared to competitors such as Everton. It is expected that the company’s operating expenses will increase as player expenditure rise due to the positive changes in the commercial and broadcasting revenue. The company has a weaker liquidity with an increasing trend in the current liability. The working capital and current ratios indicate that the business has a weak financial position. Based on the 2018 financial statements, Manchester United has an estimated value of £452 billion. The high value will support its competitiveness in the market. It is an indication that the firm’s asset value and contribution of revenue and operating income towards the business assets is significant.

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The Guardian. (2012). Manchester United sign Chevrolet as shirt sponsor from 2014-15 season. Retrieved from
The Statista Portal. (2018). Manchester United revenue from jersey sponsorship from 2009/10 to 2018/19 (in million GBP). Retrieved from