Short Term Liquidity
Even though PR fluff can misrepresent the true nature of a company’s financial condition, the statements from their annual reports provide sufficient data to help analysts discover the truth about a company’s financial health and overall performance. Fraser and Ormiston (2010) assert that examining a firm’s short term liquidity can give insight into their ability to meet cash demands (Fraser & Ormiston, 2010). EMI’s financial overview charts revealed (see Exhibit A) that during this accounting period the firm had a prosperous year, especially given the economic condition of the music industry in the global marketplace. For example, EMI delivered worldwide revenues of about £1.65 billion and showed increased levels in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of 14% from £293 million reported in 2009 that rose to £334 in 2010. The Chairman’s statement revealed it resulted from the efforts of the firm’s restructuring strategy that commenced in 2007 when EMI was acquired by the Terra Firma Corporation. The merger implemented innovative new management plans to make the company more relevant to developers and consumers of music alike. The Terra Firma alliance proved effective revealing impressive EBITDA levels that jumped almost 400% from £68 million in 2007 to £334 million in 2010. The acquisition also helped reduce the cost base of the corporation allowing EMI to benefit in both earnings and cash flow in spite of their streamlining tactics.
In the meantime, EMI’s receivables (see Exhibit B) decreased from £577 (in the millions) in to 2009 to £564 in 2010, with inventories also decreasing from £27 in 2009 to £25 in 2010 (see Exhibit C). This decrease resulted from the company having written down inventories by £10. The notes revealed this was because of the global economic slowdown at the time and the general uncertainty in reduction to the market estimates of growth from digital and online music markets, as well as the continual rapid decline of the physical market. Due to this condition, management concluded there was sufficient doubt over the recoverability of the carrying value of certain intangible assets. As a result, an impairment review of the music catalogs was conducted which ended in a reduction of the carrying values of goodwill and intangible assets from amortization and impairment charges.
The statements also revealed that EMI’s financial liabilities totaled £3,662 (see Exhibit D) having dipped a bit from the 2009 figure of £3,811 which decreased partly due to the foreign-exchange rate at the time. The shareholder loan figure increased to £398 million in 2010 from £346 in 2009. The notes revealed this increase was due to accrued interest charges. Cash and cash equivalents in the meantime (see Exhibit E), showed an upward trend rising from £336 in 2009 to £343 in 2010. This was because their cash earned interest at a floating rate based on the daily bank deposit rates. Short-term deposits, for example were made for periods that varied between one day and one month, which sometimes extended up to three months.
Additional evidence of short-term liquidity was revealed from the financial ratio trends in comparison with industry averages. For example, quick ratios revealed an upward trend reporting a loss of (4.8) times in 2009 to (1.3) times in 2010. This indicated they were in a stronger position, especially considering the music industry drifts that they and other companies were up against as well during that time. The cash flow liquidity ratios also increased from a loss of (.25) times reported in 2009 that jumped to in 2010 to a loss of (.10) times indicating an improvement in their short-run solvency. These figures revealed that EMI experienced steady improvement generating cash from their operations and that they did not have major problems with short-term liquidity during that reporting period (see Exhibit F).
The financial statements from a company’s annual report also provide data that help analysts determine the operating efficiency of the firm. One way to accomplish this is by examining the firm’s turnover ratios. Scherreik (2002) suggested that in order for companies to run effectively, they must keep costs to a minimum and reduce their need to seek loans. One way to achieve this is to trim down inventories and speed up the collection of outstanding payments (Scherreik, 2002). EMI’s financial statements disclosed that their operational performance continued to improve after the acquisition of the company by Terra Firma. For example, EBITDA figures, excluding restructuring, increased from £68 in 2007 to £334 in 2010 (see Exhibit A). In addition, operating results increased by almost 200% when in 2007 they reported a loss of £135 million then showed a profit of £121 million in 2010. This was accomplished in spite of the global economic crisis. Furthermore, the firm was able to maintain steady revenue increases and successfully launched a variety of new music from artists including Katy Perry, Lady Antebellum, and Cold Play. In the meantime, even though their global recorded music market share increased from 1.0% in 2009 to 10.4% in 2010, the firm was still challenged by an overall decline in physical sales that was not offset by growth in digital sales. Due to the market decline, EMI Music continued to develop its strategy of diversifying their revenue streams into areas like merchandising, live recordings, and other innovative digital platforms. In addition, they continued to extend their reach and income streams for their artists’ and their videos through a variety of new distribution partnerships.
Publishing revenues on the other hand, remained robust and continued to excel in the discovery of new music with an unmatched ability to find and nurture the very best songwriting talent. EMI appeared to have managed the company efficiently during this period with the Music division having achieved operating margins that rose from 14.5% in 2009 to 15.7% in 2010. The publishing division showed an improvement of 15% in EBITDA from the £184 million reported from the 2009 to 2010 period which reflects a margin increase of 13% from £133 to £150 million (see Exhibit G). These figures indicate that their operating margin rose from 28% in 2009 to 31% in 2010. The notes revealed this was partially due to revenues collected from mechanical royalties of CDs, DVDs and digital download sales; performance royalties from radio, TV, webcasts, and concerts; synchronization royalties from the use of music in TV, films, computer games and commercials; as well as other uses including ringtones, mobile products, stage productions, and sheet music. Based on this evidence it appeared that EMI was operating efficiently during that time because they continued to collect revenue, show improvement, and had enough cash on hand to meet their short term demands.
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