The nature of a company is mostly determined from the proportion of debt they have relative to their equity. This is known as the company’s capital structure and it reveals how much debt is outstanding and how well the debt was serviced. Understanding EMI’s corporate capital structure helps identify the most available options that management can pursue to reach successful outcomes by their use for example, of financing strategies from their equity as opposed to financing with debt; each have different effects on the long-term health of a company’s financial condition (How to determine your capital structure, n.d.). Due to the economic state of the industry, EMI faced considerable financial challenges during this period with £3038 million in outstanding debt and payment due dates scheduled between 2014 and 2017. The financial notes disclosed that EMI was able to generate adequate cash to service their interest payments on borrowings, however, the company still faced issues with respect to the steady tightening of financial support because of banking policies. In the meantime, due to the restructuring strategy, EMI’s debt had unlimited equity cure rights. This allowed shareholders to contribute additional funds as necessary to ensure the company met their requirements. For example, when Terra Firm purchased the firm they injected an additional £105 million in equity funding to meet their commitments. This indicated to shareholders EMI’s continued dedication to achieving successful outcomes.
The financial statements from a company’s Annual Report can help analysts determine consistent trends in the company’s earning to determine the level of profitability. Loth (2013) postulates that there are four levels of profit margins: (a) gross profit, (b) operating profit, (c) pretax profit, and (d) net profit that help determine a firm’s profitability (Loth, 2013). EMI’s report divulged that the firm faced considerable risks including uncertain economic global conditions that resulted in a declining market for recorded music products. This added pressure to bring down the pricing of music products which also played a role in the reduction of their profit margins. Additional risks they faced included their dependency on identifying, signing, and retaining artists with long term potential as well as the continued success of their current roster. Furthermore, their business was reliant on discovering and exploiting new income streams due to revenue losses from such occurrences like illegal music downloads and sharing, as well as the eventual erosion of copyright protection that introduced concerns of potential exploitation of their intellectual property and publishing assets.
In spite of these conditions, EMI Music experienced phenomenal success during that period due to their release of the Beatles Remastered Collection. This was the company’s bestselling project and broke multiple chart records globally including the most simultaneous titles released by a single artist. This proved to be one of most beneficial outcomes they achieved that resulted from their effective consumer insight and marketing strategies. It also changed the way EMI developed and promoted their music products to drive sales. This improved their EBITDA by 15% to £184 in 2010 from £160 in 2009. In the meantime, EMI Music Publishing also experienced a 13% increase in profits going from £150 in 2009 to £184 in 2010 which consisted of some of the best songs and songwriters in the world. In addition, EMI worked diligently to create new relationships with brands and businesses to support their music products. As a result, they reported sharp increases in licensing revenue from a variety of media outlets and continued diversifying their publishing revenue streams. This strategy proved effective in enabling the firm to maintain growth during a period of economic downturn.
Outlook for EMI
EMI’s financial statements provided significant information that revealed their financial condition and overall performance to help forecast their future. Friedlob and Welton (2008) explained that annual reports not only clarify how well a company is performing they can also help strategists predict the direction they are headed (Friedlob & Welton, 2008). The major question in the outlook of the EMI’s liquidity was their ability to produce cash from operations. As the statements revealed, the condition of the changing music industry was partially to blame for a depressed economical state. However, in a world where music is ubiquitous with demand from consumers and businesses growing at lightning speed, EMI seized the opportunity to expand and continued to deliver successful outcomes for the company and the artists they represent. New music remained at the core of their operations with the discovery and development of new talent as an essential component to the future and continued growth of the firm.
The significant operational performance, together with equity injections provided by the company shareholders enabled EMI to meet their ongoing needs for working capital and debt service obligations. However, due to banking facility covenants based on debt/EBITDA that decreased significantly each year, there were concerns over these progressively difficult conditions for EMI to achieve their required ratios. This meant that they experienced shortfalls to financial commitments and (due to the continual tightening of the financial covenants) they anticipated ongoing issues to occur. The principal concern was whether additional equity funding would be available in future periods to enable the firm to comply with their financial requirements under the banking policies. For example, EMI’s income statement revealed (see Appendix H) that the group incurred a net loss of £512 during the period ending 2010. At that time, the firm’s current liabilities exceeded their current assets by £3,255 which resulted from the reclassification of bank loans from non-current liabilities to current liabilities. In other words, the ability of the company to continue was an ongoing concern because of their dependency from the continued availability of existing banking facilities, which required the firm to comply with their policies.
The elements presented in EMI’s Annual Report helped provide a more transparent image of the company’s activities and overall functionality. The notes also disclosed that the profits before impairment and restructuring costs increased 34% from £143 in 2009 to £192 in 2010 and the cash they generated from operations increased 42% from £192 in 2009 to £273 in 2010. This meant that their enhanced operational performance, together with equity injections, provided EMI with enough revenue to meet their capital needs and debt obligations. The findings of this research deduced that EMI’s financial statements were indicative of a high level of financial reporting and provided a true and fair picture of the firm’s financial condition. In conclusion, the report revealed that EMI’s operating performance improved considerably during that period and provided shareholders sufficient evidence to give them confidence in the firm’s future performance abilities.
This concludes my research work on the financial analysis series in organizational management. Thank you everyone for being a part of this journey. Although this is the last post in this blog series, stay tuned for upcoming articles that reveal my current research work in the application of strategic management where I will provide a close analysis that reveals the strategic management tactics successful companies like Apple, Disney, and Starbucks incorporate that are significant in their achieving and maintaining the long term mega success status they continue to enjoy in the marketplace.
Thanks again for sharing this experience with me. I hope you were able to find something of value to enhance your own experiences, both personally and professionally, as I have.
Stay tuned …
Until then, I bid you adieu my friends …
(2011). EMI annual review 2009/2010. Finances. Hollywood: Maltby Capital Ltd.
The Johnny Mercer Research Guide. (2012). Retrieved October 30, 2013, from The Johnny Mercer Foundation: http://www.johnnymercerfoundation.org/initiatives-charities/for-researchers/johnny-mercer-research-guide/
Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.
Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.
Loth, R. (2013). Profitability indicator ratios: Profit margin analysis. Retrieved December 5, 2013, from investopedia.com: http://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp
How to determine your capital structure. (n.d.). Retrieved December 5, 2013, from Structuringfinance.com: http://www.structuringfinance.com/capital-structure/how-to-determine-your-capital-structure
Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.
Scherreik, S. (2002, December 22). How efficient is that company? Retrieved December 5, 2013, from businessweek.com: http://www.businessweek.com/stories/2002-12-22/how-efficient-is-that-company