Analysis of London Stock Exchange Group (LSEG) Financial Performance - Essay Sample

Introduction

The objective of the report is to analyze the London Stock Exchange Group (LSEG) financial performance through the financial ratios and share price movement for making an informed investment decisions. The evaluation uses LSEG financial data for the past two economic years to calculate the profitability, efficiency, liquidity, and capital structure ratios. Besides, the company assesses the share price performance the past year to evaluate its suitability for investment. Also, the report compares LSEG with Intermediate Capital Group to benchmark its performance. The analysis also assesses the stock market performance to gauge the position of LSEG in the industry. The report considers the accounting changes that are likely to impact the performance of the entity in the future. The fundamental analysis of LSEG depicts that the firm has low profitability compared with its competitor, which is mainly due to the management's inability to use the available resources to generate revenue profit for shareholders and the high gearing position of the company. The company is liquid, but there a need for improvement to raise its liquidity. The technical analysis shows accelerating LSEG share prices with an mean price increase of 5.62% and minimal fluctuations. Given the limitations of the ratio analysis, the stock price movement makes LSEG a viable investment opportunity.

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Introduction

London Stock Exchange Group (LSEG) is a London based multinational financial services firm having its operation I different countries across the globe. LSEG plays a fundamental role in the global economy by facilitating access to capital by organizations for growth and development, wealth generation, managing risks, and the investment decisions. The company's business model concentrates on the capital formation for its clients, balance sheet and risk management, and information services. The group operates three business segments, which are the capital markets, information services, technology services, post-trade services-LCH and, CC&H.

London Stock Exchange Group, over the last five years, reported an upward trend in the total income generated. The company earned a total revenue of PS1292M in 2014, which increased to PS1419M in 2015 (Annual Report, 2018). The improvement in the overall revenue continued in 2016, 2017, and 2018 at PS1657M, PS1955M, and PS2135M, respectively (Annual Report, 2018). As a result of an excellent performance in revenue generation, the operating profit raised to PS404M in 2015 from PS337 in 2014 (Annual Report, 2018). The company continued to report an improvement in the operating profit in 2016, 2017, and 2018 at PS427M, PS626M, and PS751M, respectively (Annual Report, 2018). LSEG reported a net profit of PS202M, PS357M, PS193M, PS561M, and PS553M from 2014 through 2018, respectively (London Stock Exchange Group, 2019). In the same period, the firm's financial position according to the total net assets was PS2955M, PS3196M, PS3614M, PS3752M, and PS3698M, respectively (London Stock Exchange Group, 2019). LSEG highest share price in 2018, 2017, 2016, 2015, and 2014 was PS48.14, PS40.69, PS29.22, PS27.80, and PS22.55, respectively (London Stock Exchange Group, 2019). The lowest share prices recorded by the company in the same period was PS36.12, PS28.77, PS21.23, PS21.74, and PS17.41.

The Financial Ratios Analysis: LSEG Vs. Intermediate Capital Group (ICG)

Profitability Ratios

The net profit margin is useful in demonstrating the management efficiency in converting sales into net earnings. LSEG net margin was 28.70% and 25.90% in 2017 and 2018, respectively, while ICG reported 41.80% and 34.91% in the same period, respectively. The ICG net profit ratio is higher in both years compared with that of LSEG. While the LSEG net margin dropped in 2018 from 2017, the ICG profit margin improved by 6.89% in 2018. It implies that the management of the ICG was more efficient in converting sales revenue to earnings. In terms of investors' point of view, ICG is an attractive investment because higher profitability signals higher dividends for investors. Compared with LSEG, ICG showcases a fair increase in the net margin, which makes ICG appear an attractive investment if such improvement continues in the future. At this moment, ICG is more profitable than LSEG, and therefore it's likely to reward investors more than in LSEG.

The return on assets (ROA) and return on equity (ROE) gauge the management's capability to earn income from the total assets and equity, respectively. LSEG recorded a constant ROA of 0.1% in both years, while ICG had a ROA of 4.1% and 4.2% in 2018 and 2017, respectively. The higher the ROA, the better the performance of a company. The ratio shows that ICE was more effective in converting assets to earnings than LSEG in both years. LSEG's inability to generate income using the available resources is a contributing factor to the reduction in profitability. At this level of performance, ICG is a better investment opportunity compared with LSEG. The ROE for LSEG in 2017 and 2018 was 15.36% and 14.95%, respectively. ICG recorded ROE of 18.60% and 19.03% in a similar duration, respectively. ROE shows that ICG managed to utilize owners' funds to improve profitability more than LSEG. Therefore, ICG remains attractive to LSEG.

Liquidity Ratios

The current ratio and quick ratio are metric that measures whether a firm is in a position to pay its short-term obligations as and when they fall due (Durralh et al., 2016). The short financial strength for both companies is almost at the same level in 2018, but ICG performed better than LSEG in 2017. LSEG was liquid in both 2017 and 2018 with a current ratio of one. It demonstrates that the firm owned short-term assets that equaled its short-term obligations. Similarly, ICG was liquid both in 2018 and 2017, but it was more liquid in 2017 than in 2018. The implication is that the firm was able to meet all of its short-term obligations, which is crucial for attracting new lenders and retaining the existing one.

Efficiency Ratios

The asset turnover ratio is a crucial metric for gauging the management's efficiency in turning assets to revenue. LSEG reported an asset turnover ratio of 0.3% both in 2018 and 2017, and 9.69% and11.96%, respectively. Though there was a decline in 2018 from 2017 the performance of ICG was much better than that of LSEG. LSEG possesses huge asset base, but it's not utilizing it efficiently to generate income for shareholders. Though the two organizations have low assets turnover ratio, strategies applied by LSEG to generate revenue for the business are ineffective compared with that of ICG. With a low asset turnover ratio, LSEG will continue to report low profitability compared with ICG. Therefore, ICG is a suitable investment choice due to high expected returns. The two firms need to restructure their tactics to make better use of assets to raise profitability for investors.

The accounts receivables turnover represents the suitability of the credit policy put in place by a firm to manage debts. In both 2017 and 2018, the account receivables turnover ratio for LSEG is three both in 2017 and 2018, and three and two in 2017 and 2018 for ICG, respectively. According to this ratio, both firms are at the same level of efficiency in collecting receivables. Receivables collection effort is less effective in both companies because their account receivable ratios are very low. Such performance is detrimental to the cash position of the business and the operability of the organization. It may also indicate that they rely more on a cash basis to generate cash, unreliable customers, or lack of prudent credit policies.

Capital Structure Ratios

The debt to equity ratio and debt to assets ratios illustrate the extent of the external financing in a business entity. The debt to equity ratio for LSEG is too high, implying that the company's gearing level is high. Overreliance on the borrowed funds puts a company's sustainability at risk and may drive away existing and potential lenders as well as the extension of the credit limit. It makes LSEG a risky investment because a significant proportion of the earnings goes to lenders, which impacts profitability and the cash position. ICG debt to equity ratio is also high, indicating over-borrowing. It makes ICG a less risky investment because much of the firm's earnings are not committed to paying off the interest and the principal amount of the loan. The debt to total assets ratio for LSEG shows that the amount of total debts and total assets are almost the same, while ICG has external obligations that are lower than its total assets. At this moment, the debt to total assets indicates that ICE still is a less risky investment compared with LSEG. The LSEG's management has to restructure its plans to make use of its substantial assets base to earn more earnings for shareholders.

The interest coverage ratio for LSEG in 2017 and 2018 was nine and ten times, respectively. ICG interest coverage ratio for the same period was 3 and 2 times. LSEG interest coverage ratio is higher than ICG for both years. It implies that both forms made enough operating income to cater for finance charges. Therefore, their solvency is not at stake in the future if the same performance continues in the future. The trend shows that LSEG is likely to improve on its creditworthiness in the future, making it attractive to investors. The decline in the interest coverage ratio by ICG may demonstrate sales fluctuations, and thus the management needs to salvage the situation through increased sales generation. As the interest coverage ratio increases, lenders confidence to regain their money back improves. Also, investors consider the solvency position of a potential investment when making informed investment decisions.

Limitations of the Financial Ratios

Financial ratios are fundamental for the analysis of economic performance of an entity as well as predicting the future conduct of a business. For a comprehensive analysis, other factors should come into play to make informed investment decisions. Financial ratios do not capture some critical aspects of an organization apart from the financial performance such the market share, organizational policies, and the quality of the staffs. Besides, ratios rely on the historical data to estimate the future performance, ignoring the fact that the future is uncertain and may completely change. The use of different accounting techniques may make it challenging to compare two firms even if in the same industry. Also, a change in the accounting policies is likely to alter the past findings.

Price Movement and Ratios Performance

In the last one year, LSEG experienced fluctuating stock prices with the lowest of PS4456 and highest at PS8422 (London Stock Exchange, 2020). Over the past year, the company reported the steepest negative decline in the stock price of -4.84%, where the share price dropped from PS7308 to PS6954. In the last three months, LSEG demonstrates a positive stock price movement, indicating a high demand for its shares. On average, LSEG reported a positive trend in the stock price over 2019 and in early 2020. Since stock is a risky investment over a short period, investors aiming for capital appreciation are likely to benefits from this investment in the long-run. LSEG shares are attractive, given their rising prices from the start of 2019 to date. At the end of 2019, LSEG share price appreciated from 4528 at the beginning of 2019 to 7750, translating to 80.22%. The stock price continues to improve in the first two months of 2019, with the volume of trade reducing. It means that investors are optimistic that the price will continue to appreciate even further to appreciate thei...