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financial analysis of Burswood Ltd

1. Introduction
In the following analytical report the financial success and the long-term business viability of Burswood Limited is assessed. Financial statement analysis of the company’s Annual
Reports/General Purpose Financial Reports for the years of 2000, 2001 and 2002 was carried out. The results of the analysis were then compared with the industry standards in order to demonstrate Burwoods Ltd’s standing in the Australian gaming industry.

For the purposes of financial statement analysis ratio analysis was used. The analysis is based on data that is publicly available. Finally, a recommendation is made as to whether Burswood Ltd should be considered as a prospective business investment.

2. Company Background
Burswood Limited holds 100% interest in 8 subsidiaries. The company commenced operations as Burwood Ltd Resort in December 1985 via a Trust Deed. The consolidated entity operates the Burswood complex, which comprises casino, hotel, food and beverage outlets, theatre, convention and entertainment facilities.

The consolidated entity is publicly listed and operates in Australia only. Its home stock exchange is the Australian Stock Exchange (Perth) Limited. Burswood Ltd currently has around 16, 000 shareholders of which TPIC Limited is the largest shareholder owning 9.97% of issued capital, followed by RBC Global Services Australia Nominees Pty Ltd who owns 9.27% of issued capital and third Chase Manhattan Nominees Limited who owns 3.23% of issued capital.

The consolidated entity is organised into four business divisions according to product and service type. These are: Non–commission gaming (table gaming and electronic gaming machines); Commission gaming (table gaming with commission paid to players according to gaming turnover); Hospitality (hotel, food and beverage); Other (conference, function and entertainment events).

Burswood Ltd, a monopoly casino in Western Australia, has its main competitors such as Jupiters Limited, Reef Casino Trust and Sky City Entertainment Group Ltd in other states.

As stated in the annual report, in 2002 Burswood Ltd has experienced a decline in net income from $32 million in 1999 to $20 million in 2002 and over the last three years the company’s annual revenue growth was negative by 0.6%.

The company had a tough time in the financial period of 2000-2002. Company directors explain the situation as a consequence of a combination of factors. These are: The introduction in 2002 of “non-smoking policy” on the main gaming floor, the global impact on trade of the September 11th event, the collapse of Ansett Airline and the disruption from the final stages of capital works. Within the same period the company has invested $96 million into reconstruction and improvement of the Burswood Ltd thereby increasing its total liabilities.

3. Business Analysis
In the business analysis of Burswood Ltd the process of Ratio Analysis was chosen as the most suitable for comparison with industry standard indicators which are the most often, and in that case solely, available. Several different ratios were used in order to assess Burswood Ltd’s profitability, financial leverage and activity measures. These results were compared with gambling industry standards from data available on 28 March 2003.

As most company’s avowed aim is to make profits, it follows that the most important ratios to analyse are the profitability ones. However, these ratios tend to be less analytical.

The return on net sales ratio is perhaps the most important ratio of all. It is the percentage of returns on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile and shows the percentage of profit that each dollar of sales produces.

Burswood Ltd’s result of 6.91% as an average for the past three years of 2000-2002, compares favourably with the gambling industry standard of 5.5%. However, Burswood Ltd’s net profit margin decreased from 8.67% in 2000 to 5.67% in 2002. Therefore, more net sales dollars have been taken up by a high level of spending used for extensive renovation of the complex undertaken in 2002.

Burswood Ltd’s rate of return for the three years of 2000-2002 averages 2.9%. This rate of return on total assets ratio measures how effectively a company is using its assets to make a profit. The industry standard for the gambling industry is 9% and hence Burswood Ltd’s rate of return on total assets does not compare favourably. This is due to the decline in revenue in the past three years.

Commonly quoted ratio earnings per share (EPS) shows the amount of company profit earned per share of the entity’s ordinary shares. Most successful companies strive to increase EPS by 10% to 15% annually, but even the most dramatic upward trends include an occasional bad year. Burswood Ltd’s earnings per share decreased from 8 cents in 2000 to 5.5 cents in 2001 and 5.1 cents in 2002. Therefore Burswood Ltd presents very poor in comparison with the industry which has recorded 654.35 cents. For Burswood Ltd, comparing to the industry for this ratio means that they are falling behind in this category.

Another measure of profitability which is widely used in order to show the connection between net profit and ordinary shareholders’ equity is the rate of return on ordinary shareholders’ equity ratio (ROE). This ratio measures the overall efficiency of the firm in managing its total investments in assets and in generating a return to stockholders. Burswood Ltd’s rate of return on ordinary shareholders’ equity fluctuates between 6.5% (2000), 4.4% (2001) and 4% (2002). The gambling industry average is 21%. A lower rate of return would be expected as Burswood Ltd’s has been experiencing a decline in revenue during this period.

Literature review reveals that many financial analysts believe that the most important of all is the return on investment ratio (ROI). ROI is the percentage of returns on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. In our case Burswood Ltd’s figures of that measure have declined from 6.35% (2000) to 3.8% in 2002 averaging to 4.86% for the three year period, which appears to be very low in comparison to 20.3% achieved by the gambling industry. The year 2002 was for Burswood Ltd the year of huge long-term investment and expense which consequently lowered that ratio. It reveals that return on investment ratio must be considered carefully, as it may provide misleading information if treated in isolation of a company’s long-term business plans.

In profitability assessment another set of financial ratios is measured. These are derived from share prices and dividend payments and are particularly important for the existing and potential new investors.

The price-earnings ratio (P/E) is the price of a company’s share of common stock in the public market divided by its earnings per share, therefore this ratio gives investors an evaluation of relativeness of the market price of a company’s common stock versus other companies and the market as a whole. Burswood achieved 13.308 on average in the 2000-2002 period and the industry standard was 54.6. This average produced by Burswood Ltd means that the company’s shares are selling at 13.308 times earnings.

Further dividend yield is compared to yield on alternative investments, which represents the annual rate of return, expressed as a percentage, on an investment.

Such a comparison is helpful to assess whether the investment’s objectives are being met. The dividend yield expresses the part of the stockholder’s ROI. Investors are able then to determine whether to continue holding the preferred stock as an investment or to undertake other investment opportunities somewhere else. Burswood Ltd achieved an average of 5.5% over the years 2000-2002 whereas the industry recorded only 2% in 2002. It appears that although ROI ratio was low, the investment put into Burswood Ltd paid off.

Additionally, by knowing a company’s dividend payout policy known as a dividend payout ratio (proportion of earnings) stockholders are able to assess a entity’s stability of dividend payments and indirectly its profitability. Dividend payout ratio is a measure of the percentage of earnings paid out in dividends, computed by dividing cash dividends by the net income available to each class of stock. Burswood Ltd recorded only 62.5%, 72.7%, 68.6% respectively in 2000, 2001 and 2002, reaching 67.9% on average for that period. This particular measure looks very unfavourable if presented against 153% noted by the industry.

All the above presented indicators appear to be unfavourable for Burswood when compared with industry results in the same period. Mentioned already progressive decrease in revenue impacted significantly on the overall financial measures of profitability.

Financial leverage is another critical area of business decisions as it presents an entity’s ability to pay its debts and its short and long-term solvency. Financial leverage ratios show the relative amounts of capital provided by shareholders (equity) and those lending money to the firm in the form of credit of one type or another (debt).

Debt to equity ratio is used to show the connection between debt financing and equity financing and it measures the risk of the entity’s capital structure in terms of amounts of capital contributed by creditors and that contributed by owners. It expresses the protection provided by owners for the creditors. In addition, a low debt/equity ratio implies ability to borrow. While using debt implies risk (required interest payments must be paid), it also introduces the potential for increased benefits to the firm’s owners. When debt is used successfully (operating earnings exceeding interest charges) the returns to shareholders are magnified through financial leverage. Depending on the industry, different ratios are acceptable. If the ratio is suspect and the company’s working capital, and current/quick ratios drastically low, this is a sign of serious financial weakness. Burswood Ltd’s ratio has remained at an average of 0.72:1 over the past three years, which compares favourably with the gambling industry standard of 0.86:1. Therefore, a larger proportion of the company is financed by equity, which is desirable to minimize financial risk.

Debt to total assets ratio shows the proportion of total assets financed through borrowing. It is also an indication of the business’ ability to pay long-term debt. Hence a low ratio is regarded as good. Burswood Ltd’s ratios of 0.42 (year 2000), 0.41 (year 2001) and 0.43 (year 2002) are quite low compared to the average debt ratio for most industries, which is usually between 40% and 50%.

Furthermore the comparison of current assets to current liabilities, known as a current ratio, is a commonly used measure of short-run solvency, i.e. the immediate ability of a firm to pay its debts as they come due. The current ratio is particularly important to a company thinking of borrowing money or obtaining credit from their suppliers. Potential creditors use this ratio to measure a company’s liquidity or ability to pay off short-term debts. Though acceptable ratios may vary from industry to industry, a ratio below 1.00 is not atypical for high quality companies with easy access to capital markets to finance unexpected cash requirements. For the past three years from 2000 – 2002, Burswood Ltd’s current ratio has declined from 0.66 to 0.48 to 0.44. This decline was due to additional borrowings for the expenditure on the completion of the capital works.

The next step is to distinguish the activity measures of the company. For Burswood Ltd there are not many to compare in the situation of financial analysis.

The most often used activity measure is expressed by asset turnover. This ratio is a general measure of a firm’s ability to generate sales in relation to total assets. Similarly to other measures of assets (ROI, ROE), this ratio is unfavourable for Burswood Ltd recording 0.41%, in comparison to the industry achieving 0.8%. Therefore it appears that Burswood Ltd is not using its assets most efficiently to generate sales.

4. Summary and Conclusions
In the above analysis Burswood Ltd’s financial data and results are compared with industry indicators which reveal the fact that Burswood Ltd has gone through tough years in its operations. Almost all the profitability financial indicators had a tendency to decline from 2000–2002 and the averages are unfavourable to the industry averages. The greatest differences were noted in EPS (648.15 difference) and in dividend payout ratio (85.07 difference), however dividend yield was stronger by 3.5% for Burswood Ltd. It needs to be mentioned that despite poor profitability indicators for 2000–2002, the leverage measures remained comparable with industry indicators, which means that the company’s debts are well secured by their assets and extended borrowings did not dramatically lower the debt to equity or debt to assets ratios.

There are number of internal and external factors having a negative impact on the results of Burswood Ltd’s financial indicators and especially short term earnings indicators. The most significant impact was caused by the long-term multi-million investments undertaken in 2000 and currently continued. The completion of capital works not only required an increase in the level of spending, but also decreased revenue from food and beverage and room hire operations due to causing disruptions in those facilities and a lack of popularity at that time. Moreover non-commission gaming revenue has also declined as a result of negative customer reaction to the introduction of non-smoking policy on the main gaming floor in the financial year 2001-2002. Apart from those internal factors Burswood Ltd was affected by the events of September 11 and the Ansett Airline collapse. Those events, in the opinion of company directors, had a negative impact on short-term earnings as did Australian foreign politics and the threats of possible terrorist attacks in the region, which reduced tourist activities in Australia.
In Burswood Ltd’s situation, similarly to other Australian casinos where about 80% of customers are visitors, from the local region, the internal more than external factors appear to influence the operations. In contradiction to Burswood Ltd’s directors’ opinion, a survey was conducted in 2001-2002 and reported in December 2002 to the Australian Casino Association in which it was established that the number of casino visitors in Australia remained stable over the past three years.

Furthermore unlike Melbourne and Sydney casinos who are competitors due to their shared geographical region, Perth’s casino has always had a state monopoly. In terms of competition for the overseas players Burswood Ltd is in direct competition with Darwin’s, Cairns, Melbourne’s and Gold Coast’s casinos, due to the proximity to the potential Asian market. Interestingly, no other casinos’ management mentioned in their financial reports that the September 11 event and the Ansett Airline collapse have had a negetive impact on their operations.

However, if the decline in revenue was in fact mainly due to internal factors such as major disruptions caused by renovations and the introduction of a non-smoking policy, thus one could foresee that these interruptions to Burswood’s business activities will in the long run not cause any more problems. Considering all of the above financial and non-financial factors Burswood Ltd’s position at the end of 2002 was weaker than any industry average indicator.

5. Recommendations
The decision as to the final recommendation whether an offer for the takeover of Burswood Ltd should be considered is based on the analysis of the factors from various publicly available and legally obtained sources. The data obtained from Burwood Ltd’s financial reports is researched, then calculated and compared to the Australian gambling industry standards where then final decisions can be made.

At the end of the 3-year period of 2000-2002, Burswood Ltd is in a somewhat difficult situation. This is due to external factors, which are beyond the management’s control and the unavoidable introduction of the non-smoking policy has brought a negative customer reaction. Thus, in financial terms this means lower guest rates and lower revenue. Therefore figures show at present that Burswood Ltd’s ratio analysis results mostly do not compare favourably with industry standards.

However, in the short run the major renovations and upgrades of the Burswood complex, caused extra costs and affected ratios negatively, in the long run the ratios should be positive due to the anticipated increase in business and visitor numbers. The $96 million investment into construction of new facilities has adversely affected the company’s financial position.

Burswood is also in quite a unique position as it is the only casino in Western Australia and one of only five 5-star hotels in Perth. It is situated on prime land and the whole complex is no doubt one of Perth’s major attractions for tourists and locals alike. However, there are a few significant findings in the analysis that may finally present the company in a different perspective and in fact as a potentially attractive business investment. These factors are; firstly, Burswood Ltd’s strong financial security and secondly its unique monopolistic position in the region of its operation. It would be hard to believe that Burswood Ltd may have any potential competitors in the near future. Its position is strong and the expenses undertaken within the past three years should be considered as planned and controlled long-term investments. Despite its current weaker financial position the company should remain a unique and attractive business opportunity with long-term prospects for financial success.

Concluding from the above points Burswood Ltd would still seem like an investment that is worthwhile to consider.

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