Sunday, August 12, 2012

EMI Performance for 2002

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a) Describe briefly the core activities of the company and its operations for the past year, relating these to developments in the industry

EMI, abbreviated from Electric & Music Industries , began life around 187 with the formation of The Gramophone Company & Columbia Phonograph, which would go on to merge in 11, to form EMI.

EMI, which known as famous in music recording, also working with all kinds of retail, distribution, hardware and software companies to catch up consumers¡¦ needs in different types of music, which changes with technologies and preferences. The core business could be divided into two divisions Recorded Music and Music Publishing. Currently there are five labels under EMI Group, which are

1) EMI Records

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) Capitol Records

) Virgin Records America

4) Caroline Records

5) EMI Chrysalis

Firstly we can take a glance on how music industry has performed for the period during first half year of 00 from the data published by IFPI organization. World sales of recorded music fell by 10.% in value and by 10.7% in units in the first half of 00. Unauthorized file-sharing and commercial piracy were major factors in the decline. At the same time DVD music sales grew sharply and a there was a marked increase in the availability of legitimate online music, with 00,000 tracks now on offer online.

Interim sales of all audio and music video formats were worth $US 1.7 billion, compared to $US 14. billion in the same period of 00. Within this figure DVD music video showed substantial growth in both units (up 46%) and value (up 55%), and now represents more than 5% of global music sales.

For the unique of this industry, piracy has become a major pivotal to the sales and profit. Internet piracy in particular affected the worlds major markets in the first half of 00. Germany, Japan, France and the US suffered significant declines. Germany, Japan, the US and Canada have seen the numbers of unauthorized downloads of tracks and copied CDs reach, and in some cases exceed, the levels of legitimate track and CD album sales.

Let us back to EMI Group PLC. From the Balance Sheet we could have a first impression, which is that she performed better than year 00, even as a whole still struggling at negative number, but finally turned profit into black. For the fiscal year ended at 1 Mar.00, 81.55% of turnover comes from Recorded Music whilst Music Publishing generated the rest portion of 18.45%. By area we look into the business operated, domestic market (United Kingdom) shares 14.56% of EMI Group profits, .5% from North America, 1.04% from rest Europe area and 18.70% generated by Asia Pacific area.

Certainly EMI also affected by the aforementioned industry wide movement. Recorded Music sales fell 1.6% to £1,774m as the result of a combination of factors including macroeconomics effects in some specific regions. To the Music Publishing business, on the contrary demonstrably the best performance compared with the industry, however, for the cross border sales, sales in this year still fell marginally from £416.4m to £401.m due entirely to currency movements, described by EMI Groups¡¦ financier. It would be a flat sales and only slightly loss on operation profit down by just 0.5% if the currency rate were constant.

By reducing headcount up to 100 worldwide and the ongoing fixed cost base to nearly £100m,EMI tried hard to implemented a comprehensive reorganization for both its company and financial structure in react to the global down turn.

b) Calculate the return on capital employed for your chosen company and describe the meaning of this figure in context

Return On Capital Employed calculation

ROCE for 00

Gross Profit £ 186.m

Total Capital Employed £ 5.8m X 100%=5.8%

ROCE for 00

Gross Loss (£ 6.6m)

Total Capital Employed (£15.0m) X 100%=45.7%

We found a dramatic improved performance for year 00 ,compared to year 00. First of all, headcounts-go up to 1,00 and accelerated £100m cost-cutting turned the gross profit into black for year 00, offset the total turnover slumped 11.05% for year 00. In year 00, despite of gross loss ,for the current liabilities due within one year is high, made the total capital employed negative, these two negative amounts made the ratio of ROCE meaningless .

Further look into the balance sheet, Short-term borrowings reduced heavily 5.6%, this may beautify the ROCE rate, however, the long-term borrowings increased 1.47 times compared to year 00 for the new issued Bonds and Notes, which will due on 00. Financial structure re-organized may purify the report for this year, but also could burden following years performance, especially music industry is predicted to slumping at coming years. We can not figure out the reason to issue long-term notes and bonds through this financial report, but mainly can be translated as for re-construct EMI Group organization.

As a special feature of music industry, a large proportion of EMI Group¡¦s fixed assets are Music Copyrights and Goodwill, sharing 6.5% of total assets compared with the actual tangible fixed assets put into operation, in which only sharing 14.6%. So the return on capital employed ratio for music industry can not fully demonstrate the effectiveness of its resources available to management that have been deployed. Also another interesting ratio has been noticed, her gearing ratio

Gearing Ratio


Total long-term Liabilities £ 80.1m

Total long-term Liabilities and Equity £ 87m x100%=41.4%


Total long-term Liabilities £ 400.7m

Total long-term Liabilities and Equity £ -6.5m x100%=N/A

First of all, the massive loss for 00 and 00 made the Equity shareholders funds for EMI Group PLC become negative .Even such situation made Gearing ratio analysis become meaningless, we still can find that obviously EMI Group changed its financial leverage policy and into a highly geared company for year 00. We can not see notes from this financial reports clearly stating the reason why EMI Group Plc made such dramatically change, but could be mainly refer to the massive lay-off and closure of loss-making investments during year 00 needs another amounts of liquid assets, say cash. So large portion of EMI Group Plc¡¦s current liabilities extend and will due at 00.

Maybe for the year 00 EMI Group plc showed to investors a sparkling performance, but how could EMI Group plc manage for the following years debt since no unexceptional gained will occur at predicable years is a question mark, moreover , interests generated from long-term debts also will have significant impact on following years performance.

C) Compare the overall published results of your chosen company with those of your partner company and explain significant differences

The partner company for this assignment is Music Choice Europe plc. Music Choice Europe plc provides music through digital television to consumers and businesses. We can say that if EMI Group plc is the upper stream, then Music Choice would be the lower part of it. One is to ¡¥manufacture¡¦ music product, the other is to distribute music product to general consumers. Also we found the interesting relationship between Music Choice Europe and many multinational entertainment companies. Time Warner and Sony sharing two seats of Music Choice Europe¡¦s board. It¡¦s more like a joint venture between these companies as well as EMI Group Plc invested in HMV for distribution purposes. Besides the characteristic differences, we can compared this pair companies by same ratio analysis,

We can compare these two companies by ROCE ratio and Gearing Ratio analysis, which we adapted in analyzing EMI.

ROCE (Music Europe Plc)

00 (in £¡¦000)

Gross Profit £ ,16

Total Capital Employed £ 18,05 X 100%=1.0%

ROCE for 00

Gross Profit £ 1,570

Total Capital Employed £ 5,787 X 100%= 6.08%

As a small capital new company, ROCE ratio certainly much smaller than EMI Group, which running for years and is an international company, however , her gross profit is growing. The Balance Sheet for Music Europe Plc is much simple and clean than EMI Group due to Music Europe¡¦s limited product lines. For the year 00, Music Europe performed a better cost control and rewarded as a lesser loss. For this part , it is similar to EMI as a trend to tighten cost controlling. Unlike EMI¡¦s shrank sales, Music Europe boost up her turnover for 1.1% for year 00.Under the serious piracy problem, especially for internet illegally downloading problem for music industry, Music Europe could say did a very good improvement in business.

Gearing Ratio

Amazingly, Music Choice Europe does not have any long-term liability. Despite of the size of this young company, this could ease her burden, the possible large interests, on poor performance since set up. If we do not study the reason why Music Europe holds so much cash on hands compared with last year, Music Europe Plc is much more a financial structure healthy company than EMI Group Plc.

But of course there are some information that we can not get through financial reports, The majority cost for Music Europe is distribution cost , however , we can not find any note in her financial reports explaining the reason and suitability. From this point of view, as EMI Group is a listing company and has to obey the rule, her financial reports are more in details than Music Choice Europe does.

d) Comment, in the light of your investigations, on the statement that ¡¨the profit disclosed in financial reports is calculated after the application of many judgments and estimates and therefore has limited use¡¨

Financial reports, especially for those statements have been audited, are the outcome after the application of many judgments and estimations, certainly limited their use. For many items within financial reports can only be estimated , like fixed assets¡¦ depreciation, as the difficulty to measure exactly true usable period and residual value ,therefore estimation on these should be made. Based on the accounting principles agreed or regulated, even principles may be varied from country to country, but universal language for these reports is to express the fair and true value of such company¡¦s performance for the past year.

For what financial reports representing are according to historical transactions, therefore could be one of the important resource for management team to adjust/modify whole business operation in react of future competition.

We may take EMI Group Plc for an example, for the whole music industry¡¦s down turn in year 00, EMI Group struggled but still shrank its turnover and lowered by £70.4m (11.1%) for year ended 1 Mar. 00. But with EMI Group¡¦s implementation of a comprehensive reorganization for its Recorded Music division, 100 headcounts reducing together with the ongoing fixed cost base reduced by nearly £100m, made EMI Group still turned the profit into black.

Besides the organisation-reconstruction, EMI Group completed a sweeping balances sheet restructuring, more than doubling average debt maturity to five years, and covered passive interests in its undertaking investment subsidiaries, these all the elements of EMI Group¡¦s surprising performance.

But we can also found other interesting factors , for EMI Group disposed its loss-making investment, HMV and VIVA Media AG, this disposal generated an unexpected cash income and lower the amortisation of its copyrights and goodwill acquired related to these two company. This means that the uprising performance for EMI Group in year ended mar.00, a large portion could attribute to its unexpected income. For a long term view, unless EMI Group keeps on controlling and reducing its cost and expending its revenue in forthcoming¡¦s predicted down turn in this industry, it probably could not hand out such as good profit as this year. As aforementioned in (b), EMI Group did not state clearly the reason to extend the short-term long, and this may limit people who read the financial reports to do further analyze.

From an investor¡¦s view, still there are many useful information on financial reports provided and from notes , announcements released. However, as we know that financial reports can be artificially beautify after some adjustments, which on purpose perhaps, we still need to bear in mind the nature of limitation on financial reports.


Source �ñ

�ò IFPI website/News press

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