Things move so fast in football and so slow when it comes to publishing statutory accounts that when you want to take a look at performance you feel very out of date. The financial statements for the financial year to 31 May 2015 reflect yet again a year of turmoil for Nottingham Forest Football Club.
The excitement that greeted returning hero Stuart Pearce on opening day against Blackpool turned to a sense of loss and mourning just a few months later as he was dumped out of the door and replaced by Dougie Freedman. If I’m honest it is a loss that I still feel. We will always have that special day and we’ll always have the amazing win at Pride Park but it was emotionally tough at the end, really tough.
The previous year’s accounts had already landed us with a transfer embargo for failing Financial Fair Play (FFP) and the expectation was that things would not have improved with these latest results. Of course during the current season things have improved and the club advise that they expect FFP restrictions to be lifted next summer as a result, but we will have to wait for those numbers to come through.
The headline figure is an accounting loss for the period of £21.5M, which is actually a decrease of compared to the previous year’s loss of £24.0M, but this is due to the inclusion of £6.1M profit from the sale of Karl Darlow and Jamal Lascelles to Newcastle United. It is also in part due to the restatement of last year’s accounts which increases the reported loss for 2014 from £22.9M to £24.0M. Whilst this is not a huge thing it is worthy of note that it is the second time in two years that prior year accounts have been restated by the club.
In the analysis that follows I have taken the same approach as last year focusing on EBITDA, Financing and Balance Sheet transfer activity to give a picture of what happened financially during the year. You can go back and read that review if you wish here and you can read all of my previous financial statements articles here.
Losses before interest, tax, depreciation and amortisation were £20.5M, which is an increase on both the restated figure for last year, £19.9M, and the number originally published for that year, £18.8M. The reason for this is that staff costs have increased by £2.5M to £29.5M, which more than offsets the increased turnover which has risen from a restated (reduced) number of £15.4M for 2014 to £17.4M.
The various movements which confuse the accounts, hopefully not deliberately, mean that staff costs as a percentage of turnover have actually reduced, although they remain extremely high at 170%. Non staff costs appear to have plateaued at a little over £8M.
Note 27 at the end of the accounts confirms that the restatement in turnover relates to £1.1M of sponsorship revenue agreed with companies controlled by the Al-Hasawi family for shirt sponsorship, as well as sponsorship of areas around the City Ground. This agreement was cancelled after the filing of the last accounts so the prior year results have been adjusted, reducing turnover and increasing the loss for the year. This additional gap has then been covered through the club’s loan facility rather than through increased revenue.
As explained last year EBITDA gives a good indication of the club’s day to day sustainability as it ignores non-cash items such capital depreciation and player transfer fee amortisation, as well as windfall items such as profits made on player sales. It should come as no surprise to Forest fans that the club would not be in any way sustainable without the massive subsidy of the club’s owner.
Although the financial numbers do not make any judgement on the way the club is run when they are compared with the team’s performance on the pitch it looks like poor value and realistically that is in large part down to haphazard leadership and poor decision making. As referenced in the introduction the hope is the current year’s results will show improvement on that front and that the future will see sharp improvements in leadership and direction from the owner.
Balance Sheet Transfer Activity
EBITDA is used to understand the day to day running of the club so to understand investment in the playing squad we turn to the balance sheet. This is because when a player is purchased their transfer fee is capitalised and then released through amortisation over the course of the player’s contract with the club. For example, Brit Assombalonga’s fee will be spread over 5 years in the Profit and Loss Account.
Last year the club invested £9.7M on new players, which was dominated by the signings of Britt Assombalonga from Peterborough United and Michael Antonio from Sheffield Wednesday, but also included a further 7 players. In addition the club sold a total of 10 players who had a combined original cost of £5.5M. In reality most of those players were released for no fee and the sales were dominated by Karl Darlow and Jamaal Lascelles moving to Newcastle. As those two players were home-grown through the academy they had no Balance Sheet value from any previous fee paid and so the club made a significant profit on them in the year they were sold.
The total profit on players sold during the year was £6.2M and as sated above this is why the reported loss for the year reduced year on year even though the EBITDA increased during the same period. Once again though the owner has been shown to have invested heavily in his squad, which suggests that the problem at Forest has not been a lack of investment but rather a lack of direction and focus in that investment and in the overall management of the club. A problem of long term strategic leadership rather than money.
Balance Sheet Financing
When you are making losses you need to finance those losses through sources of funding other than turnover. At Forest, as with many other football clubs, this is achieved through the owner who has a loan facility for the club to draw down on.
At Forest there are two significant loans in place. The first is an indirect one from the owner via his company NFFC Group Holdings which relates back to the purchase of the club and remains at £14.9M (see previous reviews for more detail). In addition there is a loan direct from the Al-Hasawi family which covers the ongoing losses since the takeover. This loan has increased during the year by £29.7M to £67.0M, reflecting the losses made by the club in the first 3 years of the Al-Hasawi family’s ownership.
In addition cash balances fell from £600k to £68k and finance leases were reduced to £239k. As a result the Net Debt of the club has increased from £52.0M to £82.1M in the year. Whilst it can be argued that this debt is mostly owed to the owner himself, rather than to external parties, it remains a very large figure and it would be reassuring to see him take the approach that owners of other clubs have done and convert the debt to equity.
The size of the debt also draws a clear line below the other comments about annual losses, confirming the consistency of those losses over the three years of ownership we have figures for.
To be honest the conclusions have not really moved on since the last set of results, in much the same way as the club itself had not progressed between the two dates. The first three years of ownership by the Al-Hasawis have been extremely poor and have severely affected confidence and trust in them as owners. As a fan you only have to look at the turnover of managers, players and other staff to see that there has been a lack of vision, leadership and planning and that has resulted in the combination of poor results both in the accounts and on the pitch.
Some hope has been derived from the season in progress in that the club seems to have finally understood the importance of Financial Fair Play. It is essential that claims that the club will pass FFP this year and come out of its transfer embargo are realised. If that does happen then it is an opportunity to draw a line under the past 4 years and start to move forwards. If it doesn’t then trust will again take a knock and it will be hard to rebuild.
Even if Forest are released from the Football League restrictions next summer there is still some way to go before we can feel confident that there is now a coherent strategic vision for the future. The first 4 years have not been good however you look at them and there is no point pretending that they haven’t happened. The club is, however, reliant on the ongoing investment of a wealthy owner if it is to have any hope of competing in a Championship that will only get tougher as parachute payments increase, so we must hope that this experience has at least provided Fawaz Al-Hasawi with a chance to learn and that he will improve his performance in the years ahead.