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Calvin Ayre

Water Water Everywhere and Nary a Drop to Drink - Liquidity Ratio Analysis For Sportsbooks

3 March 2004 Sportsbook & Casino the most profitable in the online world!

Could this be true? I read a lot of interesting opinions in forums and articles covering our industry on who is doing well and who is not. I know that there is a lot of misinformation in our industry that is released on purpose, but I am shocked that I have never read any analysis for our industry like I have for mainstream industries.

Where I am going with all of this is the use of financial statements, such as balance sheets and financial analysis, to make an informed decision. For my Masters degree I majored in management finance, so it's an area I know better than most in the industry. If you read any of my other articles in my archive (, you will see I frequently mention one in particular that I think is a huge determinate of financial health in any industry, the liquidity ratio.

As astonished as I am about this, it seems that a large percentage of our industry's analysts still have no idea how a business is analyzed. I seldom, if ever, even get asked about ratio analysis, but instead get questions like how much money we have or why do we advertise so much. I have never even been asked how much, if any, debt we have, which is a necessary bit of information to make the first question have any meaning, and the second one is like asking someone why they breathe. Interestingly enough, I also have never been asked how profitable we are, which at the end of the day, drives everything else that shows up on our statements.

What I want to do in this article is give a layman's explanation of financial statements and ratio analysis and some idea of what are considered normal ratios in general industry. I will include our own actual ratios as of the end of January 2004, including some comparables with four of our major competitors who are public companies.

Let's start with financial statements. There are a number of statements and reports, but the two most important are the income statement and the balance sheet and these are the two I am going to focus on for the purposes of this article. We do them up every month and also year to date and then a final set to show what happened in the last 12 months. The income statement shows how much profit is left after all the bills are paid in some period. The balance sheet is essentially a snapshot of the difference between your assets (money and property etc.) and liabilities (for the purposes of this article just assume this is what you owe).

This difference is called your owner's equity. The relationship between the two is that if you are profitable as outlined by the income statement, your balance sheet improves (more assets and equity) and this is the where you get the numbers from for your ratios (we will come back to this).

Because sports betting is a cash-based business, we are a private company operating from tax-optimized Costa Rica, we treat our financial statements as a management tool and we keep everything really simple by doing our accounting in pure cash. What I mean by this is we write off all our assets at the time we purchase them except for real estate (land) or securities (stocks and bonds). We do this so we do not have to carry depreciating assets, but this also reduces our profits per period compared to most industries. This means we have extremely conservative financial statements, but also very simple to understand, and we are profitable enough that they are still very healthy looking documents. This also has the effect of making our competitors appear larger relative to us than they really are.

This is important to understand because when I give you the ratios, they will not include computers and office equipment etc. as assets (remember I subtracted these in total from income earlier) or any real estate. I am only going to talk cash and near cash (things that can be rapidly and predictably turned into cash like stocks and bonds). What I will refer to as current assets are assets that can rapidly be used to pay a bill or debt.

I should also explain that a large portion of our competitors' total assets are recorded as goodwill, making them appear larger compared to our assets on the balance sheet. Goodwill is an intangible asset, it is an accounting entry used when assets are purchased for an amount different from their market value. Goodwill has no cash value and therefore cannot be liquidated to assist in the repayment of debt.

Now that you have a basic understanding of the two statements we are using for this article, I want to explain basic financial statement ratio analysis. Below is the Data I used for the purposes of this explanation and comparison:

The sports books used in this analysis are all public companies trading in the United Kingdom or Australia, are well known names in our industry and all publish their actual financial statements. Three of them are direct competitors to us and the largest one is a U.K. land-based sports book that is also doing well online, but does not offer services to the U.S. market. This accounts for its larger size, but is still useful to compare to us ratio-wise. The revenue used is for the last full 12-month period of all the books in question except Book D where we only had six months. The ratios would be essentially the same with the six-month period as a 12-month period so it still offers a decent comparison. Also the periods might not be exactly the same due to different fiscal year-ends. Revenue includes casino revenue if available.'s year-end is Januarly 2004. Some books are reported in Australian dollars or pound sterling, but this will have no effect on the ratios.

The first ratio I show in the graph included herein is the liquidity ratio. This ratio is the total dollar value of cash and marketable securities (current assets) divided by current liabilities. What this basically shows is how able any company is to pay off its debts (in our case mostly player account balances). A good ratio in general industry is considered to be 1.5 in the form used in the chart above. Clearly, the ratio of 2.96 is very healthy in any industry but is also significantly better than any other known large company in our industry. This makes us the most solvent company that we know of, which translates into the highest level of security in our industry for depositors. We have three times player balances plus total trade debt in cash and near cash.

The debt-to-equity ratio is essentially the opposite of the liquidity ratio (but using total equity instead of current assets), and smaller is better for this one, so clearly is an industry leader in this one also as would be expected after seeing the liquidity ratio. One of the main purposes of this ratio is to determine who is funding the business. The higher the ratio, the higher the risk that is being held by the creditors. (Read player deposits here).

The next two ratios, "return on assets" and "Return on Equity” are also self-describing; it's the amount of revenue generated by the assets and equity you have at work for the business. A benchmark ratio for return-on-equity in general industry would be 10 percent. While all the sports books but "Book A" are achieving this, we again are significantly outperforming our competition.

What is the conclusion of all of this? It's not how much advertising you do, its how well you convert the attention you get from that advertising into revenue, combined with how fiscally conservative you are with that revenue. Clearly this study has convinced everyone in top management in our organization that we are now a legitimate world leader in our industry able to generate revenues significantly above market norms for our size. I originally did this study for us alone, but when I saw the results I decided that this was information that we should share with the rest of the industry. Some in our industry get caught up in focusing on our sometimes-flamboyant marketing programs. Hopefully by reading the articles I produce, more of the industry will understand what is currently driving what I consider to be one of the strongest business models in our industry. Thankfully anyone playing with can easily find a drink of water (get a payout) when they want one, which is unfortunately not the case industry-wide.

For more articles by Calvin Ayre, go to

Water Water Everywhere and Nary a Drop to Drink - Liquidity Ratio Analysis For Sportsbooks is republished from
Calvin Ayre
Calvin Ayre