17th March 2023


17th March 2023.

It’s that time of the year again when the pace regarding the release of football club annual accounts begins to run that little bit quicker and the financial picture for the previous season starts to emerge. Will there be a continuation of trends that have been embedded for years or will a surprise or two suggest a different financial road ahead for the clubs?

Ten of the 20 Premier League club cohort of 2021-22 have released their accounts and it makes for grim reading. As we correctly predicted, those who thought that a return to ‘normal’ revenue levels would lead to a post-Covid profit bonanza are, based on what we have seen so far, going to be very disappointed.

Yes, the numbers will change as more clubs release their data. Will there be big profits emerging from the remaining group? Unlikely, unless the new fad of loan forgiveness becomes more prevalent (more about that shortly). But people still try to convince us that football’s economics are in good shape. If so, why are we seeing more loan forgiveness?

To date, the 10 2021-22 Premier League clubs have achieved revenues of £3.55bn with staff costs of £2.22bn. Pre-tax losses so far come to £356.71m. However, the economic profit/loss calculation, where we take all invested capital and apply a charge once the net operating profit after tax has been determined, arrives at a loss of £563m. And this is just the half-way point in proceedings.

Thus far, our cohort of 10 clubs achieved economic losses of £15.85 for every £100 of revenue during 2021-22. To put this into perspective, the total Premier League club economic losses for the pre-Covid 2018-19 season was £599.54m from revenues of £5.16bn. That’s an economic loss of £11.63 for every £100 of revenue.

Time PeriodRevenue – £mEconomic Loss £mEcon. Loss per £100 revenue
2021-22 (10 clubs)£3,550m(£563.0m)(£15.85)
2018-19 (20 clubs)£5,160m(£599.5m)(£11.63)

So, for the 10 clubs that have released their numbers, the divisional loss per £100 of revenue is 36.3% higher than the last full season before the Covid pandemic (2018-19).

The work so far has established the following:

  • The 6th biggest annual economic loss of £145.85m (across all clubs since 2008-9), achieved by Manchester United.
  • Indeed, the season has contributed two entrants into the list of 17 instances of annual economic losses over £100m, the other being Tottenham Hotspur at £115.07m.
  • Just one of the ten clubs has achieved an economic profit; West Ham United with £11.63m. This follows three straight years of economic losses amounting to £124.3m. Budding ‘apprentices’ should take note…

Of course, regular readers will appreciate that the trend of achieving economic losses is not new in itself but the scale of the losses particularly in recent seasons is worrying. There are those who extol the virtues of increasing revenue with bigger and better sponsorship and broadcast deals. However, it matters little if the underlying financial dynamic warrants repeated injections of capital and increased costs to the P&L account to keep the show on the road which appears to be the current position. Even if the effects of Covid are considered, the trend has been one of regular economic losses.

Usually, these capital injections initially take the form of a loan with associated interest charges and is then converted later into equity thus eliminating the interest charge to the profit and loss account. For reasons dating back to the beginning of the 20th Century, the accountancy profession does not believe that equity has a cost. However, we differ from the accountancy profession in that the capital asset model demands and establishes a cost to that equity, hence the increased transparency provided by the economic profit metric. Once this capital cost/charge has been applied, the true picture of financial and economic performance can be determined.

This is why the economic loss numbers tend to be that much bigger, especially if the club owner is issuing additional shares as has been the case at Aston Villa, Newcastle United, Fulham, Tottenham Hotspur etc. The economic profit metric is recognising that equity capital is not free.

However, the new and emerging post-Covid approach would appear to be loan forgiveness/write off whereby the debt is eliminated. For the accountants, it is a debit to the loan account and a one-off credit to the P&L line.

The £194m write off at Leicester City won’t show up until the 2022-23 accounts whereas the Wolves write off of £124m sits happily within the 2020-21 accounts giving the club a pre-tax profit of £144m and an economic profit of £137m.

Nevertheless, this goes to show that the Premier League is indeed ‘a license to print money’ but only when you move it from your left-hand pocket to your right-hand pocket.

Is this an efficient method of managing the longer-term financial health of the club? Set out below is an example from our very own football club, Fictional Athletic FC.

  • Over the period, revenue has grown from £550m in year 1 to £720m in year 5, which is an increase of £170m or 31%.
  • In year 3, the owner of Fictional Athletic FC decides to forgive/ write off a £200m loan.
  • Over the full period of analysis, Fictional Athletic FC produces an accounting profit after tax of £252m which is dominated by the £200m loan forgiveness credit in year 3.
  • The interest charge in year 4 is £10m lower than it is in year 3, reflecting the loan forgiven at the end of year 3.
  • In this case we assume that debt is costing 5% and the effective tax rate is 20%.
  • Equity capital, significantly more expensive than debt, is assumed to cost 12.5%.
  • The somewhat questionable EBITDA metric reveals a £795m surplus over the 5 years.

The Balance Sheet perspective is as follows;

  • Non-current assets in this context are primarily the playing squad, which is depreciated annually, and as new players are added. In year 5, there is a £300m acquisition funded equally by a reduction in cash and an increase in long-term (greater than one year) loans.
  • At the end of year 3, the owner writes off a £200m loan.
  • Equity capital rises from the opening balance sheet (year 0) with a balance of £400m to £652m at the end of year 5.

Overall, the accounting picture shows an organisation broadly generating “wealth”. The situation as indicated with this data would probably prompt the owner and the management team to think the following:

  • Overall, the financial performance has been fine.
  • £0.8bn of EBITDA has been achieved in the past 5 years.
  • Recent years have been more challenging with profit after tax in year 5 just one-third of what it was in year 1.
  • Nevertheless, a positive performance all round.
  • Nothing to change as business is performing well.

The signal from Economic Profit

Now we will begin the economic profit calculation.

The formula is Net Operating Profit After Tax (NOPAT) less a charge for ALL the capital used by the business.

The first step is to calculate the NOPAT which in this example is very straight forward; we simply add back the interest charge because that will, in effect, be rolled up into the charge for capital. If we did not add back the interest charge, the amount would end up being double-counted.

Next, we must establish the charge for capital, which is Invested Capital multiplied by WACC (the Weighted Average Cost of Capital (including the cost of equity capital)).  Invested Capital is defined several ways but we use Total Assets less short-term non-interest-bearing liabilities (trade creditors, accruals, and deferred income) which do not really fund the business. The Fictional Athletic FC Invested Capital calculation is set out below:

Following on from the invested capital calculation, we have to calculate the cost of capital – see below:

Note how the cost of capital has risen after the loan cancellation/forgiven at the end of year 3. This is reflecting the greater preponderance of equity capital within the overall financing mix. Also, the proportion of Fictional Athletic funded by equity capital rose from 30% in year 3 to 41.6% in year 4.

Normally, equity capital is often significantly more expensive than debt and we note that one or two high-profile commentators who have called for Manchester United to be ‘debt-free’ are, in effect, consigning the club to a higher cost of capital overall than might have been the case with debt and therefore positioning the club with a potential (competitive) disadvantage against other clubs.

Of course, we are NOT suggesting that the club should be financed entirely by debt but there is, in our view, a sensible blend of financial support, perhaps one routed in the economic realities of the club rather than from a simplistic accounting narrative?

The Charge for Capital

Having established the cost of capital, and calculated the quantum of invested capital, we are now in a position to quantify the cost of capital:

To keep things simple, we take the closing Invested Capital balance from the prior year to calculate the charge for the subsequent year.

In our 5-year view, Fictional Athletic FC has produced an economic loss of £32m, despite revenues over the five-year period of £3.2bn. Whilst this example is indeed fictional, it is a common economic reality for many Premier League clubs. 

However attractive it may seem, debt cancellation may alleviate short-term cash management considerations but it increases the overall cost of capital. Executive Management teams and indeed several academics ought to be aware of this, although our experience would suggest otherwise.

We do find it interesting that whilst some commentators continually promote the notion that the game is ‘awash with money’, it is counter-intuitive to this point that there is a need for loan forgiveness.  Both cannot co-exist.

And given the economic performance of our club relative to the more optimistic and incorrect perception provided by the EBITDA metric, the correct signal to the Executive Management team is something along the following:

  • Performance has been poor and has deteriorated.
  • £32m of value has been destroyed in the last 5 years.
  • The loan forgiveness strategy has increased the cost of capital, potentially placing the club at a longer-term competitive disadvantage.  A debt-free strategy might strike a chord with characters in a Charles Dickens novel, but it is seldom the value-maximising way forwards.
  • The current strategy is not working and cannot be allowed to continue.

Marshall Definition and Valuation

We don’t want to be repetitive but it is contextually important to go back to 1890 and Alfred Marshall’s definition of Value Creation:

“Value is created by investing capital and generating a return greater than the cost of that capital.”

Principles of Economics – Alfred Marshall 1890

Let us be clear, if you accept the above definition, then one must also admit that the picture painted by modern financial accounting practice does not meet that definition.  Why? Simply because, whilst modern financial accounting has its uses, it does not include all the costs of capital and hence all the costs of doing business.  Therefore, the picture it paints is most likely to mislead management teams regarding both strategic and economic progress, as the above example demonstrates.

Until the appropriate authorities recognise the economic realities, we remain pessimistic regarding the longer-term feasibility of the beautiful game.  Many commentators express a degree of suspicion and antipathy to investment coming from the Middle East and elsewhere.  However, they fail to recognise the roots of the current situation which go back many years in that only those with both deep pockets and exceptional indulgence can, given the current economics of the game, afford to participate with any prospect of on-field success.

No one is denying the huge popularity of the English Premier League, but “marketing reach” is not the same as value creation.  As ever, a quote from Warren Buffet comes to mind:

Nothing sedates rationality like large doses of “effortless money.” After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: they are dancing in a room in which the clocks have no hands.”

We frequently hear that “the clubs might well be economically negative but look at the (ridiculous) valuations currently quoted across the media.”  We say re-read the above Warren Buffet quote, then have a long think about one or two recent ‘valuations’ of clubs within the EPL, and then contemplate whether they are justified or not?

The Big Six

It is evident that financially the Big Six clubs continue to rule the roost although Newcastle United is starting to flex its financial muscle. Indeed, we are prepared to call at this time the distinctive split between those privateer clubs financed by wealthy individuals, the private equity-funded contingent and the state-owned clubs.

With the possibility that Manchester United may end up in the hands of a state-related entity from Qatar, the implications for the privateers are profound with increasing costs associated with a constantly rising labour market, transfer fees which is the price of remaining competitive. It is a squeeze from all sides. Yet, through good coaching and management the likes of Brentford and Brighton are still able to compete, but for how much longer?

Unfortunately, the vast majority of clubs outside of the Big 6 eventually succumb to what we call ‘economic exhaustion’ whereby the cost of remaining in the Premier League continually increases as do the economic losses which eventually reflects on the pitch with a decline in performance. Ultimately, the result is relegation and a battered balance sheet. Spending more gets you nowhere, so to speak.

But get this. We are sitting on 14 years of data. We can see that when the Big 6 clubs achieve bigger losses, their points tally decreases. When they reduce those losses, the points tally increases.

Who knew?

Indeed, the focus on revenue via money leagues and other promotional vehicles, belies a financial model that lacks resilience. Despite this, there are those who continue to extoll the virtues of revenue generation above all else. Tottenham Hotspur has been cited as one example, although when we dug into the numbers, we see costs outrunning revenue and the millstone of a very expensive shiny new stadium.

Since 2015-16, the club’s revenue has more than doubled.

The lesson in this case is that for the lucky few in the mix to acquire Manchester United, the elephant in the room has to be the stadium reconstruction. Tottenham Hotspur’s stadium was originally costed at £400m. It ended up costing £1bn and the club is literally paying the price of the project’s inflated trajectory as can be seen via the net debt profile.

But the cost base has also risen with revenue – see below:  

As net debt has increased, we also note that the economic performance of the club has declined…

We have seen media estimates regarding Old Trafford’s reconstruction costs between £1-1.5bn. Who is to say that it won’t be north of £2bn by the time the first footings are cemented in. As can be seen from the Tottenham Hotspur experience, the effect on the balance sheet can be profound and long-lasting.

Meanwhile, we await ten more balance sheets for the 2021-22 Premier League cohort. Having established the longer-term and more expensive effect of loan forgiveness, we wonder what the next financial rabbit will be when profits become even more elusive.


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