Ratio Analysis for Building Company

Ratio Analysis for Building Comp each entitle Ratio analysis for Bellway CompanyAbout Bellway plcThe Bellway assemblage is one of the largest housebuilders in the U.K. It was established in 1946 by John T.Bells and his two sons1.The separates ope symmetryns ar spread throughout the country.The primeval activities of the convocation intromit land acquisition, finance, planning, architecture, design, build management, marketing and customer service. Bellway builds low- be homes and apartment blocks on disused or abandoned sites.Position and StrategyBellway sells around 6,000 houses all(prenominal) socio-economic class and has till date provided more(prenominal) than coke,000 homes.The houses atomic number 18 designed, built and marketed by local teams operate from regional offices. These offices are managed and staffed by local people. The go with employs about 2,000 people with varying expertise.Corporate Social ResponsibilityThe class has adopted five principles in the ir day-to-day opeproportionns to minimise the milieual effects of the building process and create sustainable communitiesProtection of the environmentPrudent use of natural resourcesCreating environments that have the potential to add to economic growth and employment opportunitiesSocial conside dimensionns that recognise the needs for a changing and advancing populationThe creation of communities that result endure and where people go away aspire to liveSource Bellway p.l.c. Annual narrative Accounts 2007The gathering reports on these five principles in its Annual announce.Performance Overview of Bellway multitudeThe housing perseverance has been facing challenging market conditions since the last few months. However the death chair of the Group has made the following statement in the Annual Report of the Group for the stratum stop 31 July 2007.Bellway has, yet again, produced a in truth good set of results for the year ended 31 July. The Group continues to have got organic growth in volumes and sugar despite the challenging market conditions experienced by the housing patience everywhere the last dozen months.The present paper attempts to examine the reality of the statement by doing a ratio analysis to assess the financial health of the Group ground on its Annual Reports for the year ended 31 July 2007.Performance OverviewThe key high lighters of performance in the year ended July 2007 over the previous year are presentn in the table2 infraIn the next office a detailed analysis of the financial performance and health of the Group has been examined on the basis ofPerformance RatiosWorking Capital Efficiency Ratios enthronization RatiosFinancial Status RatiosPERFORMANCE RATIOSReturn on capital employed (ROCE) avail before Tax and liaison Payable= x hundredTotal Assets sharp Current Liabilities* This is taken as equal to operating realize addition engross incomeThe ROCE of the Group is around 22% in the year ended 2007. Despite a 6.5% adjoin in the clams before Tax and sideline Payable in 2007, the ROCE stands at the similar figure as in 2006. This only indicates that the wage assets have in any case plusd in the same proportion as winnings. However, there has been no improvement in the efficiency in employing theses net assets to generate pay.Moreover, ROCE for the Group is lower than five year sightly ROCE achieved by builders over UK which stands at 2530%3. Thus, the efficiency in employing net assets to generate profits for the Group is lower than the industriousness mean(a).Asset employee turnovergross revenue employee turnover=Total Assets less Current LiabilitiesThe asset turnover ratio of 1.165 indicates that a sale of 1.165 is generated from to each one invested in assets by the Group. This ratio has increased by around 3.6% in 2007 over 2006 which is a good sign. The increase is earlier imputable to an increase in total assets and also a comparable increase in the sales turnover.Ne t profit brinkProfit before Tax and Interest Payable = x 100Sales turnover*This is taken as equal to operating profit plus evoke incomeDespite the increase in profit before interest and taxes and also sales turnover, there is a slight pedigree in the net profit margin from 19.5% in the year ended 2006 to 19.1% in the year ended 2007. The decline indicates that proportionate increase in cost of operations has been higher than the increase in sales. Thus, there has been a decline in the efficiency of sales to generate profits.Gross profit marginGross Profit= x 100Sales turnover in that respect has been a decrease in the gross profit margin of the Group by 0.6% despite the increase in sales revenue. The decline in the gross profit margin has been due to a larger increase in cost of sales as compared to corresponding increase in sales. Sales revenue has increased by 9.2% over 2006. The corresponding increase in cost of sales has been 9.9%. The decline in the gross profit margin also explains to certain extent the decline in net profit margin.WORKING CAPITAL EFFICIENCY RATIOSInventories (or stock) turnoverStocks and Work in Progress= x 365Purchases (or Cost of Sales)The housebuilding intentness by its very reputation has slow moving stock / inventory. In 2007, as compared to 2006, there has been a decline in the number of days the stock takes to be converted into sales. The stock is getting converted into sales in 538.65 days in 2007 as compared to 552.16 days. This is an improvement of around 2.4% over 2006. interchange receivables (or trade debtors) turnover make do Debtors= x 365Sales Turnover* All sales are assumed to be on creditThough it takes less than 1 week to collect receivables, the increase in the time taken to win payments from customers must be examined carefully before it gets out of hands. An increasing ratio also indicates that the company is taking more time for collecting its payments. Thus, each 1 of its sales revenue stays tied up in trad e receivables for a longer time period.Trade account payables (or trade creditors) turnoverTrade Creditors= x 365Cost of Sales** All purchases are assumed to be on creditThere has been a decline in the average settlement period for trade creditors by almost 17%. This is non a good sign as trade credit is a type of free finance available to a company. A declining ratio indicates that suppliers in the year ended 2007 gave a lower credit period to the Group as compared to the previous year. This becomes a bigger stick of line as the Stock Turnover ratio for the Group stands at a high figure. It may also have adverse implications for the Groups liquidity position.INVESTMENT RATIOSEarnings per share (EPS)Profit before indifferent Dividend =No. of Ordinary Shares in issueEPS reflects upon share performance. Thus EPS social movement of the Group highlights the investment potential of its shares. It also highlights the possibility that the company will pay a dividend8.There has been a 6.2% growth in the weaken EPS of the Group in the year ended 2007 as compared to 2006. This indicates that the potential of the shares of the Group is growing. This increase in EPS is primarily due to an increase in the profits with no corresponding increase in tax rates.Price earnings ratio(PE)Market Value per Share =Earning per shareIn general, if the PE ratio of a company is high it implies that investors are optimistic about the companys future and are expectinghigher earningsgrowthin the future compared to companies with alower PE. However, the ratio can only be interpreted appropriately when compared to historical PE ratio or industry benchmarks.Groups historical PE ratioThe PE ratio for the Group has been constant over the previous two years.The ratio needs to be examined in light of the deteriorating industry scenario over the last two months. The PE ratio calculated to a higher place may non hold true today and would have declined substantially. This is because housebu ilding is a cyclical business where earnings fall exponentially as sales termss decline. Recent times have seen a substantial decline in sale prices. If the PE is calculated at the share price of 713.5p9 as on 25 April 2008, assuming earnings to be constant at 31 July 2007 level, it will be only 4.9. Thus, actual PE will be lower.Industry averageThe following diagram10 highlights the PE ratios of 8 leading housebuilders in UK as on 21 July 2007.The diagram clearly indicates that Bellway is towards the lower end of the selected companies in the industry UK with regard to its PE ratioDividend yieldLatest Annual Dividends= x 100Current market share priceThe dividend yield at the up-to-date price as on 25 April 2008 = (43.125 / 713.5) %= 6%However, the market price of shares for the Group is a lot lower than it was a year ago.Historically, the dividend yield has been as indicated in the table belowDividend pass overProfit on familiar activities afterward taxation=Ordinary Dividend The dividend cover has fallen despite the position that the profits have increased. A declining trend makes dividend less secure. However it is non a cause of concern for the Group as the dividend cover is much better than many other companies in the industry. For example, housebuilder Persimmon has cover of 2.6911. Thus, if the Group has a cover of more than 3, it could maintain its payout more than thrice over.Return on equity (ROE)Profit on ordinary activities after taxation= x 100Equity shareholders fundsThe Group shows a decline in this ratio in 2007 over 2006. The decline may be primarily due to increase in equity shareholders funds. monetary STATUS RATIOSWorking capital ratio (WCR)Current Assets=Current liabilitiesThe real average for the WCR ratio is that present-day(prenominal) assets should be double the current liabilities. However, the norm varies with industry. In the case of the Group the ratio has declined but it is higher than the real norm. However, a closer a nalysis indicates that the Group faces a liquidity crisis. A close examination of the current assets indicates that inventories constitute more than 95% of the current assets. This, added to a high stock turnover ratio, will not let the Group meet its current obligations. A clearer picture of the liquidity is provided by the Quick Asset ratio.Quick assets ratio (QAR)Current Assets Stocks=Current liabilitiesThe norm for this ratio is 1 1. However, it again varies from business to business. The ratio is far below the norm. In other words, the Group has no way of covering up its current obligations. This is a cause of concern and can lead to excerpt problems also if the condition persists.GearingLong-term Debt + Preference Shares=Total Assets less Current Liabilities*These include preference shares of 20,000,000 in both the yearsThe wagon train or dependence on debt has decreased by about 7% for the Group. Thus, there has been a decline in the Groups luck as lesser amount is committ ed for periodic interest and quittance commitments. This is especially welcome in the time of deteriorating housing market conditions.Interest coverProfit before Tax and Interest Payable=Interest payableDespite the decline in gearing, the Groups interest cover for the year ended 31 July 2007 also shows a slight decline. The decrease in interest cover from last year is due to a higher increase in net interest payable than increase in profit before tax and interest.ConclusionTo desist it can be said that Bellway has performed well in the year ended July 2007 over 2006 in terms of profitability as well as increased sales. However, it faces a major short-term liquidity crisis. This is a cause of concern as the UKs housebuilding industry, in general, is expected to be facing more difficult times ahead due to credit crunch and declining consumer demand.ReferencesAtrill slam McLaney Eddie, Financial Accounting for Decision Makers, 5th ed. 2008 , FT Prentice dormitory roomBarker Review Interim Report, The Housebuilding Industry, accessed from http//www.hm-treasury.gov.uk/media/2/9/barkerreview_interim_chapters4to6.pdfBellway p.l.c. Annual Report Accounts 2007Elliott B. and J. Elliott, Financial Accounting and Reporting, 11th ed. 2007, FT Prentice HallHIFIC Barnard Report, afterlife Trends in character Construction and Implications for HIE Region, accessed from www.forestryscotland.com/pages/download2.asp?file=attachments/HIFIC_Forres%2007_Barnard.pdfSteed, Alison, Five base hit shares for hard times, The Sunday Times 20 April, 2008Team Limited, The Cartel- Like Industry, accessed from http//www.teamlimited.co.uk/Assets/pdf/Building-Barriers.pdf hayseed finance, accessed from http//finance.yahoo.com/q/pr?s=BWY.LHemscott website accessed from www.hemscott.comBrief 209439Page 1 of 131 Source http//finance.yahoo.com/q/pr?s=BWY.L2 Source Bellway p.l.c. Annual Report Accounts 20073 HIFIC Barnard Report, Future Trends in Timber Construction and Implications for HIE Region, accessed from www.forestryscotland.com/pages/download2.asp?file=attachments/HIFIC_Forres 07_Barnard.pdf4 Ideally average stock and spend a penny in progress figures should be taken for calculating the ratio as they give more accurate ratios as average inventory accounts for any seasonality effects on the ratio. However, in the case of house building industry seasonality effect is not there. Moreover due to non-availability of 2005 figures, end of the year figures are used. .5 Ideally average trade debtors figures should be taken for calculating the ratio as they give more accurate ratios. However, due to non-availability of 2005 figures, end of the year figures are used.. Trade receivables do not include other receivables not arising from sales (Refer Note 13 of Bellway Annual Report pp 68)6 Ideally average trade creditors figures should be taken for calculating the ratio as they give more accurate ratios. However, due to non-availability of 2005 figures, end of the year f igures are used. Trade payables do not include other payables not arising from purchases (Refer Note 15 of Bellway Annual Report pp 69)7 Diluted EPS is based on the total capital shares after all Options and awards have been exercised.8 EPS only indicates the possibility of a dividend. However, dividend end is a corporate decision and there is no rule of flicker regarding its size and frequency.9 http//finance.yahoo.com/q?s=BWY.L10 Based on PE ratios published on 21 July 2007 by www.hemscott.com11 Steed, Alison, The Sunday Times, 20 April 2008