Ratio Analysis for Building Company

proportion Analysis for Building CompanyTitle Ratio analysis for Bell counsel CompanyAbout Bellway plcThe Bellway throng is one of the largest home-builders in the U.K. It was established in 1946 by John T.Bells and his two sons1.The Groups ope symmetryns be spread throughout the country.The key activities of the Group include land acquisition, finance, planning, architecture, design, build management, marketing and customer service. Bellway builds low-cost homes and apartment blocks on disused or devoted sites.Position and StrategyBellway sells around 6,000 houses every course of instruction and has till date provided more than 100,000 homes.The houses ar designed, built and marketed by local teams operating from regional offices. These offices atomic number 18 managed and staffed by local people. The fri terminusship employs about 2,000 people with varying expertise.Corporate Social ResponsibilityThe Group has adopted five principles in their day-to-day ope balancens to mi nimise the environmental effects of the building process and create sustainable communitiesProtection of the environmentPrudent use of natural resourcesCreating environments that have the potential to adjoin to economic growth and employment opportunitiesSocial conside balancens that recognise the needs for a changing and advancing populationThe creation of communities that leave behind block upure and where people will aspire to liveSource Bellway p.l.c. Annual Report Accounts 2007The Group reports on these five principles in its Annual Report.Performance Overview of Bellway GroupThe housing industry has been veneer ch onlyenging market conditions since the last few months. However the Chairman of the Group has made the following statement in the Annual Report of the Group for the year terminate 31 July 2007.Bellway has, yet again, produced a very level-headed set of results for the year finish 31 July. The Group continues to deliver organic growth in volumes and earnings d espite the challenging market conditions experienced by the housing industry all over the last twelve months.The present paper attempts to examine the truth of the statement by doing a ratio analysis to assess the financial health of the Group based on its Annual Reports for the year ended 31 July 2007.Performance OverviewThe key highlights of performance in the year ended July 2007 over the previous year are given in the table2 beneathIn the adjoining section a detailed analysis of the financial performance and health of the Group has been examined on the basis ofPerformance RatiosWorking Capital Efficiency Ratios enthronisation RatiosFinancial Status RatiosPERFORMANCE RATIOSReturn on capital employed (ROCE) gelt sooner Tax and Interest Payable= x 100 add up Assets less Current Liabilities* This is taken as equal to operating profit plus refer incomeThe ROCE of the Group is around 22% in the year ended 2007. patronage a 6.5% increase in the Profit before Tax and Interest Pay able in 2007, the ROCE stands at the same figure as in 2006. This only indicates that the clear up assets have also increased in the same proportion as profits. However, there has been no improvement in the efficiency in employing theses net assets to generate profits.Moreover, ROCE for the Group is lower than five year average 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 average.Asset turnovergross revenue Turnover= nub Assets less Current LiabilitiesThe asset turnover ratio of 1.165 indicates that a sale of 1.165 is generated from each 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 primarily due to an increase in total assets and also a corresponding increase in the sales turnover.Net profit leewayProfit before Tax and Interest Payable = x 100Sales turnover*This is taken as equal to operating profit plus interest income despite the increase in profit before interest and taxes and also sales turnover, there is a slight radioactive decay in the net profit adjustment 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 turnoverThere 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 shop) turnoverStocks and Work in Progress= x 365Purchases (or Cost of Sales)The housebuilding industry by its very nature has slow moving stock / inventory. In 2007, as compared to 2006, there has been a decline in the reckon 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.Trade receivables (or trade debtors) turnoverTrade 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 receive payments from customers must be examined carefully before it gets out of hands. An increase 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 trade receivables for a longer period.Trade payables (or trade creditors) turnoverTrade Creditors= x 365Cos t 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 not 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 cause of concern 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 Ordinary Dividend =No. of Ordinary Shares in issueEPS reflects upon share performance. Thus EPS form 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 diluted EPS of the Group in the year ended 2007 as compared to 2006. This indicates that the potential of the s hares 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) commercialise 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 above may not hold true today and would have declined substantially. This is because housebuilding is a cyclical business where earnings fall exponentially as sales prices decline. Recent times have seen a substantial decline in s ale 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 dissemble to its PE ratioDividend yieldLatest Annual Dividends= x 100Current market share priceThe dividend yield at the current price as on 25 April 2008 = (43.125 / 713.5) %= 6%However, the market price of shares for the Group is much lower than it was a year ago.Historically, the dividend yield has been as indicated in the table belowDividend coverProfit on run-of-the-mill activities after taxation=Ordinary DividendThe dividend cover has fallen despite the fact that the profits have increased. A declining trend makes dividend less secure. However it is not 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.FINANCIAL STATUS RATIOSWorking capital ratio (WCR)Current Assets=Current liabilitiesThe accepted average for the WCR ratio is that current 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 accepted norm. However, a circumferent analysis 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 survival 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 gearing or dependence on debt has decreased by about 7% for the Group. Thus, there has been a decline in the Groups risk as lesser amount is committed for periodic interest and repayment commitments. This is in particular welcome in the time of deteriorating housing market conditions.Interest coverProfit b efore 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 conclude 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 go about more difficult times ahead due to credit crunch and declining consumer demand.ReferencesAtrill Peter McLaney Eddie, Financial Accounting for Decision Makers, 5th ed. 2008 , FT Prentice dorm 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 R eport Accounts 2007Elliott B. and J. Elliott, Financial Accounting and Reporting, 11th ed. 2007, FT Prentice HallHIFIC Barnard Report, Future Trends in Timber Construction and Implications for HIE Region, accessed from www.forestryscotland.com/pages/download2.asp? institutionalize=attachments/HIFIC_Forres%2007_Barnard.pdfSteed, Alison, Five safe 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.pdfYahoo 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 work in progress figu res 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 figures 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 outstanding shares after all Options and awards have been exercised.8 EPS only indicates the possibility of a dividend. However, dividend decision is a corporate decision and there is no rule of thumb regarding its size and frequency.9 http//finance.yahoo.com/q?s=BWY.L10 establish on PE ratios published on 21 July 2007 by www.hemscott.com11 Steed, Alison, The Sunday Times, 20 April 2008