Financial Statement Analysis of Barratt Developments Plc. Sample

Question: Required to produce a financial analysis report for the business managers and owners (investors). The report should examine the financial health of the business and evaluate the business performance by summarising the financial performance and applying financial ratios to further analyse the business financial health. Your report will provide recommendations to the business managers and investors. Answer: Introduction Barratt Development Plc is a leading house builder in Britain. The company carries out its operations through four brands namely Barratt Homes, David Wilson Homes, Barratt London and Wilson Bowden Developments. Three of them are house building brands and the last one is a commercial developments brand. The company employs 5971 employees as on 2015 and has delivered a total of 16447 homes as of 2015. The company has the capability to deliver housing developments ranging from standard houses to highly complex housing schemes. The purpose of this report is to analyse the financial information of Barratt Development provided in the financial statements for the year ending June 2015. The financial position of the company is determined on the basis of the above reports and is further analysed with the help of ratios calculated from the above information. This analysis can be used by the managers to the performance of the company and by the investors to decide whether to buy or sell the shares of Barratt Developments. Financial Statements Year 2015 has been a very good year for the company in terms of profits and the company has also been able to maintain a strong balance sheet. A summary of the change in major items of the profit and loss account, balance sheet and the cash flow statement in the year 2015 as compared to 2014 is shown below: Particulars 2014 2015 % change Revenue 3157 3760 19.10% Cost of sales 2628 3045 15.87% Gross Profit 529 714 34.97% Profit from Operations 410 577 40.73% Net Profit 305 449 47.21% Current Assets 3896 4703 20.71% Non - current Assets 1248 1208 -3.21% Total Assets 5144 5911 14.91% Current Liabilities 1160 1412 21.72% Non - current liabilities 638 796 24.76% Equity 3346 3702 10.64% Net Cash flow from Operations 242 184 -23.97% Net Cash flow from investing activities -36 42 -216.67% Net Cash flow from financing activities -226 -140 -38.05% Net change in cash during the period -20 86 -530.00% From the above table, we see that the net profit has improved remarkably by 47%. This is due to an increase in the revenue accelerated by the growing demand for housing in Britain. Recently, Britain is recovering from an economic slowdown which has led to an increase in demand for houses so much so that supply is falling short of demand. Also there is easy availability of low interest mortgage finance which has led to an increase in the prices of the houses, thus increasing the revenue for the company. Even the operating costs have reduced owning to efforts made by the company to reduce the cost of raw materials procured and improving the overall operational excellence. The selling and administrative expense shave also reduced couples with a fall in the interest expense, thus increasing the net profits. The balance sheet has been strong in 2015. The cash and cash equivalents have increase by 30% leading to an increase in current assets by 21%. Other items which led to an increase in current assets are inventories and receivables. The current liabilities have increased in proportion to the current assets i.e. by 22% mainly due to trade payables, deferred taxes, and payable taxes. The company has decreased its short term debt by repaying a part of it. The non- current assets have not changed much, there is only a marginal fall by 3.2%. The non current liabilities have increased by 25% due to an increase in long term debt by 1 million. The share capital also increased by 1 million, thus increasing the equity by 10.5%. The position of cash balance has improved in 2015 with an increase of whopping 216% in cash flow from investing activities. This is on account of increase in the investments accounted for using the equity method. These investments were reduced by 59 million in2014 and as such 2015 shows an increase in value. Cash flow from financing though being a negative figure but is still better than what it was in 2014. The inflow from financing activities is in the form of share capital valuing 1 million and outflow includes payment of dividends and repayment of loan. Cash flow from operating activities has reduced by 58% in 2015 on account of an increase in inventory and taxed paid. The net cash has however increased by 500% amounting to a cash balance of 86 million, thus making Barratt Developments a cash rich company. Looking at the above analysis, we can therefore say that Barratt Developments has had an improved Profit and Loss Statement and Cash flow Statement and a more or less stable balance sheet. Financial Ratios Profitability Ratios Profitability Ratios 2014 2015 Gross Profit Margin 16.8% 19.0% Operating Margin 13.0% 15.3% Return on Equity 9.1% 12.1% Return on capital employed 10.3% 12.8% From the above table, we see that all the profitability ratios have improved in 2015. The gross profit margin has increased due to an increase in revenue and a less than proportionate increase in cost of sales. The operating margin has increased due to a fall in operating expenses in the form of marketing and distribution expenses and also a fall in interest expense as the company has repaid all of its short term loans. Return on equity has also improved due to an increase in the profits belonging to the equity shareholders. Though the equity has also increased by 1 million, but the net profits have increased by 47%, thus improving the return on equity. The companys return on capital employed has also increased mainly due to an increase in the companys EBIT by 41%. The total capital employed has reduced in 2015 due to a decrease in the capital in the form of loan. The company has repaid loans amounting to 24 million whereas it has issued share capital amounting to 1 million. Even wit h a reduced capital employed, the company has managed to improve its return on capital employed which is remarkable. The highest ever profit before tax has been achieved by the company in the year 2015 thus making it a highly profitable year. Liquidity Ratios Ratios 2014 2015 Current Ratio 3.4 3.3 Quick Ratio 0.3 0.4 Interest Coverage Ratio 6.9 10.5 The liquid ratios indicate good liquidity of the company in terms of current ratio. The current ratio is more than 2 for both the years. However, since most of the current assets are in the form of inventory, the quick ratio falls below 1. This shows the actual liquidity of the company is low i.e. if the company were to pay for all its current obligations, it would not be able to do so since inventory is not easily convertible. However, the low quick ratio is justified by the nature of the industry in which Barratt Development operates i.e. the construction industry. The process of building homes may take months together and thus place a lot of WIP and also a lot of funds is tied in already built homes as one home is of high value. Even if one house/product is sold, it reduces the inventory by a great extent. Another liquidity ratio i.e. the interest coverage ratio has increased to 10.5 from 6.9 in 2014. This is on account of reduction in debts as the company has repaid all of its sh ort term debts in 2015, thus reducing the interest expense of the company. The company can easily pay all its fixed charges from its operating income, thus making it a liquid company. Efficiency Ratios Ratios 2014 2015 Asset Turnover 0.61 0.64 Inventory Turnover 0.75 0.73 Inventory Turnover days 487.4 500.3 Receivables Turnover 30.6 24.6 Receivables Turnover days 11.9 14.9 The total assets turnover ratio measures the efficiency of a company to utilize its assets in generating sales. The turnover has remained the same for the company in both the years. Even though the revenue has increased by approx 20%, still the asset turnover has not changed much as the total assets have also increased by the same proportion. The asset turnover ratio for a construction industry is said to be 0.8 on an average, but the turnover ratio is poor in that comparison. The company should work towards better utilization of its assets. The inventory turnover for construction industry is more than 1; however, Barratt has a lesser inventory turnover. The turnover has not varied in both the years. There was an increase in inventory in 2015 but so was an increase in the sales also. Hence we can say that the company is managing its inventory well and the number of days of inventory turnover has also remained more or less the same. There is a decrease in the receivables turnover in 2 015. This is due to an increase in the receivables which is more than the increase in sales. The industry standard for a receivables turnover is 15, since Barratt has a turnover more than 15 in both the years, hence it can be said to have an efficient receivables management. Receivable turnover days has increased from 12 days to 15 days which means the company is able to recover its payments in 15 days, though there is an increase but the increase is not significant enough. Hence we can say that the company has an efficient inventory and receivables management systems, it only needs to strengthen its assets utilization. Financial Stability Ratios Ratios 2014 2015 Debt Equity Ratio 0.06 0.05 As compared to its equity, the company has very low debt. This means that the company finances its operation expenses as well as growth and expansion through internal sources of funds i.e. retained earnings and equity. The company has only 6% debt in its total capital structure in 2014 and the same has further reduced to 5% in 2015 as the company has repaid part of its short term debt in 2015 and also issued share capital amounting to 1 million. Both reduction in debt and increase in equity have led to a fall in debt equity ratio, making the company highly stable as it does not have fixed obligations like interest payment etc. Investment Ratio Ratios 2014 2015 Dividend Yield 1.5% 2.2% Dividend Payout Ratio 0.18 0.26 The dividend yield has improved in 2015 as compared to 2014. This is due to an increase in the market price of shares of Barratt Developments. The dividends paid has also increased significantly in 2015, it has been almost double of what was paid in 2014. The dividend paid is more than the increase in market value of the shares. This is good news for potential investors looking for a stable cash returns on their investment. However, it may be said that the company is not reinvesting its profits in the business to fuel growth and expansion and hence capital gains to the investors will be less. The dividend payout ratio has also increased owning to an increase in dividends paid. The increase in dividends paid is higher than the increase in profits. Recommendation and Conclusion From the above analysis, it is advisable to buy the shares of the company. This is looking at the financial performance in the years 2014 and 2015 and also since the housing market seems strong in Britain and the company is equipped with all necessary policies to carry out its business efficiently and thus make the most of the growing demand for houses, thus it is expected that the market value of the shares of Barratt Developments will further rise in the future. The profitability, liquidity, efficiency, financial stability and the investment ratios all show a positive result and hence gives the investors all the more reason to invest in the company. The managers of the company would be happy with the analysis as it shows increasing profits, it should only try to work on its efficiency ratio and also look at paying less dividends and rather reinvesting the profits to increase capital gains for the investors. 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