The Pendragon plc and Its Industry - Essay Example

The Pendragon plc and its Industry Pendragon PLC (or “Pengragon”) is an operator of franchised motor car dealerships in the United Kingdom under 276 franchises under done independently. It has certain segments serving different segments. It first one is the Stratstone segment consisting of luxury car brands on the sale of used motor cars and motor bikes. Another is the Evans Halshaw segment, which caters on volume car brand on sale of new and used motor cars, along with the associated or related after sales service, body repair and parts sales.

The third segment is the Chatfield segment on sale of trucks and commercial vans brand. The fourth is the California segments that include the retail operation in California, United States on sale of ale of new and used motor cars. The Leasing segment forms part of the segment where contract hire activities are covered. Another segment is the Quickco segment of part distribution business. The Pinewood segment also caters on dealer management and share service centre. Lastly, it has is Central segment which forms it head office function (Reuters. 2010a). 1.

Introduction This paper seeks to prepare a financial statement report for Pendragon plc to determine whether the company stock is worth investing into by examining the company’s financial performance, liquidity, solvency and stock position in in relation to the industry using relevant financial ratios, market ratios and dividend ratios from the data for the past ten years. This paper will also look into the analysts’ estimate and projection on the company’s stock and what they have to say about company and any relevant news about the status of its stock.

In addition, this paper will look into the company’s PE ratio, as well its condition in relation to competition and to determine the likely future of company in the coming years and as way of determining possibility of overvaluation or undervaluation for investment decision purposes. Detailed Evaluations 1. Short-term liquidity Pendragon’s liquidity can be measured using the current ratio and the quick asset ratio or simply liquidity. As applied now to Pendragon, its computed current ratio is 1.

03 as against industry average of 2.03. Liquidity ratio of the company on the other was reflected at 0.34 as against industry average of 2.4. From 2000 to 2005, the current ratio of the company stayed at above 1.0 level but beginning in 2007 up to 2009, a continued decline in the ratio was noted. From 1.02 in 2005, in decreased to 0.97 in 2006. This was followed by another decrease to 0.94 in 2007, then followed by increase to 0.93 in 2008 and then 0.83 in 2009. The deterioration could easily explained by the effect of the crisis for 2007 onward but for 2006 from 2005, the cause could be the decline in net profit margin from 1.

94% in 2005 to 1.89% in 2006. In other words, the liquidity is basically affected by declining profitability. With the liquidity and current registering of Pendragon registering at lower than industry averages, one can only deduce inferior liquidity as competitors. However, from an objective point view, Pentagon may still be considered liquid from a current ratio of at least 1.0 since its current assets can be enough pay current liabilities. In fact an excess working capital is also evidence given the said level of its current ratio.

See Appendix A and Case Study financial Ratios (Pendragon, 2010). 2. Capital Structure and Solvency Pendragon’s capital structure and solvency as measured by the gearing ratio registered an average of 222.22 for the past ten years. To determine how it has such very high ratio, it important to look at what happened in the past ten years and giving emphasis for the latest five years. The behaviour of the ratios for past five years indicate that from 136.94 in 2005, it deteriorated to 171.

67 in 2006 but slightly improved to 142.64 in 2007. The deterioration and slight improvement and could be explained by decrease in net profit margin from 1.94% in 2005 to 1.89% and 2006 followed by improvement in 2007 due to lower Long-term debt in 2007 at £297,200 as against £371,000 in 2006. See Case Study financial ratios (Pendragon, 2010). The net profit margin was still positive in 2007 but it was not enough to cause improvement in the gearing ratio so the reduction of liabilities must have caused the same.

From 2007, level of 142.64 gearing ratio deteriorated to 616.35 in 2008 and then slightly improved to 505.19 in 2009. This could be explained again by negative profit margin of 4.82% in 2008 but which recovered slightly in 2009 to register at minimal 0.04%. The average gearing ratio of 222.22 however is very high when compared with industry average of 17.97. See Case Study financial ratios (Pendragon, 2010) and Appendix A. The company’s gearing ratio makes its risk position less favourable than the industry average but at least ten times.

This signifies less value of company investments from stockholder compared to creditors as far as one evaluating the company is concerned as against its competitors. A high leverage capital structure for Pendragon, could only be deduced from gearing ratio and this may make it uncertain for the company to invest for more expansions in the future . To become riskier than present competitors as a result of further investments would inevitable be expected to happen. Stated differently, that Pendargon could have struggle in in its risks management efforts in the long-term.

Its present level of profitability may not be adequate to sustain needs for funds needed in paying presently ripening obligations. Even provision for decent amount of dividends annually for present stockholders after the practice was apparently stopped beginning in 2005 and continued up to 2009. See Appendix C 3. Operating Efficiency Efficiency tells how manage was able to maximize the use of its resources in accomplishing its objectives. This can be measured through returns on assets and net profit margin.

Pendragon’s average return on assets (ROA) for ten years registered at the rate of 2.56%, which is lower than the industry average of 5.56%. ROA may measure both profitability and efficiency in terms of proper utilization of assets as measure in terms of profits generated as these assets get employed in business. Efficiency can be further measured using net profit margin where had averaged at 0.86 % for the last ten years as against the industry average of 9.89%. Clearly then, it means that Pendragon is definitely less efficient than its average competitors in the industry are. 4. Profitability Ten-year average return on equity (ROE) of 8% of Pendragon shows less superiority about its past performance in relation to the industry average of 23.95%. However, an average of about 8% return on equity, if based on what could be earned from average industries could still be definitely attractive to investors, as it would mean that for every 100 British pounds mace, the investors expect returns of about 8 pounds.

These rates could be viewed as something acceptable for a company like Pendragon given the present condition of the economy. See Appendix A for more details. Investing with Pendragon that promises 8% ROE is sixteen times better compared to an average rate of 0.50% Bank of England base rate (Housepricecrash, 2010). The said base rate can be assumed as bank rate if money is invested in a bank with the investor doing nothing.