Financial Analysis of Granite Construction Industry Plc - Essay Example

(Penman, 2003). In addition, investors consult investment analysts who provide an almost endless stream of information and recommendations to sort out. There are often claims that some shares are undervalued and vice versa. (Penman, 2003). This information at times becomes confusing leaving the investor with no clear indication of what the true prices of stocks should be. (Penman, 2003). Under such circumstances, the investor is forced to make the investment decision following his/her instinct or based on the information provided by the market.

(Penman, 2003, Kaplan & Norton 1992, 1993). Investors who make the decision based on instinct are referred to as intuitive investors while those who make investment decisions based on capital market efficiency are referred to as passive investors. (Penman, 2003). Passive investors carry out their investment decisions based on the assumption that the market price is a fair price for the risk taken, that is, that market forces have driven the price to the appropriate point. (Penman, 2003). These investment mechanisms appear to be very simple, as they do not require much effort.

(Penman, 2003: pp 3). However, both investors run risks that are even more than the risks of the firms they are investing in since they can either pay too much or sell for less and as a result suffer a decrease in returns on their investments. (Penman, 2003). According to Penman (2003), the intuitive investor has the problem of the intuitive bridge builder: "one may be pleased with one's intuition but, before building gets underway, it might pay to check that intuition against the calculations prescribed by modern engineering as not doing so, may lead to disaster".

(Penman, 2003: pp 3). The passive investor runs the risks of either paying too much or selling for less should stocks be mispriced. (Penman, 2003). Although economic and modern finance theory (Bodie et al, 2002; Penman, 2003) predict that capital markets are perfect it is good practice to check before taking action. (Penman, 2003). Therefore, both the passive and intuitive investor run the risk of trading with someone who has done his homework well, that is, someone who has analysed the information thoroughly.

(Penman, 2003). This study is aimed at carrying out financial analyses of Granite Construction Plcwith particular focus on the liquidity, profitability and solvency ratio so as to gain a reasonable basis for providing recommendations to investors and suppliers on whether to invest or continue business for the company, and finally see the various methods through which the company access the capital market.Having said this,