Financial Reporting of Persimmon plc - Assignment Example

 Financial Reporting of Persimmon plc Introduction With increased competition, in the housing sector with many firms aiming attaining the status of being the leader of the industry in the United Kingdom, there is a need for company to carry out fundamental analysis so as to ascertain whether the firm is financial health and indentify the difficulties that the firm is experiencing so that appropriate measures can be taken. The main objective of this report is conduct both fundamental and technical analysis on the persimmon plc against its main competitor so as to establish measures and procedure that help in position the organization as the leader in the housing industry. In order to achieve the objective of the report we will conduct a financial statement analysis, analyze the corporate social responsibility of persimmon, conduct an analysis on environmental and social responsibility in conformity to the international financial reporting standards. Background information Persimmon is well established company in the housing sector in the United Kingdom. Persimmon was founded in 1972 by Duncan Davidson, from its initiation the organization has expand tremendously and so far the firm operates 24 regional offices building homes in most areas in the united kingdom[ CITATION Per121 \l 1033 ]. The company concentrates on developing and building both residential and commercial buildings with the recent design while using the recent technology. The has made company sales to increase significantly with a slight drop in sales in the year 2009 illustrated by the chart below A chart illustrating the trend of sales in the company As delineated in the chart above, the company sales units have remained relatively stable (for the years period starting 2009 up to 2011) with only a slight drop in the year 2009 despite the hard economic hard ships. As observed from the chart above the company sales declined with a great margin in the year 2008, this was occasioned by the global financial crisis that drove the economy into a recession[ CITATION Per121 \l 1033 ]. The company turnover has been supported by the growth in sales current the company enjoys a turnover of about £ 1535 million. This is great achievement despites the hard economic times the economy is experiencing. The company is mainly know by offering cheap house unit, this can be attributed to the accusation of distressed land Despite this achievement the company has faced criticisms on the quality of the house that it constructs. Many individuals have been quoted criticizing the quality of the housed constructed by persimmon on grounds of dangerous wiring of sockets. Industry analysis (competitive analysis) Persimmon has two main competitors, Barratt developments plc and Taylor Wimpey plc. The housing sector in the United Kingdom can be describe a constrained, this market that is characterized by supply deficiency. There remain a mismatch between the housing supply and demand; this has been occasioned by inadequate fund to finance construction of houses. The restriction in finance is due inadequate mortgage finance and high borrowing cost as result of high interest rate on funds borrowed for house building[ CITATION Bar12 \l 1033 ]. The government has also introduced a new policy that embraces localism. Localism is a situation where the local community where house development is taking place the society is consulted, such that all the participants will have to reach a consensus to avoid a situation where any stake holder is negative affected by the development process. This will reduces legal suits as well reduces the level of resistance by the local to the activities of the housing developers. In addition the housing developers will have an opportunity to ensure that the products they offer to the market match the customers’ expectations. Apart from this, the government in an effort to stimulate the housing sector which is on r of priority sector in economy has introduced first time buy schemes. The first buy scheme will provide equity share loans to first-time home buyers in situation where the mortgage lending is not available to such individuals. Analysis of key competitors Barratt development plc: The company total sales was estimated to be 11171 units in 2010 as compared to that of Persimmon plc 9630, the company has achieved this level of sales through strategic acquisition of the land[ CITATION Bar12 \l 1033 ]. The average price the house unit of the company can be averaged at £ 198, 900 while in comparison of that of persimmon where the average selling price can be ascertained to be £ 166, 142. Barratt has attributed this high average selling price to efficient management mix of its products and services[ CITATION Bar12 \l 1033 ]. The operating profit of the company can be ascertained to be approximately £ 135 million as compared to that of the Persimmon plc £ 153 million[ CITATION Bar12 \l 1033 ]. This implies that, Persimmon plc although with low volume of sales and a lower average price per unit has been able to efficiently control its profit. The net debt of Barratt is approximately £ 322.6 million [ CITATION Bar12 \l 1033 ]while persimmon does not have any outstanding long-term loans and borrowings Taylor Wimpey plc The company total sales was estimated to be 10180 units in 2011 as compared to that of Persimmon plc 9630, the company has achieved this level of sales through strategic acquisition of the land[ CITATION Per12 \l 1033 ]. The average price the house unit of the company can be averaged at £ 171, 000 while in comparison of that of persimmon where the average selling price can be ascertained to be £ 166, 142. Barratt has attributed this high average selling price to efficient management mix of its products and services[ CITATION Tay12 \l 1033 ]. The total turnover of the company is approximated to be about £ 1,779.40 an increase in 2.5% from the last financial year[ CITATION Tay12 \l 1033 ]. While, the annual turnover Persimmon plc, has been estimated to be about £ 1535. The operating profit of the company can be ascertained to be approximately £ 173.2 million a 56.0% increase from the last financial year financial year[ CITATION Tay12 \l 1033 ], as compared to that of the Persimmon plc £ 153 million. The net debt of Taylor t is approximately £ 264.6 million (debentures loan plus bank and other loans) while Persimmon plc does not have any outstanding long-term loans and borrowings. Financial statement analysis There five categories of ratios which include; a) Profitability ratios b) Liquidity ratios c) Gearing ratios d) Activity ratio e) Investors ratio Profitability analysis Profitability analysis involves calculation of the profitability ratio. This help in ascertaining whether the firm has the ability able to generate returns on the investment. Profitability ratios can be classified into two; those in relation to sale and those in investment. Gross margin Gross margin ratio indicates returns that a firm makes on cost of sales. Gross profit margin indicates the ability of the company sales to generate returns. Usually this ratio is given as percentage of revenue from sale divided by the cost sales[ CITATION Kri08 \p 35 \l 1033 ] Gross profit margin formula is calculated as = (Sales – costs)/ cost of sales The company has experienced unstable growth in its gross profit illustrated above by the chart above. This can be associated by unstable revenue occasioned by unstable average selling price. Net profit margin The net profit margin ratio help to indentify the amount of return per £ 1 of turnover a business has earned. This ratio is more relevant gross profit margin since it has the ability to capture other cost such as marketing and administration costs. Net profit margin is calculated as the net profits before divided by the net sales = Net profit / Net sales [ CITATION Per121 \l 1033 ] In the year 2011 the company recorded a decline in net profit margin due two main reasons; a decline in the sales and the average selling price per unit. Return on capital employed This can be used as measure how efficient the firm has been in using the net assets to generate returns in the business This ratio is calculated as follows; Return on capital employed = Net profit after tax/ Net asset As illustrated by the chart below the return on capital employed has declined from the year 2009 to 2011. This implies that the firm is not efficiently utilizing its asset to generate returns Liquidity ratios This part of the report will concentrate on evaluating the degree liquidity of the firm. In this case, evaluation on ability of the firm to meet their current obligations is conducted. In order to achieve this computation of both current and quick ratio are necessary. Current ratio Current ratio compares the current asset with current liabilities. It is obtained by dividing the total current asset with the total current liabilities. This ratio help an organization to evaluate its ability to meet its current short term obligation using the resources the organization already have. In addition, current ratio helps in highlighting the efficiency of company in turning its products into cash[ CITATION Kri08 \p 58 \l 1033 ]. Current ratio = current assets / current liability Year Current ratio 2009 3.74:1 2010 3.88:1 2011 02:1 The recommended ratio is usually 2:1[ CITATION Kri07 \p 67 \l 1033 ], the company exhibit a higher ratio than the recommended. Using this ratio the company will be able to its obligation using the current resource in its portfolio. Quick ratio Quick ratio is tighter than the current ratio in that it ignores inventories and pre payments. In comparison current ratio it measures the ability of the organization to meet its current obligation. The recommend ratio is usually 1:1[ CITATION Kri07 \p 69 \l 1033 ]. Quick ratio = (current ratio- inventories)/ current liabilities Year Current ratio 2009 0.17:1 2010 0.32:1 2011 .0.20:1 In this case the current ratio omits the company inventories in its computation. As observed from the table above, the company quick ratio is below the recommended level of 1:1, this implies persimmon has difficulties in meeting its current obligation as they fall due. Gearing ratios These ratios helps in evaluation of financial risk of a firm, that is the probability that a firm will not be able to pay up its debt, usually the more debt the firm has the higher the financial risk. Debt Equity ratio This measures how a firm has been financed by the non-owners supplied funds in relation to the amount financed by the owners[ CITATION Kri07 \p 89 \l 1033 ] This ratio is expressed as follows; Debt equity ratio = Total liabilities/ shareholders’ equity In this case in the year 2011 for every pound contributed in the business by the owner, the creditors have put in 40%. In the year 2009 the company faced a higher financial risk as compared to all the years under consideration. Long Term Debt Ratio = Non Current Liabilities Net Assets This measures the proportion of the total net assets financed by the non-owner supplied funds, the higher the ratio, then the higher the financial risk. In this case in the year 2010 the company had the highest level of financial risk. Activity ratios These measure the efficiency with which the firm is using various assets to generate sales revenue or how active has the firm been[ CITATION Kri07 \p 104 \l 1033 ]. Total asset turnover This ratio measures the efficiency with which an enterprise is using all resources (assets) at its disposal in order to generate sales Total assets turnover = total sales/ total assets Year Total asset turnover 2009 0.6 times 2010 0.58 times 2011 0.37 times Fixed Asset turnover This ratio evaluates the efficiency with which a firm is utilizing it fixed assets to generate sales[ CITATION Kri07 \p 121 \l 1033 ]. Year Fixed asset turnover 2009 3.24 times 2010 3.38 times 2011 0.44 times Investor ratios They measure the relative value of the firm and returns expected by the owners of the firm. They also try to look at the overall performance of the firm and going concern of the firm[ CITATION Kri08 \p 112 \l 1033 ] Basic earning per share Basic earning per share measures the returns that investors expect for every dollar they have invested in the enterprises The EPS is increasing over the years indicating that the returns to investors are increasing. An analysis of social and environmental reporting in their published financial statements The company reports on various social responsibilities which it is engaged in, for example, in the annual reports of 2010 the management disclose a donation made to benefit the society. In reference to environmental reporting, a statement that the organization is environmental conscious is not enough. Under the IAS 1; Presentation of financial statement a company is obligated to disclose all the provisions made, according to the IFRIC 5; Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds, a company is bound to make provision for the following, clean up cost, contingency claims arising from environmental degradation and acquisition for machines to control pollution. All this provision had not been disclosed thus the organization does not correspond to the laid down standards on environmental reporting. Despite the above limitation in preparation of the company financial statement the company the does have an environmental policy aimed preventing and conservation of the environment also the company acts in accordance of the environment policy recently endorsed by the government. In relation to health and safety of employees and visitors who visit the construction sites the company ensures their safety. All workers are provided with the appropriate working materials that protect them from the hostile conditions normally associated with construction site. The company also maintains health record of employees so as to ascertain they eligibility. The employees of the key to success, therefore, the organization usually motivate employees through many ways, such as ownership scheme where employee own share under the employee benefit Trusts. This ensure employee involve in achievement of the organizational goals. In addition to this employees are treated equal and equal opportunities of career development accorded to them. This can show cased where if an employee becomes disable, the employee does not cease to a bona-fide employee but he or she is trained to perform in areas which suits his capability. The company has also established a remuneration committee to regularly review the salaries of the employees so that the salaries remain competitive[ CITATION Bri04 \l 1033 ]. Although the company in conformity with the IAS and IFRS, the company fails to disclose the related party transaction as required by the IAS 24, also the IAS 1 presentation of financial statement to dictates that all provisions be disclosed but the company fails to disclose the provisions for depreciation[ CITATION Bri04 \l 1033 ]. In conclusion although the firm has been able to acquire land distressed land thus making to sell their products at lower price as compared to its main competitors, the management needs to improve the company working capital management procedure so as to increase liquidity and enable the firm to honor its obligations as they fall due. In addition to these, the firm is faced with a higher financial occasioned by the use of non-owner funds therefore needs to ascertain an appropriate capital structure. The company has the lowest average price per unit if well utilized the a lower price can help the company in penetration of a new segment.[ CITATION Bri04 \p 131 \l 1033 ] Bibliography CITATION Per121 \l 1033 : , (Persimmon Plc), CITATION Bar12 \l 1033 : , (Barratt Developments PLC, 2012), CITATION Bar12 \l 1033 : , (Barratt Developments PLC, 2012), CITATION Per12 \l 1033 : , (Persimmon Plc, 2012), CITATION Tay12 \l 1033 : , (Taylor Wimpey plc, 2012), CITATION Kri08 \p 35 \l 1033 : , (Palepu & Healy, Business analysis & valuation: using financial statements, 2008, p. 35), CITATION Per121 \l 1033 : , (Persimmon Plc), CITATION Kri08 \p 58 \l 1033 : , (Palepu & Healy, Business analysis & valuation: using financial statements, 2008, p. 58), CITATION Kri07 \p 67 \l 1033 : , (Palepu, Business Analysis and Valuation, 2007, p. 67), CITATION Kri07 \p 69 \l 1033 : , (Palepu, Business Analysis and Valuation, 2007, p. 69), CITATION Kri07 \p 89 \l 1033 : , (Palepu, Business Analysis and Valuation, 2007, p. 89), CITATION Kri07 \p 104 \l 1033 : , (Palepu, Business Analysis and Valuation, 2007, p. 104), CITATION Kri07 \p 121 \l 1033 : , (Palepu, Business Analysis and Valuation, 2007, p. 121), CITATION Kri08 \p 112 \l 1033 : , (Palepu & Healy, Business analysis & valuation: using financial statements, 2008, p. 112), CITATION Bri04 \l 1033 : , (Britton & Alexander, 2004), CITATION Bri04 \p 131 \l 1033 : , (Britton & Alexander, 2004, p. 131), Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2011). Financial reporting, financial statement analysis, and valuation: a strategic perspective (7th ed.). Mason, OH: South- Western Cengage Appendices 1. Calculation of gross profit : Year 2011 2010 2009 Revenue 1535 1569.5 1420.6 Cost of sales 1298.7 1294.5 1222.2 Gross profit 236.3 275 198.4 Gross profit margin 18.20% 21.24% 16.23% 2. Calculation of net profits Year 2011 2010 2009 Net sales 1535 1569.5 1420.6 Net profit 109 115.3 74.1 Net profit margin 7.1% 7.35% 5.23% 3. Calculation of return on capital employed Year 2011 2010 2009 Net Assets 1839.3 1744.0 852.9 Net profit after tax 109.0 115.3 74.1 Return on capital employed 5.93% 6.61% 8.7% 4. Calculation of the current ratio Year 2011 2010 2009 Current Assets 2099.2 2260 553 Current liabilities 561.2 583 2704.2 Current Ratio 3.74 3.88 0.2 5. Calculation of the quick ratio Year 2011 2010 2009 Current Assets 95.8 187 553 Current liabilities 561.2 583 2,704.2 Current Ratio 0.17:1 0.32:1 0.20:1 6. Calculation of the debt equity ratio Year 2011 2010 2009 Total liabilities 734.3 980.6 2958.4 Shareholders’ equity 1839.3 1744 1623.2 Debt equity ratio 40% 5.23% 182.26% 7. Calculation of long-term debt ratio Year 2011 2010 2009 Noncurrent liabilities 171.3 397.6 254.2 Net Assets 1839.3 1744 852.9 Debt equity ratio 9.31% 22.8% 29.80 8. Calculation total asset turnover Year 2011 2010 2009 Total assets 2573.6 2724.6 3811.3 Total sales 1535 1569.5 1420.6 Total assets turnover 0.6 times 0.58 times 0.37 times 9. Calculation net asset turnover Year 2011 2010 2009 Fixed assets 474.4 464.6 3258.3 Total sale 1535 1569.5 1420.6 Fixed asset turnover 3.24 times 3.38 times 0.44 times Read More