Prepare A Report of Financial Analysis On Barratt Developments Plc

Question: Required to prepare a report on Barratt Developments Plc that would be of interest to a potential shareholders using financial details and ratios. Answer: Introduction Company name and External Auditor The purpose of this report is to assist the investors in providing useful information which would help them in the decision of investment in the shares of Barratt Developments Plc. The information has been provided in the form of analysis of the financial statements of the company for the period ending 30th June, 2015 given in the annual report audited by Deloitte LLP. Financial ratios and change in the financial statements items have been calculated for the analysis. Brief Description of the Company Barratt Development Plc is one of the leading house builders operating across Britain. The company operates through four brands namely, Barratt Homes, David Wilson Homes, Barratt London and Wilson Bowden Developments. The first three are house building brands whereas the last one is for commercial developments. The company operates only in Britain and has delivered 16,447 total homes as of 2015. The distinguishing feature of the company is its capability to deliver developments at all level of complexity ranging from standard housing to large and highly complex schemes. The company employs a total of 5971 employees. Details of Chairman, CEO and Directors Title Name Chairman John Allan Chief Executive Officer Mark Clare Chief Finance Officer David Thomas Chief Operating Officer Steven Boyes Non Executive Director Tessa Bamford Non Executive Director Nina Bibby Senior Independent Director Mark Rolfe Non Executive Director Richard Akers General Counsel and Company Secretary Tom Keevil Market Capitalisation The total Market Capitalisation of the company for the year ended 30th June, 2014 was 368, 08, 83,246.08 (3.73*984983475) and for the year ended 30th June 2015 was 533, 56, 26,274 (5.36*99542663). Financial Details and Ratios 3.1 Table of % change in Income Statement items given in Annexure 3.2 Table of % change in Balance Sheet items given in Annexure 3.3 Table of % change in Cash Flow Statement items given in Annexure 3.4 Table of Financial Ratios given in Annexure The figures included in the annexure are as on 30th June 2014 and 2015 as per the annual report. Analysis and Interpretation Financial Statements The financial year 2015 has been a great year for Barratt Developments Plc. in terms of increase in revenue and profits. The revenue increased by 19% in 2015, mainly because of the strong housing market in Britain. Britain is recovering from the slowdown hence; the demand for housing is more than the supply, thereby, giving a lot of scope for the company to increase their revenue. Also, the house prices have gone up due to a shortfall in supply and availability of low interest mortgage finance. The cost of sales has also increased but the increase is less than the increase in revenue. This has been achieved by the company due to its efforts towards improvement in operational excellence by reducing cost of raw materials procured. The gross profit has increased by an impressive 35% and the operating profit has also increased by a remarkable 41%. This has been possible because of lower operating costs which include both cost of sales and selling and administrative expenses and increased revenue. The net profit has increased by a whopping 47% as the interest expense has gone down. The company has had a strong Balance Sheet in 2015. The current assets have increased by 21% as the cash balance has increased by 31%. Also other current assets like inventories and receivables have increased. The current liabilities have also increased by 22% mainly due to an increase in taxes payable, trade and land payables and accruals and deferred income. The short term debt has reduced. The non current assets have remained stable with a fall in 3.2% due to a fall in deferred income taxes. The non current liabilities have increased by 25% due to an increase in trade and other payables and a marginal increase in long term debt by 1 million. The Equity has increased by 10.5% due to an increase in the retained earnings by 18%. The share capital has also increased by 1 million. The cash position of the company has been strong in 2015. There has been an increase in cash from investing and financing activities by 216% and 38% respectively. The cash flow from investing activities has increased due an increase in the investments accounted for using the equity method; there was a decrease in these investments in 2014 by 59 million. The financing activities is negative but better than 2014. The inflow has been only in the form of issue of share capital of 1 million whereas the outflow is of approx 145 million accounted by dividends paid and loan repayment. The cash inflow from operations has reduced by 58% mainly due to an increase in inventory by more than 100% and increase in taxes paid. There has been a remarkable increase in net cash by 500% in 2015 as compared to 2014 with a positive cash balance of 86 million, thus making it a cash rich company. From the above analysis of the items of the financial statements, we see that the Income Statement has improved considerably, the Balance Sheet has remained mostly stable with only major movement in inventories, and the Cash Flow Statement has also improved significantly. Financial Ratios Profitability Ratios The profitability ratios have improved in 2015 as compared to 2014. The gross profit margin has improved by 2.2% due to an increase in revenue and a fall in cost of sales. The operating margin is 15.3%, an increase of 2.4% from 2014. The interest expense has reduced as the company has paid back some of its debt and there are no short term debts. The Return on Equity is 12.1%, an increase of 3% from 2014. The increase is due to an increase in the net income attributable to the equity shareholders. The share capital has increased by only by 1 million whereas the net income has increased by 47%, thus increasing the returns on equity. The company has not paid high dividends; rather they have retained the profits which they will use for growth of the company, thus promising a bright future for the shareholders. The Return on Capital Employed (ROCE) for the company is 13%, an increase of 2.5% from 2014. This capital employed has reduced by 23 million due to a decrease in debt of the compan y by approx 24 million whereas the equity has increase only by 1 million. The increase in ROCE is due to an increase in EBIT by 41%. This means the returns on the capital employed have improved significantly. The overall profitability of the company has been very good in 2015 and 2015 has been the year of highest ever profit before tax. Efficiency Ratios The Total Assets Turnover ratio is 0.6 for both 2014 and 2015 with a slight increase in 2015 by 0.04 points. The revenue as well as the total assets both has increased with increase in revenue being slightly more than the total assets. There has been almost no improvement in the efficiency with which the company is utilizing its assets to generate revenue. The Industry Standard for a Construction Industry Assets Turnover Ratio is 0.8, so we can say that Barratt Developments is not up to the industry standards and the company should try to utilize its assets better. The Inventory Turnover has is 0.7 for the company whereas the industry standard is more than 1. We can say that the company has managed its inventory better than the other companies in the industry. The number of days of inventory turnover has increased by 10 days but the increase is very less as compared to the increase in inventory, thus signifying improving inventory turnover. The Receivables Turnover has reduced in 201 5 to 24.6 lower by 6 points. But the industry turnover for receivables turnover is 15; hence, the company is not up to the industry standards. It is not utilizing its receivables properly to generate revenue. The company is providing more credit than what the other companies in the industry are giving. The receivable turnover days has increased to 15 days which means on an average it takes 15 days for the company to recover its sales revenue. The company needs to work on its inventory and receivables management to match up to the industry standards. Liquidity Ratios The Current ratio of the company is 3.3 in 2015 almost similar to what it was in 2014. The current ratio should be more than 1 as per industry standards; hence the company is quite liquid as per industry standards. The current assets are sufficient to pay for the companys liabilities. Looking at the Quick Ratio, which is only 0.4 because most of the current assets of the company are in the form of inventory. A lot of cash is tied up in the inventory making the company less liquid in short term i.e. the company is not in a position to release cash immediately. However, this is the nature of a construction industry as the product they sell i.e. homes and buildings have a long construction period which is why the product of the company is mostly in WIP and it may take years for a product to complete, thus increasing the inventory. The Interest Coverage Ratio has improved by 300% in 2015 due to an increase in operating income and a decrease in interest expense. The company is comfortably able to pay for its finance charges from its operating income, thus making the company liquid. Financial Stability Ratio The Gearing ratio of the company is 0.05 in 2015 a slight increase from 2014. The company has very low debt as compared to the equity share capital. In the year 2015, the company has further reduced its short term debt by 24 million and increased the equity by 10.5%. The company relies mostly on its equity capital for funding its operations. Though this makes the company quite stable from shareholders point of view, but the company is unable to use the debt to gain tax benefits and has very low gear. Investment Ratio The Dividend Yield Ratio is 2.2% in 2015, an increase of 0.7% from 2014. The increase is due to a market capitalisation increase and an increase in dividends paid. It is good news for investors as there is an appreciation in the market value of the share and also an increase in the dividends paid, thus giving them more cash returns. Performance and Position up to December, 2015 Looking at the above analysis, we can say that the company has a strong profitability and stability. Even the liquidity is good looking at the nature of the industry the company is. The returns to shareholders are also satisfactory. The performance of the company has been quite satisfactory in 2015 with increasing profits and a strong balance sheet. A potential investor could look at investing in the company as it gives goods return on stocks and the fundamentals of the company are also strong with a strong future outlook instigated by a clear strategy and continuous improvement in management and operational capabilities. Possible Improvements to the Companys Annual Report Disclosure of dividends policy and practice Currently the annual report of Barratt Developments Ltd. does not have a dividend policy disclosure in the Accounting Policies. There is a mention of the dividend policy on page no. 17 of the annual report, but a detailed policy is not given. The policy is needed in the annual report as it reflects the companys cash and capital management process. Both debt and equity investors are interested in knowing how the company balances between the various competing priorities like investment needs, targets of credit rating agencies and other forms of return to stockholders. The policy could be either Progressive or payout ratio. Also, the disclosure would include how the company worked in order to deliver according to the policy. The above policy will appear on page no. 112 117 in the Accounting Policies section of the annual report. Reporting of Pay and Performance Currently the pay is reported in the Remuneration report section of the annual report. FRC lab suggests that the remuneration information should be clear and simple. The investors favour scenario charts being prepared which will access the relationship between the remuneration of the CEO and the company performance. The company is expected to provide three scenario bar charts i.e. when performance meets, exceeds and falls below the target. The bar chart will have the breakup of total remuneration into fixed, annual variables and long term incentives. Currently, the annual report of the company provides only the details of each of the executive directors salary; the scenario charts are not included. The above reporting of pay and performance will be done in the Remuneration Report given on page no. 75. Presentation of the Operating Cash Flow Currently the details of the operating cash flow by the indirect method are being shown in the notes to the financial statements. According to FRC lab reports, the indirect method of reconciling the profit or loss to the operating cash flow should be shown in the main part of the Cash Flow Statement. This is helpful to the investors when they view the annual report on the electronic media. The above suggestion of reporting the Operating Cash Flow in the main Cash Flow Statement would be given in the Financial Statements section of the annual report present in page no. 111. Appendix a) Consolidated income statement /consolidated statement of comprehensive income Consolidated statement of financial position Consolidated cash flow statement b) Financial details and Ratios References Barratt Developments Plc, (2015), Barratt Development Plc Annual Report and Accounts, 2015 Morningstar, (2015), Barratt Developments Plc Financials, accessed on 20th January, 2016, available https://financials.morningstar.com/ratios/r.html?t=BDEVion=gbrculture=en-US Ive, G., Murray, A., (2013), Trade Credits in the UK Construction Industry: An Empirical Analysis of Construction Contractor Financial Positioning and Performance, BIS Research paper no. 118, Department of Business Innovation and Skills CSImarket, (2016), Construction Services Industry: Efficiency Information and Trends, accessed on 20th January, 2016, available at, https://csimarket.com/Industry/industry_Efficiency.php?ind=205 FRC, (2012), Lab Project Report: Operating and Investing Cash Flows, The Financial Reporting Council Limited FRC, (2015), Disclosure of Dividends policy and practice, The Financial Reporting Council Limited FRC, (2013), Lab Project Report: Reporting of Pay and Performance, The Financial Reporting Council Limited Yahoo finance, (2016), Barratt Developments Plc, Historical Prices, accessed online on 20th January,availablehttps://in.finance.yahoo.com/q/hp?s=BDEV.La=05b=30c=2014d=05e=30f=2015g=m