1.0 INTRODUCTION This report describes an analysis and evaluation of the current and prospective profitability, liquidity and financial stability of Bellway Plc. The different methods of analysis include trend, horizontal and vertical analyses as well as ratios such as Current and Quick ratios and compared the performance with the industry using different financial tools such as working capital position efficiency and assessment of corporate governance statement. On the other hand director’s report is also taken into consideration which is explained in the report. 1.1 Company Profile: Bellway Plc (2009) The company was established in 1946 by John T. Bell & Sons and since its foundation they are providing quality homes and services to their customers of which the biggest example is that they have built 100,000 homes till now. The company is located in Newcastle, England which functions through a divergent structure of the company as a whole. The company has 13 regional divisions in all over UK which is responsible for making their own decisions in particular areas like housing types and design, materials and purchasing, construction methods, pricing, and sales which allows them to know their customer requirements in better way. (Bellway, 2010) In 1979 it was listed on the London stock exchange (Londonstockexchange, 2010). The company group pre-tax profit exceeded 1
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1.0 INTRODUCTION
This report describes an analysis and evaluation of the current and prospective profitability, liquidity
and financial stability of Bellway Plc. The different methods of analysis include trend, horizontal and
vertical analyses as well as ratios such as Current and Quick ratios and compared the performance with the
industry using different financial tools such as working capital position efficiency and assessment of
corporate governance statement. On the other hand director’s report is also taken into consideration which is
explained in the report.
1.1 Company Profile:
Bellway Plc (2009)
The company was established in 1946 by John T. Bell & Sons and since its foundation they are providing
quality homes and services to their customers of which the biggest example is that they have built 100,000
homes till now. The company is located in Newcastle, England which functions through a divergent
structure of the company as a whole. The company has 13 regional divisions in all over UK which is
responsible for making their own decisions in particular areas like housing types and design, materials and
purchasing, construction methods, pricing, and sales which allows them to know their customer
requirements in better way. (Bellway, 2010)
In 1979 it was listed on the London stock exchange (Londonstockexchange, 2010). The company group
pre-tax profit exceeded by £100 million in the year 2001 which was the biggest achievement ever seen in
their long history progress (Thefreelibrary, 2010). According to Dohetry (2007), Bellway builds houses at
lower price that they sell for an average of £173,000.
According to Annualreport (2009), a survey was undertaken by company and they got 300 positive
responses at the end of March 2009, 89% (2008 – 80%) in which the customers on account of their
satisfaction would recommend their friend to go for bellway homes. This reflects the goodwill of the
company in the present housing market.
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2.0 ANALYSIS OF FINACIAL POSITION OF COMPANY:
In the financial analysis ratios plays an important role which helps financial analysts to implement plans that
can improve financial structure and interest coverage. (Accountingissue, 2009)
2.1 PROFITIBAILITY RATIOS:
This ratio is more specific analysis of profit margin (Elliot and Elliot, 2004). The profitability ratio is the
primary factor for a business. Profitability ratios are concerned with the effectiveness of the business in
generating profit. (Atrill and McLaney, 2004)
RETURN ON CAPITAL EMPLOYED (ROCE):
This ratio explains the performance and earning power of the business. It considers the size of the profit
relevant to the size of the business and shows how efficiently funds are being utilised in the business during
that period. (Atrill and Mclaney, 2006)
Operating profit * 100
Capital employed
Note:: Capital employed = share capital + Reserves + Non-current liabilities
2008 2009
Return on capital employed 4.17 (1.94)
The company is having a negative return on capital employed of (1.94) % as compared to positive return of
4.17% in the previous year. This means that the company is having a poor return on its funds employed. The
reason for the change is that the company’s sales were down by 41% as they have sold 4380 homes which is
33% lower and the average selling prices of house has fallen by nearly 9.26% as compared to last year.
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There is a revaluation in work in progress and stock (land) due to the current market condition.
(Annualreport, 2009)
The fall in operating profit is also due to discounts and the incentives have increased as they were necessary
to generate sales (BBC, 2008).
GROSS PROFIT MARGIN:
According to Alexander and Nobes (2007) ‘gross profit is the difference between the sales price and the cost
of the goods sold. The gross profit margin is an indication of the extra inflow from an extra unit of sales’.
Gross profit margin =
2008 2009
Gross profit margin 9.82 3.04
From the working notes it could be seen that Bellway experiences a downfall in the gross profit margin of
around 3.04% compared to previous year it had a positive figure of 9.82%. The exceptional amount
amounted to £66.3m which is 49.3% less than previous year. The gross profit is also down from last year
before inclusion of exceptional as the sales is down by 41% as they have sold less number of homes, the
company has given discount and incentives to generate sales. According to the chairman statement in the
annual report another factor for less home sales was the major recession with a deteriorating economy, low
consumer confidence and poor mortgage availability. The mortgage approvals have fallen down by nearly
3300 since august 2008. (Annualreport, 2009)
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Gross profit * 100
sales
During this year Bellway’s other competitor Redrow also suffered losses of £140.8m (BBC, 2009).
Due to credit crunch and the press article clearly states that the mortgages lender are not funding up to 100
% of the amount required as they need some deposit (BBC, 2008).
NET PROFIT MARGIN:
According to Alexander and Nobes (2007), the net profit margin shows the amount of net profit a company
makes for every £1 generated in revenue.
Net Profit Margin =
Net profit Sales
2008 2009Net profit margin 4.70 (3.03)
The company is also having a negative return on net profit margin of (3.03) % as compare to positive return
of 4.70% in the previous year it means that company is not earning high profit margins at the expenses of
other aspects (Annualreport, 2009).
In comparison to 2008 the turnover of the company for 2009 is £683.8m with total expenses being £704.5m
whereas it is noticeable that expenses of £1095.4m are lesser than the revenue of £1149.5m in the year 2008.
Since the last five years it is observed for the first time that the company has experienced expenses in access
of turnover (Bellwaycorporate, 2010).
There is a revaluation in work in progress and stock (land) due to the current market condition which has
resulted in exceptional charge of £66.3m. The pension cost for 2009 has increased by £32m as compared to
year 2008 and because of that expenditure has increased and it affected the administrative expenses
(Annualreport, 2009).
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2.2 LIQUIDITY RATIO’S:
Acoording to Atrill and Mclaney (2004) this is concerned with the ability of the business to meet its short
term financial obligation. The ratios which are widely used are as follows.
CURRENT RATIO:
‘Current ratio is calculated by dividing current assets by current liabilities’
The current ratio measures the relationship between an organisation’s current assets and its current liabilities
(Brigham and Ehrhardt, 2007)
Current Ratio = Current Assets
Current Liabilities
2008 2009Current Ratio 4.95:1 5.30:1
It can be seen that the current ratio for the company is 5.30: 1 times in current year as compared to 4.95: 1 in
previous year. It means in year 2009 for every 1 pound liability the company has 5.30 times the current
assets. The rise in the ratios is seen as the company has increase its cash with cash generation and less
commitment towards land deals which have reduced current liability. They have reduced their expense also
by reducing headcount which will generate cash in near term. In comparison to the last year the trade
receivable has increased by 26.71% hence significantly raise the current assets. The company is going to
receive tax receivables what will lead to further cash flow in the operation (Annualreport, 2009).
We can compare and contrast the Bellway performance with their competitor companies in the industry as
follows: Year(2009)
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It can be seen that the company is having more or less the same ratio as per the industry and companies such
as Barrat plc.
Acid Test Ratio
Brighan and Houston (2009) suggests that acid test ratio is calculated by subtracting stock from current
assets and dividing the remainder by current liabilities.
Acid test ratio illustrates the company’s ability to repay immediate commitments using cash or near cash .The results of this ratios are more acceptable in terms of liquidity of the company .During the year 2008 the margin was approximately 0.48 but it was decreased to 0.38 by June 2009 it shows that Bellway has 0.38 pence of quick assets to meet £1 pound of current liability. During the end of the financial year the company has 650 units of closing stock in hand. Thus this has increased the volume of the inventories. The company has charged deposit from potential customers for registrations of land which has heightened the current liabilities under 'payment in advance'. (Annualreport, 2009)
The ratio for this industry when compared with other company is as follows. Year (2009)
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Bellway Plc 5.30:1Persimmon 3.53:1Barrat 4.37:1Bovis homes 8.64:1
Current assets – Inventories Current liabilities
2008 2009
Acid Test Ratio 0.48:10.38:1
Bellway Plc 0.38:1Persimmon 0.16:1Barrat 0.31:1Bovis homes 1.62:1
2.3 WORKING CAPITAL RATIO:
‘Working capital is the difference between a firm’s current assets and its current liabilities. The current ratio
also called the working capital ratio, is current assets divided by current liabilities’. (Stickeny et al., 2009)
Stock days:
This ratio explains how many days the stock is held before the sale takes place (Atrill and Mclaney, 2006).
Stock Days = Stock * 365 days
Cost of Sales
It is noticed from working notes that the stock days for year 09 are 667 days and for year 08 is 530 days. The
changes in the stocks days is that the company had to value their land again as the housing prices slumped
by nearly 9.26 % last year. During this year the company had closing stock of 650 units which reflects and
appreciation to inventories. (Annualreport, 2009)
Debtor Days:
According to Atrill and Mclaney (2006) This ratio explains how long the debtors take to make the payment.
This also says which credit policy the company is having and how effective it is. This average time taken by
debtor to pay the amount sometimes varies as the good debtor pays faster sometimes few debtors will delay
the payment.
= Trade Receivables * 365 days
Credit Sales
The trade debtors are paying in 6 days as compared to 4 days in previous year the company is not able to
collect its funds from debtors quickly. Bellway has brought a new scheme in housing market called Opening
Doors. In which the company agreed to receive three-fourth of selling value and the remainder to be paid
when the client is able to sell or re-mortgage. It reflects an increment in debtors. While looking into the
balance sheet it can be seen the trade receivables are higher this year as compared to previous year.
(Annualreport, 2009)
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Creditor Days:
This ratio’s explains how long the company takes to make its payment to the suppliers.
(Atrill and Mclaney, 2004)
Trade Payables * 365 day
Credit Purchases
It shows how many days the company is enjoying free finance. The company is making its payments to its
suppliers in 29 days as compared to 26 days previous year. The reduction in this is due to reduction in sale
and the cost of sales is done by 36% compared to last year. The management has gone for less number of
contracts commitments in the current market situation. The company has received at small deposit of £250
for registering the land of their interest and this has increased the creditors account under payment in
advance. (Annualreport, 2009)
2.4 LONG TERM SOLVENCY RATIO:
Long term solvency ratio are concerned with how a company is dealing with the long term debt or what measure is adopted for long term financing activities like issue of shares ,loans and so .
Gearing Ratio
The gearing ratio measures the contribution of long term lenders to the long term capital structure of the
business (Atrill and McLaney (2004). It shows how much the company is financed in terms of debt and
equity.
Long term debt + Preference share capital * 100
Share capital + Reserves + Long term debt
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The company is nearing less gearing ratio in current fiscal at 9.43% as compared to 22.76% in previous
year. As compared to previous year share capital has increased from 14372 to 14375 which shows that total
equity of the company has raised. In addition to that the company has paid the debts on bank borrowings
which have reduced the long term debt significantly by £180.9m than the value of total equity. The gearing
ratio is less for 2009 which shows that the position of the equity is stronger than the debt position.
(Annualreport, 2009).
INTEREST COVER RATIO:
This ratio measures the amount of profit available to cover the interest payable (Atrill and McLaney, 2004).
It has been observed that in year 2008 Belway had 2.84 time to cover interest payables portion and in the
year 09 the company has made an under recovery of interest to tune of (1.31) times. This is due to the
operating loss reported by the company after the inclusion of exceptional item.Due to inclusion of written
down value on option cost and part exchange properties the company has confronted operating loss which
has resulted in negative value of interest cover ratio. (Annualreport, 2009)
3.0 CORPORATE GOVERNANCE ASSESSMENT.
At the date 31th July 2009, the Board of Bellway Plc comprises of one Non-Executive Chairman, 3
Executive Directors, 3 independent Non-Executive Directors .The chairman of the board is Howard
Dawe who is the dependent executive director. The structure of the Board and the integrity of individual
Directors is such that no single individual or group dominates the decision making process.
(Annualreport, 2009)
As per the combine code [A.3.2] there is a balance in the number of the executive and non executive
independent directors (FRC, 2010).
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According to corporate governance all Directors have to submit themselves for re-election at least in
every three years, if they wish to continue and eligible according to the Board. It can be seen that the
roles of Chairman and chief executive director are separated where the primary responsibility of
Chairman is to run the Board, and chief Executive has responsibility to result and operate the Board, and
making proposals to the Board for the strategic development of the Group. In the year end 31 st July 2009
board scheduled eleven meetings in which four meetings were audit committee meetings and seven
meetings for Board Committee on Executive Directors’ Remuneration. (Annualreport, 2009)
According to FRC (2010), this criterion is in compliance with the provision A.2.2 of Combined Code
1. What did I learn from producing the coursework?
Answer:
This was my first time when I was doing the financial analysis for any company though I am not from commerce background but I was fully able to analyse financial concept with a practicable applicability and it helped me how to carry on with research works .After producing the coursework now it would be easy for me to go in more details about the financial concept. The work also helped me to realise my potential in critical thinking and reasoning.
2. What problems did I encounter when completing the assignment (if any)?
Answer: Nothing because I have attended all the classes so my concept was clear about it.
3. What would I do differently next time and what would have enabled me to do a better job ?
Answer: Firstly I will see what mistakes I have done and will try to correct it as well as will go for deeper study, with seeking advice from experts so that I can sense the practical difficulties in research and analysis during the business of a company.
4. When completing the assignment, which learning outcomes did I find easiest / perform best at ?
Answer: Ratio analysis and corporate governance are the two main areas of my research.
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5. When completing the assignment, which learning outcomes did I find most difficult / perform worst at?
Answer: While doing the ratio analysis and corporate governance, I have noticed that companies are having different financial year closings. As well as learned about board of directors that how they operate the huge business. The other thing was, to see whether a company board is balanced and independent or not .
6. Do I honestly believe that I have performed to the best of my ability?
Answer: Yes, I do believe that the input of work in this report was the best to my ability.