The ratios are calculated and cleverly predicted by using the tools of the financial analysis. Ratios are basically arithmetic terms the 'relationship between figures drawn from financial statements' (Needham. D & Dransfield. R, 1994, p.481)
Financial ratios offer a good and quite simple means of investigating the financial health of a company. 'Ratios can be very helpful when comparing the financial health of different businesses' (Tyran. M, 1992, p.67)
Ratios can be made into definite categories, each of them shows a respective aspect of financial position of the company. That includes 'Profitability Ratios, Liquidity, Efficiency, Long term solvency.
This report compares and contrast of the two companies, one company which already assigned is Bellway plc, comparing with the Berkely group holdings plc.
Company profile
Bellway plc (2009):
They are the 'leading in building the houses providing first class quality homes and services to their valuable customers in a consistent way in good environmental conditions for the assistance of their shareholders, members of the company
The company having 46 years of foundation, and the key activities are land acquisition, planning, finance, architecture, design, building management and customer services. It is one of the Britain's most successful housing building group. It is very aggressive in every piece of the nation and builds across the housing spectrum from the small houses to the luxury houses, offering good quality and worth full value for money.
Berkeley Group holdings plc (2009):
The company having 34 years of foundation in providing the beautiful homes from the small apartments to the luxury houses and property development focussed on the urban restoration. This group is one the fastest growing in the field of housing. They produce a wide range of products for satisfying all sectors in the market.
FINANCIAL RATIOS OF BELLWAY PLC AND BERKELEY GROUP PLC
PROFITABILITY RATIOS
The ratios that are used to assess the financial concert of the company, which can be calculated by using the profit, loss and balance sheet of the companies. It shows the effects on the liquidity, asset management and liability on operating results.
Gross Profit Margin:
This ratio measures the gross profit in relation to net sales. It says that how much of the profit remains out each pound of sales. Take an example a Gross profit margin of 0.03(3%) means that for each and every pound of sale, 3% of the pound gross profit to the organisation.
Gross Profit margins:
Name of Company
2009
2008
Bellway plc
3.04%
9.82%
Berkeley group plc
28.45%
30.70%
Table-1
Berkeley group plc has the highest gross profit gain than the Bellway plc in both of the years with higher volume of the sales. Factors such as competition among the companies, types of the customers, the poor economic factors will also effects the gross profit of the business. The high gross profit margin means that better the organisation is capable of controlling of the costs by the reduction of the production costs. The high gross profit margin is a sign of the good direction of the company. A gross profit margin can be increased by cost of goods sold remains unchanged but higher of sales prices (or) sales price remains unchanged but lower the cost of goods sold. There is a lot of variation in gross profit between the two companies, Berkeley group maintains the good profit margin than the bellway group plc.
Net profit margin:
This ratio shows 'what is left of the sales revenue after all the expenses of running the company (or) organisation. (Wood, F &Sangster, A, 1999, p.76). It shows the overall efficiency of the company is to turn the each pound of sales in to net profit. If the gross profit falls down it may be interpret that either the price of sales has declined (or) production cost has increased.
Name of company
2009
2008
Bellway plc
3.08%
4.70%
Berkeley Group plc
17.77%
20.77%
Table-2
The main reason for gross profit is declined because of the declination in the high cost. High cost in turn occurs due to the inefficient operations i.e. the long term debt .There is a unfair comparison between Berkeley Group plc and bellway plc, the berkely group is having higher net profit than Bell way plc with less number of sales. The Berkeley group is having net profit margin reduced from 20.7% to 17.7% because of reduction of cost of sales. The net profit margin should 'as high as possible. Both these companies are increasing the price of sales and deducting the cost that can pick up the net profit margin.
Return on Capital Employed (ROCE):
This ratio is used to contrast the profits earned to the funds used to generate the sales generally before the tax and interest. It is the 'best way to assess profitability' (Dyson, T , R, 1997, p.178 ). By calculating the R.O.C.E for getting the better idea in profitability of the company is achieved. It is the 'fundamental measure of the company performance'. (Atrill, P and Mclaney ,E, 2001,p.147).
Name of the company
2009
2008
Bell way plc
13.53%
27.0%
Berkeley group plc
15.45%
29.70%
Table-3
The above ratios clearly showing that Berkeley group is having the highest ROCE than Bellway plc therefore Berkeley group plc is in the good position but the figures are similar for both of these companies. When the ROCE is high means the company performance is good.
LIQUIDITY
Current ratio:
This Current ratio is used to measure the ability of the company to meet the current obligations (or) short-term liabilities (Mitson , A, 2002,p.11). Current assets include cash, inventories and market securities. Current liabilities consist of payables, accured taxes & expenses, long term debts. The current ratios of both of the companies are as follows:
Name of the company
2009
2008
Bellway plc
5.30 times
4.95 times
Berkeley group plc
2.15 times
2.13 times
Table-4
From the above table we can say that in 2009 the current assets were 5.30 times than the current liabilities of the bellway plc, and that has not much fluctuated throughout the years. According to the Berkeley group plc in 2009 the current assets are 2.15 times of the current liabilities, the ratio is not much fluctuated throughout the years. The reason for such stability is not investing extremely on the assets and not having any big amount of loans. If have a look at the balance sheet then the assumption get more sensible, but the assets are higher than liabilities which represents the partial increment in the ratio.
Quick ratio (or) Acid test ratio: It is the indication of liquidity position of the company, refers to the liabilities, assets of the company except inventories.
It is not easy to organize the stock in the short term as they cannot always be instantly turned into money, but the firm would be depriving itself of assets to make profit. Therefore if stocks were not included what will happen to the working capital ratio (Grey R et al, 1996, p.164) from the definition of current assets. So this must be the better to find out liquidity position of the firm because it excludes the stocks (i.e. it's already sold)
From the following table shows the quick (or) acid test ratios of both of the companies
Name of company
2009
2008
Bellway plc
0.385 times
0.486 times
Berkeley group plc
0.498 times
0.035 times
Table-5
From the above values we can analyze that there is a slight increase in the ratios just like current ratios. So the liquidity position of the company is good, but at the same time they can't in a position to recover the same. The profit gain margin was not high so they can make some of the investments paying off the liabilities as a result there is an increment in the assets and decrement in the liabilities to make the liquidity position good.
LONG TERM SOLVENCY
Gearing ratio:
It can be explained as the proportion of the debt and equity in the firm. A company is high geared when it is having the high proportion of debt in relation to its equity and vice versa.
The table shows the gearing ratios of the both companies
Name of company
2009
2008
Bellway plc
9.05%
2.68%
Berkeley group plc
6.70%
6.60%
Table-6
The ratios are clearly saying that bellway is having higher gearing than berkely group plc. The difference is that the bellway is getting better returns on equity, Berkeley group doesn't have the preference shares. The higher the gearing a company has' (Dyson, J, R,1997, p.325) the bigger the risk for share holders because of the less economic situations, but the returns are higher the good the business is. The berkely group plc has less gearing so therefore less proportion of debt in relation to equity. Finally both companies are not in financial risk because they are in less gearing.
Interest cover:
It is used to 'measure how secure the payment of interest is' (Mclaney, E, J,1997,p.365), clearly say that it is to determine the sufficiency of firm profits that is associated to interest payments on its debt. Greater the risk if the interest cover is less, the profit is not enough to cover interest payments.
The below table shows the interest cover values for both of the companies
Name of the company
2009
2008
Bellway plc
-3.08
2.309
Berkely group plc
118.95
32.196
Table-7
The Berkely group plc is having the high interest cover than bellway plc. So the financial risk is low for Berkely group plc, the financial risk is high for bellway plc because the firm have to pay more interest, it creates the higher burden on the firm. The higher interest cover means more the lenders are having.
WORKING CAPITAL RATIOS
There are various ways to calculate the efficiency of the organisation. There are as follows
a. Inventory days:
Another name for inventory days is stock turnover means 'it measures the period for which stocks being held' (Tyran, M, 1992, p.143).
The below table shows the inventory days of both companies
Name of the company
2009
2008
Bellway plc
666 days
529 days
Berkeley group plc
809 days
654 days
Table-8
The lower the stock turn over period is better than higher stock turn over period, as funds tied up in the stocks it cannot be used for different purposes. Bellway has higher level of stocks means that lower turnover. Bell way has better position for selling their houses in the less span of time than Berkeley group. Berkeley group has to carry the business have to consider the future demand, mortgage facilities.
Receivable (Debtor) days:
Fixed assets are the best investment for real estate groups, but there is not much in generating sales if the people do not pay for them. Customers should encourage buying more by a 'combination of lower prices and to generous credit terms' (Bendry, M et al, 2002,p.167).
The below table shows the debtors days are
Name of the company
2009
2008
Bellway plc
5 days
4 days
Berkeley group plc
24 days
6 days
Table-9
Bell way receivable (debtors) days is better than the Berkeley's because it produces an average figure for the number of days that amount overdue are outstanding. The effect on the cash flow business by the speed of the payment. So less span of settlement period is good for the lower one.
Creditors (payables) days:
This will explain that 'how long, on average, after purchasing on the basis of credit the firm meets its obligation' (Fleming, Mckinstry, S, 1998, p.34) to pay for the goods. A good and well creditor's policy is that the firm preserving the good will of the suppliers and at the same time the firm will taking free credit as possible.
The below table shows the creditors days of both the companies
Name of the company
2009
2008
Bellway plc
28 days
242 days
Berkely group plc
142 days
155 days
Table-10
The ratio is higher for Berkeley group plc than Bell way plc. Higher the ratio of Berkeley group plc suggests that there is a difficult in finding the money to pay for its creditors. Higher the ratio means that it is having a longer settlement period, so there is a result in the loss of the goodwill by creditors.
CORPORATE GOVERNANCE
Corporate Governance
Corporate governance will discuss about the responsibilities and roles of a company and to what extent the company can use the rights. Without corporate governance company cannot legally operate. Corporate governance describes all the influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services. Described in this way, corporate governance includes all types of firms whether or not they are incorporated under civil law. Corporate governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations. Where the political scene is capital versus labour, "the investor coalition defined corporate governance in terms of 'meeting the challenge of financial globalization, fulfilling 'international standards of governance in the global competition for capital.'"
Corporate governance with the company.
According to the report the corporate governance is bad in 2009 it can be with the performance of the company .The performance effects the total management of the company and shows company is not responsible to manage the share holders funds. In the corporate governance company has intimated to lots of things for increasing the business but when compared to the report2009 it is totally different and the company is not at all ready in taking any kind of risk from its level of approach
ANALYSIS AND CONCLUSION
The gross profit margin and net profit margin of the Berkely group plc is better than that of the Bellway plc, so it says that Berkely group plc is good at converting of sales in to profits. The net profit margin says that both of companies achieve good price of sales.
The higher return on capital employed for the Berkely group plc says that good administration of the firm, share holders can trust on the firm, but the Bellway performance is poor so it's not suggestible for share holders.
The Liquidity is good for the Berkely group plc than Bellway plc, but the Bellway is in bad position in this area.
Berkely group plc performance is good than the Bellway plc in the concept of profits from ratios, there is a unfair comparison between these two firms and the concept of efficiency. Finally the better performance goes to the Berkely group plc, share holders can trust this company for buying the shares.
Appendix
Types of ratio Formulae Table number
Profitability:
Gross profit margin = *100 1
Net Profit Margin = *100 2
Return on capital employed= 3
(Or)
=
Liquidity:
Current ratio = 4
Quick ratio = 5
Long term Solvency:
Gearing = *100 6
Interest cover = 7
Working Capital Ratios:
Inventory days =*365 8
Receivable days = *365 9
Payables days =*365 10
