UNIVERSITY OF WALES, NEWPORT

NEWPORT BUSINESS SCHOOL

FINANCIAL ANALYSIS

Course Title: MBA

Module Title: Financial Management

Module number:
Module tutors: GEORGE (Great Dude)
NAME: HASSAN
ID #:
INTRODUCTION

Henry Boot is one of the UK’s leading property and construction organizations, with its four
principal trading subsidiary companies operating in the property development and investment,
land management, construction and plant hiring sectors (Annual Report 2009, P.02).

Henry Boot Developments Limited operates nationally in all sectors of property development.
The company has built up a substantial investment and perspective development portfolio in
recent years.

Hallam Land Management, land promotion business, promotes the Greenfield land planning
opportunities throughout the UK.

Henry Boot Construction specializes in delivering high quality construction work to both the
private and public sectors, primarily in the North of England. Road link ( A69) Limited, a 61%
owned subsidiary, operates and maintains the A69 Newcastle-Carlisle trunk road for the
Highways Agency under a PFI contract.

Banner Plant, plant Hire Company, provides accommodation compressed air and mechanical
plant and small tools to customers in the North and Midlands.
The Group’s main objective is to maximize shareholder value in the longer term through active
commercial development and land management, allied to recurring income from investment
property, PFI, construction and plant hire activities (Annual Report 2009 P.02)

In Annual Report (2009, P.04) they were continue to buy the land only very selectively and cut
their capital expenditure accordingly.

Planned to gearing up again as cash generated from investment property rentals and
development sales to reduce the net debt and continue to invest in securing planning consents on
Greenfield land portfolio to enable to supply the recovering house building market and where
the commercial development is capable of creating a viable long- term investment.

The property market continues to suffer the lack of liquidity so long- term aim remains the value
enhancement of land through development, planning promotion and construction.

FINANCIAL ANALYSIS

According to ‘businessdictationary.com’ financial analysis is the assessment of the

effectiveness with which funds (investment and debt) are employed in a firm, efficiency and
profitability of its operations, and value and safety of debtors’ claims against the firm’s assets.

It employs techniques such as ‘funds flow analyses and financial ratios to understand the
problems and opportunities inherent in an investment or financing decision. (Business
Dictationary).

Evaluation of firm’s stock is based upon firm’s financial statements and for this financial
analysis tool is used. So, financial analysis purpose is to measure the long term financial
stability, profitability and financial soundness of the firm. And it includes both ‘analysis and
‘interpretation’. So word analysis means here is the simplification of financial data and
interpretation means the explanation of that data. It’s also used to determine the financial
weaknesses and strengths by analyzing the income statement and balance sheet. It also involves
the overall financial health, management quality, economic and political conditions, industry
factors, marketing aspects and future outlook of the company or we can say it involves PESTLE
analysis as well.

Now, ‘Analysis’ part of Henry Boot could be done from Ratio Analysis which is about to
compare current financial data and ratios calculated below are:

RATIO ANALYSIS FOR THE YEAR ENDED ON 31 DECEMBER 2007 TO 2010

PROFITABILITY RATIO:

Profitability ratio is important to company managers and owners as it shows the company
overall efficiency and performance. E-g if a small business has outside investors who have put
their own money into the company, the primary owner certainly has to show profitability to
those equity investors.

Profitability ratios divided into two types: Margins and Returns. Ratios that show ‘Margins’
represent the firm's ability to translate sales pounds into profits at various stages of
measurement. Ratios that show ‘Returns’ represent the firm's ability to measure the overall
efficiency of the firm in generating returns for its shareholders.

1. MARGIN RATIOS:

Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at
how well a company controls the cost of its inventory and the manufacturing of its products and
subsequently passes on the costs to its customers. The larger the gross profit margin, the better
for the company. The calculation is: Gross Profit/Sales Revenue *100 = ____%. Both terms of
the equation come from the company's income statement.

Net Profit Margin

When doing a simple profitability ratio analysis, net profit margin is the most often margin ratio
used. The net profit margin shows how much of each sales pound shows up as net income after
all expenses are paid. For example, if the net profit margin is 5% that means that 5 cents of every
pound is profit.

The net profit margin measures profitability after consideration of all expenses including taxes,
interest, and depreciation. The calculation is: Net Profit/Sales Revenue *100 = _____%. Both
terms of the equation come from the income statement.

2. RETURN RATIO:

Return on Capital Employed:

The Return on Capital Employed ratio is perhaps the most important of all the financial ratios to
investors in the company. It measures the return on the money the investors have put into the
company. This is the ratio potential investors looking at when deciding whether or not to invest
in the company. The calculation is: Operating Profit/Capital Employed * 100 = _____%.
Operating Profit comes from the income statement and Capital Employed comes from the
balance sheet. In general, the higher the percentage, the better, with some exceptions, as it shows
that the company is doing a good job using the investors' money.
 Figure 1

ANALYSIS:

Higher gross profit means that company is showing good performance but the decrease in gross profit
margin can be result many factors like cost prices, discounting or decrease in selling prices etc. The ratio
shows continuous decrease in gross profit margin from 2007 to 2009 as from 33.94% to 23.94%. And
this causes due to the current recession of property which reduces the prices of property resulting an
incline value of GPM form 2007 to 2009.

Increase in net profit means the company is making good profit in the same period of time. Factors
which can affect the operating profit can be rise in product prices, decrease in cost price or rise in sales
volume of the products of the company. Decrease in cost price also have direct effect on net profit margin
as the value of assets decreases due to the global property recession which directly effect on company’s
profit so it decreases from 40.37% to 8.61% from 2007 to 2009 respectively.

ROCE ratio is also used to maximize the return on capital. This compares the capital invested and the net
profit earned by the company in the given period of time to measure the performance of the company.
The figure shows decline in ROCE in 2009 as compare to 2007 and 2008 as they reduce the total equity
from 182,219 to 176,200 from 2007 to 2009 respectively and with decrease in current liabilities from
134,138 in 2007 as compare to 89,958 in 2009. They also stick to the borrowings by reducing it almost
more than more than 65%.

CONCLUSION:

It is shown from above Figure 1 that Henry Boot has decline in profitability in 2009 and 2008 as
compare to 2007 due to the global economic recession in the property market which leads the prices gone
very down as a resultant the value of assets gone down. It can be observed from above discussion that
company cuts its expenditures like made very few purchases to stabilize itself and regain position in
market and to increase the profit as maximum in this time so this shows that company is really trying
hard for improvements as there is a huge decrease in liabilities as well which is a positive sign for
company’s growth.

LIQUIDITY RATIO:

These are the ratios which are calculated from balance sheet which shows financial situation of a
company that, weather the company is able to pay its bills and can make other payments. Usually lenders
have their interest to know about the company’s current situation to know that company can pay their
loans back. Current assets also known as liquid assets because these can be converted quickly into cash
like stock and loans etc. these ratios are used to evaluate the firm’s ability to evaluate the firm’s ability to
pay its short-term debt obligations such as accounts payable means payment to suppliers and accured
taxes and wages. liquidity of Henry Boot is shown in Figure 2 by using following tools.( George, P.61)

1. Current Ratio:

Current ratio is used to measure the ability of a company to pay its short term payables and
liabilities. If the current ratio is high it means the company is more able to pay its short term
liabilities. If the ratio is less than one it means that company is not able to pay its liabilities. So it
gives the idea that in operations, company can turn its assets into cash or not. The current assets
and liabilities on balance sheet that convert into cash within a year duration. So these Current
Assets/Current Ratio = ____ times make up the current ratio.

2. Acid-Test Ratio:
Acid test ratio and current ratio are quite similar but in acid test ratio inventories are not
included in acid test. This ratio reflects that weather a company can pay its short term
liabilities without selling its stock. It helps answer the question: "If all sales revenues
should disappear, could company meets its current obligations with the readily
convertible ‘quick' funds on hand?" (Peter, 2002 P.158)

Figure 2

ANALYSIS:
In current ratio as the figure 2 shows that Henry Boot has good current assets which increase
from 0.89 to 0.94 in 2009 to pay its liabilities as company has enough stock to convert it into
cash. But in 2008 company was not showing good performance in current assets reason being to
de-valuation of assets and very less business due to which inventory stocks got low. This is
obviously a good position for the firm to be in. It can meet its short-term debt obligations with
no stress.
The acid test ratio produced from Henry Boot shown in (figure 2) reflects that in the period of
2007 to 2009 it remains less than 1 which indicates that company is was not able to pay its short
term liabilities and company need to look for cautions. But the company is like a land and
construction business type and has much of its investment in type of property so can coup the
situation by selling its property.

CONCLUSION
The liquidity ratio of Henry Boot by using above indicators indicates that company is showing
its ability to pay its current liabilities only in current asset ratio. Except this company has very
poor performance in acid test ratio. Company need to look at its current assets and need to
decide further goals to achieve good results by making operational staff more efficient to get
more output.
EFFICIENCY
Efficiency ratio is one of the important scales to reveal that how well inventory is being
managed and measure the performance of any company which shows the internal
performance, i.e. company is dealing with its assets and liabilities in the same period because it
has direct effect on profitability and cash flow statement. It is important because the more times
inventory can be turned in a given operating cycle, the greater the profit. Here we are going to
calculate the efficiency of Henry Boot by using its annual reports of 2007/2008 and 2008/2009.
These ratios are derived from Balance sheet and Income Statement. Some of the efficiency
ratios are given below. (Barry et al. 2008 P.670-673)

1. Inventory Days:

It is used to measure the inventory turnover if the stock turnover is higher than company will be
more efficient which means money will be tied up for less duration in the form of stock.

2. Receivables Days:

It is very important for any company to control its debts. This ratio is used to measure the
debtor’s quality. It shows the time in which any enterprise collects its debts.

3. Payables Days:

Creditor days show the average time taken by any enterprise to pay its credits. It shows the
efficiency of business. If the credit payment period is less its mean company is working more
efficiently and making more profit. (John, 1996 P.29)

Figure 3

ANALYSIS:

It is illustrated in figure 3 that the stock turnover ratio is 369 in 2007, 159 in 2008 and 228 in
2009 days. But in 2008 company was more efficient in stock turnover. It also means that
company was making quicker profit by quicker stock turnover.
In debtors days figure 3 shows the average collection period of debts of Henry Boot in years
2007 to 2009, which is an average of 101 days.

In receivables days figure 3 shows that Henry Boot performance was more efficient in 2009 as
compare to 2007 and reason is due to their policy of not to make any more purchases in this hard
time of recession and simply minimize the receivables.

CONCLUSION:

It is concluded that the company emphasize on recovering itself rather to make anymore
investment in recession. As there is a positive effect on stock turnover just according to demand,
increase its collection period of recovering from debts and minimize its loans.

LONG TERM SOLVENCY:

It is used to measure a company's ability to meet long-term obligations. It provides a

measurement of how likely it is a company can continue to meet its debt obligation. A high
solvency ratio indicates a healthy company, while a low ratio indicates the opposite.
Potential lenders may take the solvency ratio into account when considering making
further loans. (Investopedia)

1. Gearing Ratio:

Gearing ratio describe the financial position of the company and it is measure of financial
leverage and indicate to which degree company can be funded from owner equity by measuring
its capital structure. If the company has more gearing ratio its mean company is more at risk.
The gearing ratio of Henry Boot is given in figure 4. (John, et al. 1996 P.15-30)
 2. Interest Cover:

Interest cover is about the company is earning enough profits in order to cover its interest on
borrowings. The Interest cover ratio of Henry Boot is illustrated in figure 4.

Figure 4

CONCLUSION
Looking at the gearing Henry Boot got a decrease in gearing ratio from 15.50 to 10.28 which
means company is progressing now again.

As more the interest ratio the better is the financial position of the company. Here the interest
cover increases from -11.09 to -4.48. This means they are progressing to pay the payments
towards their debt but still they have difficulties on the other side the gross profit indicates that
they are progressing but not as well as they were progressing in 2008. (John, 1996 P. 56-59)
COMPETITOR ANALYSIS:

There is a very huge competition in property and construction industry though many competitors
are there and all are going to catch as many fishes as they can of land and construction projects.

Henry Boot faces a huge competition from its competitors and from all one is Carillion.
Carillion is growing at very fast rate. It goes global it got multinational experience and bigger
projects like in Canada and the Caribbean, Middle East and North Africa as an additional
some big contract projects of more than 30 years gives an edge to dominate as they got some
security in future as well as they got Uk railways projects as well. The downward phase of
recession cycle doesn’t affect that company. Carillion enjoy the fruits of its projects in Dubai.
They got 4% increase in revenues in 2009. Last year they were in an operating loss and now they
are making profit. There is a 12% increase in dividends. And 18% increase in earnings per share
so more investment is coming.
Henry Boot continue to operate throughout the UK they are going to bring forward the food
store as well latter in 2010. There are some factors need to be focus on and some of the issues
and reasons as well when comparing Henry Boot with Carillion. Henry boot suffered an
operating loss due to downturn turmoil in land and construction sector due to which company is
unable to get profits and dividends so in order not to be as much affected by this recession the
company is going to minimize its inventory levels and borrowings in order to create its good
image in the market. There are certain other environmental key risks are involve as well like
Treasury- the lack of readily available funding to undertake the property transactions can have a
significant effect on market place. Planning-increased complexity, cost and delay in the planning
process may slow down the project pipeline. Environmental-the group is inextricably linked to
the property sector and environmental considerations are paramount to their success. Economic-
they operate solely in UK and are closely allied to the real estate, house building and
construction sectors. A strong economy with strong tenant demand. And moreover the
company’s KPI’s are Profitability growth, cash generation and level of debts, forecast cash
requirements, return on capital employed, share holder return, and asset value created. (Annual
Report 2009, P.16)

AGENCY PROBLEM
A conflict of interest arising between creditors, shareholders and management because of differing goals.
(Investopedia)

Now the conflict arises when the directors of the company wants to invest more and shareholder don’t
want to reason is though they put their money in business so they want actual results they want results in
a short period. In order to resolve this conflict ‘corporate governance’ term is used. It is the system by
which shareholders expectations can be fulfilled through different ways. It helps to establish and maintain
the good relationship between shareholders and directors of business by ensuring the reasonable and
sustainable results and make sure to introduce and apply laws among others.
The Institute of Directors (IOD) in South Africa (2002) identifies (7) characteristics of good corporate
governance these are discipline, transparency, independence, accountability, responsibility, fairness and
social responsibility.

Steps taken out with help of corporate governance:

• The group recognizes the importance of working in a healthy and safe environment with their
suppliers and clients.
• The directors of the company ensure to provide every information to the company’s auditors are
unaware of.
• Directors may be appointed by the company by ordinary resolution or by the board.
• Beneficial owners of shares who have nominated by registered holder of those shares to receive
information rights under section 146 of Companies Act 2006.
• Directors are responsible for preparing the Annual Report, Director’s Remuneration Report and
the Financial Statements.
• Details of the directors of the company are set out in Directors report.
• The main strategy of the company is set by the Board as a whole.
• The Executive Director’s performance is reviewed annually by the remuneration committee.
• The company has complied with the vast majority of the provisions of the June 2008 version
Code which are: A.1.2, A.4.1, A.4.2, A.4.3, A.4.6
• The Remuneration of Executive Director is fixed by the remuneration committee.

REFERENCES:

1. Financial Analysis. [WWW]

http://www.businessdictionary.com/definition/financial-analysis.html#ixzz17Blc8mbS
 2. George, F. Financial Statement Analysis. 2nd Edition

3. Peter, W. 2002. Financial Statement Analysis

4. Berry, E. Jamie, E. 2008. Financial Accounting and Reporting. 12th Edition

5. Agency Problem. [WWW]

http://www.investopedia.com/terms/a/agencyproblem.asp

6. John, B. Orio, Amat. 1996. Interpreting Accounts. 3rd Edition

7. Solvency Ratio. [WWW]

http://www.investopedia.com/terms/s/solvencyratio.asp

8. Financial Ratios. [WWW]

http://www.zeromillion.com/business/financial/financial-ratio.html

9. Rosemary, P. An Analysis of A Company’s Liquiditiy Position Using Financial Ratios. [WWW]

http://bizfinance.about.com/od/financialratios/ss/Overview_Liquidity_Analysis.htm

APPENDIX A

RATIO ANALYSIS
PROFITABILITY RATIOS:-
1) Return of capital employed = Operating Profit × 100 [where capital employed = total
equity + non-current liabilities]
Capital Employed

50,381 /182,219+182,219 *100 22,115/190,100+40,061 *100 (10,044)/176,200 *100

2007 2008 2009

21.88 % 9.60 % 4.76 %

2) Gross Profit Margin = Gross Profit × 100

Sales Revenue

42,363/124,782 *100 58,687/193,679 *100 27,899/116,524 *100

2007 2008 2009

30.94 % 30.30 % 23.94 %

3) Net Profit Margin = Net profit × 100

Sales Revenue

50,381/124782 *100 22,115/193,679 *100 (10,044)/116,524 *100

2007 2008 2009

40.37 % 11.41 % 23.94 %

 LIQUIDITY RATIOS:-
4) Current Ratio = Current Assert
Current Liabilities

114,538/134,138 88,819/111,690 84,809/89,958

2007 2008 2009

0.85 times 0.79 times 0.94 times

5) Acid Test Ratio = Current Asset – Inventory

Current Liability

114,538-83,403/134,138 88,819-59,011/111,690 84,809-55,433/89,958

2007 2008 2009

0.232 times 0.26 times 0.32 times

WORKING CAPITAL CYCLE RATIOS:-

6) Inventory Days = Inventory × 365
Cost of Sales

83,403/(82,419) *365 59,011/(134,992) *365 55,433/(88,6235) *365

2007 2008 2009

369.35 days 159.55 days 228.29 days

7) Receivable Days = Trade Receivables × 365
Sales

28,809/ (82,419 *365 32,385/ (134,992)* 365 28,814/116,524 *365

2007 2008 2009

127.50 days 87.56 days 90.25 days

8) Payable Days = Trade Payable × 365

Cost of Sales

55,259/ (82,419) *365 59,118/(134,992) *365 55,705/ (88,625) *365

2007 2008 2009

244.71 days 159.84 days 229.41 days

9) Gearing Ratios = Long Term Debt + Preference Share Capital *100

Share Capital + Reserves + Long Term Debt

30,980/199,775 *100 19,818/196,494 *100 18,655/181,431 *100

2007 2008 2009

15.50 10.08 10.28

11) Interest Cover = Profit before interest and Tax

Interest Payable

46,547/ (4,195) 19,273/ (3,427) (11,892) / (2651)

2007 2008 2009

11.09 5.62 4.48