Executive Summary 4
Introduction to Bovis Homes Group PLC (BVHMF) 5
Objectives of this Report 5
Methodology – Three-Year Financial Performance Analysis through Ratios 5
Liquidity Ratio Analysis 6
Current Ratio 6
Quick Ratio 7
Overall Liquidity Performance 8
Debt Management Analysis 8
Debt-to-Equity Ratio 8
Interest Coverage 9
Overall Debt Management Analysis 9
Analysis of Operating Efficiency 10
Receivable Turnover (in days) 10
Inventory Turnover (in days) 11
Fixed Asset Turnover (in times) 11
Overall Efficiency Management 12
Analysis of Profit Generation Capacity 12
Net Profit Margin 13
Return on Equity 13
Valuation Using Forecasted Dividend Growth Model 14
Investment Decision – Conclusion 14
References 16
Appendices 17
Appendix A – Income Statement 17
Appendix B – Balance Sheet 19
Executive Summary
This report contains financial performance analysis of Bovis Homes Group PLC (BVHMF) from 2012 to 2014 by examining of different ratios such as liquidity, debt management, efficiency and profitability. It is found that the company is in overall good position due to faster sales generation, quick cash collection, employment of zero short-term debt in capital structure as well as strict cost controls to increase net profitability from 2012 to 2014. The interest rate risk is also kept to a controlled level since Bovis Homes Group PLC (BVHMF) relies completely on trade credit from suppliers and long-term debt. The only problem with Bovis Homes Group PLC (BVHMF) is that its management is inefficient to manage liquidity though the cash and receivable balances increased from 2013 to 2014. An investment decision is also derived from all of the financial performance analysis which is a primary concern of conclusion section.
Financial Performance Analysis of Bovis Homes Group PLC from 2012 to 2014
Introduction to Bovis Homes Group PLC (BVHMF)
It is a British house-holding company which is headquartered in New Ash Green, Kent. Bovis Homes Group PLC (BVHMF) is traded as one of the important constituents of FTSE 250 Index. In the house-hold and real estate property market, Bovis Homes Group PLC offers its customers a wide range of one bedroom to six bedroom housing. Bovis Homes Group PLC not only undertakes specialisation in retirement living division but also assumes undertakings in designing and building for British housing associations.
Objectives of this Report
The purpose of this research report is to execute financial performance analysis of Bovis Homes Group PLC (BVHMF) over a three year period from 2012 to 2014. This is to be done by examining the financial ratios derived from financial data of Bovis Homes Group PLC from 2012 to 2014. Based on certain findings, a judgment will be passed if the company’s stock is a good buy in the money and capital market (stock market) or not. Should investors extend financial support to Bovis Homes Group PLC is major concern of all such analysis and investment decision.
Methodology – Three-Year Financial Performance Analysis through Ratios
This section is aimed at performing an extensive financial performance analysis of Bovis Homes Group PLC (BVHMF) through examination of different ratios over a three year period, from 2012 to 2014. Different ratio categories such as liquidity, debt management, operational efficiency and profit generation capacity are assessed from a detailed perspective in this section.
Liquidity Ratio Analysis
Divided into current and quick ratio, this category of financial ratio measures the capability of BVHMF to manage working capital operation and repay short-term creditors or trade suppliers . To perform examination of liquidity management practices of BVHMF, the following ratios are considered:
Current Ratio
This ratio is calculated by dividing the total current assets by total current liabilities of Bovis Homes Group PLC from 2012 to 2014. Analysis of financial performance from 2012 to 2014 makes it apparent that BVHMFfaced liquidity management issues from 2012 to 2013. This was so because cash and receivables declined by sixty five percent and fifty three percent from 2012 to 2013. For the first time in 2012, BVHMF made short-term investments which it withdrew completely in 2013 that contributed to its financial distress in 2013. Tax liabilities increased by forty two percent approximately whereas trade credit from suppliers increased by 8.15%. Total current assets of BVHMF increased only by six to seven percent whereas total current liabilities increased by more than eight percent from 2012 to 2013.
However, the liquidity strength of Bovis Homes Group PLC improved from 2013 to 2014 because cash balances increased by a substantial margin while receivables against credit sales skyrocketed by forty percent in total. Total current assets increased by 20.68% while net current liabilities of BVHMF increased by almost twenty four percent from 2013 to 2014. For more comprehensive analysis, quick ratio is investigated to perform acid-test for this company.
Quick Ratio
This ratio is also known as acid-test ratio because it considers only the highly liquid current assets in the equation. Inventories and prepayments are ignored or disregarded as they can never be sold without a decline in their financial worth. In other words, these two can only be sold at a Forced Sale Value (FSV). However, cash, marketable securities and receivables are considered highly liquid in the money and capital markets .
Analysis of three year financial data and ratios, from 2012 to 2014, reveal that Bovis Homes Group PLC has been suffering from liquidity management problems since 2012. The liquidity management practices of BVHMF weakened dramatically from 2012 to 2013 because of rise in ending inventories which increased by 12.38%. Additionally, increase of 150% in prepayments harmed the liquidity strength of BVHMF from 2012 to 2013. Moreover, increase in current liabilities by more than current assets contributed heavily to the financial distress of Bovis Homes Group PLC from 2012 to 2013.
In 2014, as cash and receivables increased by substantial margins while inventories and prepayments posted a mere increase, the liquidity management of Bovis Homes Group PLC improved further. Despite this, the larger portion of Bovis Homes Group PLC’s current assets were locked in rising stock unsold ending inventories and prepayments in all years. Because of this, one can say that the risk of default in case of BVHMF.
Overall Liquidity Performance
Bovis Homes Group PLC (BVHMF) has been providing less safety margin to its short-term creditors, suppliers, vendors or trade creditors in all years from 2012 to 2013. Bovis Homes Group PLC is unable to control rising levels of inventories and prepaid expenses. Due to this, the financial distress of BVHMF has damaged its ability to address concerns of trade creditors. A slight decline in the value of liquid current assets will greatly harm the liquidity management practices of this organisation under review.
Debt Management Analysis
Here, the ability of Bovis Homes Group PLC (BVHMF) to manage debt in the capital structure and service its fixed interest payments is analyzed by examining different debt management financial ratios using the following tabular representation:
Debt-to-Equity Ratio
After analyzing the balance sheet items concerning debt portion of BVHMF, it is found that since 2010, this company has never employed short-term debt in its capital structure. Instead, Bovis Homes Group PLC has been relying more on long-term debt since 2010 to escape frequent volatility in interest rates.
For managing its working capital operations, BVHMF is focusing more on applying for trade credit from suppliers. This activity has helped the company to escape unfavourable fluctuations in short-term interest rates. Though, BVHMF has been relying more on long-term debt, yet the use of this debt portion is kept to an optimal or controlled level in the capital structure.
Interest Coverage
This ratio measures the capacity of BVHMFto service its debt obligation or fixed interest payments on regular time intervals. Analysis of financial ratio reveals that Bovis Homes Group PLC has been making industrious efforts to improve capabilities to repay lenders. In 2012, BVHMF had £10.48 in its pocket against the repayment of £1 in interest expense. This ability increased in 2012 and 2014 as well for which one can say that Bovis Homes Group PLC is in good position to repay its lenders.
As identified in the previous debt ratio, Bovis Homes Group PLC has been relying more on long-term debt instead of short-term debt, zero exposure to short-term interest rate volatility has helped the company to control bankruptcy risk. This is the only reason for which the debt servicing capacity of BVHMF is increasing though more long-term debt is employed since 2010.
Overall Debt Management Analysis
As Bovis Homes Group PLC is relying more on long-term debt instead of the shorter one, its exposure to interest rate risk is kept to a controlled level. Due to this zero volatility to unfavourable fluctuations in short-term interest rates, this U.K. Company has been able to increase its debt servicing capacity since 2010. Though BVHMF is providing less safety margin to short-term creditors or trade suppliers, yet this company promises lucrative/ higher safety margin to debt-holders and lenders.
Analysis of Operating Efficiency
This section makes discussion about the strengths of Bovis Homes Group PLC (BVHMF) to generate cash from inventory sales and cash collections against credit sales while repaying its short-term creditors/suppliers. Different efficiency ratios are analysing considering the following table:
Receivable Turnover (in days)
This ratio measures the frequency with which BVHMF makes cash collections from its clients to whom credit sales facility was extended from 2012 to 2014. Analysis reveals that the management of BVHMF has been making productive efforts to collect cash from customers to manage its liquidity problems. Since the nature of business operated by Bovis Homes Group PLC depends heavily on proper cash reserve and management, it was important that fewer sales of housing facilities should be extended against credit.
Since 2012, BVHMF is collecting cash from customers more quickly than before. For instance, the company’s management became efficient to collect cash from customer within fourteen days in 2014, compared to fifty three days in 2012. Here, it is observed that BVHMF became efficient to collect cash forty days earlier from 2012 to 2014. This could be related to consistent increase in cash sales and collections efforts since 2012.
Inventory Turnover (in days)
This financial ratio helps analyse the frequency within which Bovis Homes Group PLC can sell its inventories of housing facilities once they are constructed and ready to be lived in . One must understand that building housing facilities and selling them in the real estate market is a time-consuming activity. One must be very patient if pursuing such types of businesses, as undertaken by BVHMF.
Analysis reveals that, in 2012, Bovis Homes Group PLC was able to find a customer and sell housing facilities in an average of 922 days. As the market reputation of Bovis Homes Group PLC improved gradually, the company found it easy to access target customer base and sell housing schemes. Prominently, BVHMF sold its constructed inventories within an average period of 786 days in 2013, which 136 days earlier compared to sales period in 2012.
The capacity to construct housing facilities and sell them to the target market improved further in 2014 when Bovis Homes Group PLC sold inventories in 625 days which is 161 days earlier compared to 2013. Therefore, one can be easily convinced that constructing houses and selling them has become smoother for BVHMF as the corporate image and efficiencies of this company improved over time.
Fixed Asset Turnover (in times)
As the business concern for Bovis Homes Group PLC is to construct housing facilities and sell the same to its customers through transfer of title and ownership, the company must be using its financial resources to acquire and maintain fixed assets. Therefore this financial ratio is selected to examine the extent to which this business entity utilises its fixed assets to generate sales revenue.
After analysing the situation, it is found that the capacity of Bovis Homes Group PLC to effectively and efficiently utilise all of its fixed assets to generate sales revenue has been increasing since 2012. For instance, in 2012, the company under review generated revenue of £36.18 for each £1 invested in acquisition and maintenance of fixed assets. This position improved in 2013 and 2014 where BVHMF now generates total sales revenue of £59.6 by the end of financial accounting year 2014.
Overall Efficiency Management
With a careful analysis of operational efficiencies of Bovis Homes Group PLC (BVHMF), it is found that this company has been efficient in collecting cash from customers, generate sales in less time than before and is efficiently as well as effectively utilising its fixed assets. When compared to historical performance in this category, no sign of warning or risk is highlighted or observed.
Analysis of Profit Generation Capacity
Net Profit Margin
Return on Equity
This ratio examines how much earnings or return on investment s rewarded by Bovis Homes Group PLC to its shareholders against their investments. In other words, the return on investment and its level for shareholders of common equity of BVHMF is assessed by this financial metric.
Valuation Using Forecasted Dividend Growth Model
Bovis Homes Group PLC paid a last dividend per share of £0.34 per share (DO) by the end of December, 2014. The current market price is £15.21 per share for Bovis Homes Group PLC. Using the dividend growth model, we can find the growth rate using the following formula:
Price per share = D1 / (Ke – G)
Using the formula mentioned above, it is found that the dividend growth for Forecasted Dividend Growth Model through Forecasted Dividend Growth Model is found to be 7.741%.
Investment Decision – Conclusion
After carefully analysing the overall financial performance of Bovis Homes Group PLC from 2012 to 2014 using different ratios, it is found that the company is a good option for investment for lenders of long-term debt. This is because the ability of BVHMF to service its fixed interest obligations is increasing since 2012 while its exposure to interest is kept to a minimum due to zero use of short-term debt.
As far as liquidity issues are concerned, Bovis Homes Group PLC has been generating sales revenue more rapidly compared to 2012 and 2013. It is also collecting cash from customers more quickly than before. Despite this, this company is providing less safety margin to short-term creditors is because this company lacks effective liquidity management practices in its internal controls. Therefore, Bovis Homes Group PLC is not a suitable company for suppliers or vendors to extend trade credit until and unless more safety margin is provided.
Since the overall profitability of BVHMF is increasing since 2012 to 2014 due to tighter control on business costs and expenses, it is able to provide lucrative investment returns to common equity shareholders. Therefore, Bovis Homes Group PLC is a good buy for stock market investors who wish to act as day-jobbers to buy and sell shares immediately to profit from capital gains or increase in price per share.
References
Gibson, C.H., 2012. Financial Reporting and Analysis. Cengage Learning.
Nikolai, L.A., Bazley, J.D. & Jones, J.P., 2009. Intermediate Accounting. Cengage Learning.
Tracy, A., 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
Appendices
Appendix A – Income Statement
Appendix B – Balance Sheet
