Executive Summary
Financial management is one of the crucial success tools for any organization. A good financial management must include the use of the required accounting standards when presenting the financial reports. A company that is financially viable is most likely to compete favorably with its peers. In this paper, I have analysed the financial performance of Persimmon Plc in the last four years. The company’s current success lies in its ability to treat the global competition as an opportunity in building capabilities, and adopting strategies that result into competitive advantage. The analysis includes a brief introduction of the company and the company’s financial performance including a time-series ratio analysis for the last four years (2007, 2008, 2009, and 2010). For this analysis, the company’s annual reports for the four-year period, have been used together with the Fame reports, after reconciliation. The paper then concludes with a recommendation to the clients on whether to buy, sell, or hold the shares of the company.
Key words: financial performance; financial ratio analysis; financial adaptability; Persimmon Plc.
Introduction
The dream of every company is to become competitive and exploit the vast opportunities in order to maximize its gains. In this endeavor, firms are faced with critical managerial and financial challenges, and Persimmon Plc is not an exception. In spite of the challenges, some companies have managed to successfully battle and have scored spectacular success. One of these companies is Persimmon Plc, which I have considered herein.
Company Profile
The company’s main activity is house-building with United Kingdom. The company is listed on the London Stock Exchange. The company has been in operation since 1972. The brands include Persimmon Homes, Westbury Partnerships, and Charles Church.
The core operation is the Persimmon Homes business, which is majorly the building of quality homes that are considered the very best in terms of design, construction and service. The property types included herein are bungalows, apartments, two and three-bed town properties, four and five-bed detached houses, and the semi-detached houses. Charles Church business, on the other hand, provides premium homes with both traditional styles and modern styles. It is one of the top house building brands in the country, with unbeatable reputation for the quality and design of its homes. The other brand, Westbury Partnerships, majors in the social housing. Space4 majors in the manufacture of the company’s timber frames. The company’s social housing, in collaboration with the Housing Association, offers some solution to the problems of affordable housing in the country.
An analysis of the financial performance, financial position, and financial adaptability of Persimmon Plc
In the last four years, the company has been outstanding in its performance despite some challenges in 2008. Given hereunder is the ratio analysis of the company’s financial position and the performance in the last four years.
The Company’s profitability
Profitability is measure by both the Gross Profit Margin and the Net Profit Margin, as computed below.
Profitability Ratio
Formula
2007
2008
2009
2010
Gross Profit Margin
Gross Profit / Net Sales
736.1 /
3,014.9
= 24.42%
- 422.9 /
1,755.1
= - 24.1%
198.4 /
1,420.6
= 14.97%
275.0 /
1,569.5
= 17.52%
Net Profit Margin
Net Profit / Net Sales
413.5 / 3,014.9
= 13.71%
-625.0 / 1,755.1
= -35.61%
74.1 / 1,420.6
= 5.22%
115.3 / 1,569.5
= 7.35%
Profitability ratios measure the ability of a firm to generate earnings with respect to the expenses and other incurred costs during the specified financial period (Bernstein and John, 2000; Daniel, 1997). In 2007, the company had the highest profitability with Gross Profit Margin of 24.42% and Net Profit Margin of 13.71%. However, the profitability drastically dropped, and in 2008, the company had a Net Loss Margin of 35.61%. The year 2008 was the most challenging period in the housing market. The company significantly restructured the business and amended the credit facilities to provide stability. The impacts of these amendments are seen in 2009 and 2010 as the profitability keeps improving. From the net loss in 2008, the Net Profit Margin rose to 5.22% in 2009. In 2010, the company had an excellent performance despite the challenging conditions. The profitability measures indicate successful implementation of the firm cost control strategy, sales revenue maximization, and the pursuit of strong cash generation. In the year, the company’s Gross Profit Margin was 17.52% and the Net Profit Margin was 7.35%.
Liquidity
Liquidity Ratio
Formula
2007
2008
2009
2010
Current Ratio
Current Assets / Current liabilities
3568.9 / 1040.3
=3.3:1
2706.3 / 773.7
=3.5:1
2379.6 / 673.7
=3.5:1
2260 / 583
=3.9:1
Quick Ratio
Current Assets less inventory / Current liabilities
182.3 / 1040.3
= 0.18:1
159.8 / 773.7
= 0.21:1
191.8 / 673.7
= 0.28:1
186.8 / 583
= 0.32:1
Liquidity ratios measures the company’s ability to meet its short-term financial obligations. The higher the ratio, the more liquid the firm is (Neely, 2002)
Based on the liquidity ratios, it can be concluded that Persimmon Plc is at a better position of meeting its current obligations. The current ratio reflects the company’s general liquidity. Considering the last four years, it is evident that the liquidity has been on the rise. In 2007, the ratio of current assets to current liabilities was 3.3:1. In 2008, the ratio improved to 3.5:1 despite the poor performance of the company in terms of profitability. 2010 showed the highest liquidity with current assets to current liabilities ratio of 3.9:1. Current ratio only tells the general liquidity, however, for specific measure, the quick ratio is employed.
Quick ratio measures a firm’s short-term liquidity more rigorously. It indicates the firm’s ability to meet its unexpected demands using its liquid current assets. In the last four years, the company’s quick ratio indicated an improving trend in liquidity. The year 2007 had the lowest liquidity indicated by quick ratio of 0.18:1. The subsequent years had remarkable improvements in the quick ratio indicated by 0.21:1, 0.28:1, and 0.32:1 for the years 2008, 2009, and 2010 respectively.
Asset Utilization or Turnover Ratios
Asset Utilization Ratio
Formula
2007
2008
2009
2010
Total Asset turnover ratio
Net sales revenue / Average total assets
3,014.9 /
4,156.3
=72.5%
1,755.1 /
3,153.9
=55.6%
1,420.6 /
2,795.6
=50.8%
1,569.5 /
2,724.6
57.6%
Inventory turnover
Cost of goods sold / Average inventory balance
2,278.8 /
3,386.6
= 0.67 times
2,178.0 /
2,546.5
=0.86 times
1,222.2/
2,187.8
=0.56 times
1,294.5 /
2,073.2
=0.62 times
Receivables turnover
Net sales revenue / Average receivables balance
3,014.9 /
180.2
= 27.9 times
1,755.1 /
138.2
=12.7 times
1,420.6 /
50.2
=28.3 times
1,569.5 / 50
=31.39 times
Asset Utilization or Turnover Ratios measure the effectiveness with which the firm’s assets are utilized. Total Asset turnover ratio measures the firm’s effectiveness in using its assets to generate sales during the entire financial period (Steven, 2006). In terms of asset utilization, the company is in a better position. In all the four considered years, the company used its assets more efficiently and effectively. The year 2007 tops with asset turnover ratio of 72.5%. Even though the company performed poorly in terms of its profitability in the year 2008, its assets were put into effective use as indicated by asset turnover ratio of 55.6%. As compared to all other years, 2009 showed the least effective use of assets towards sales generation. This is represented by a ratio of 50.8%. In 2010, there was a great improvement in the company’s asset utilization from the previous year’s value. This is represented by a ratio of 57.6%.
Inventory turnover measures the liquidity of the inventory. It reveals the number of times the inventory was sold on the average during the financial period (Steven, 2006). The higher the ratio, the better the firm is. Persimmon Plc does not have liquid inventory. The inventory turnover is less than one in all the four considered years. 2008 was the year when the company’s inventory was most liquid, i.e. the rate of sale of the inventory was highest. This is represented by a ratio of 0.86 times. The inventory turnover ratio substantially dropped in 2009 to 0.56 times. However, in 2010, there was an improvement in the sales of the company’s inventory, shown by a ratio of 0.62 times.
Receivables turnover measures the company’s effectiveness of collections and is used to assess whether receivables balance is in excess (Steven, 2006). A company that effectively collects its receivables has a higher receivables turnover ratio and is considered to be at a better position. The above calculation shows that Persimmon Plc is extremely good in collecting its receivables. It 2007, the company’s rate of receivables collection was 27.9 times, which is good for any company. In 2008, there was a remarkable decrease in the collection of receivables. This, probably, was one of the reasons why the company had poor performance. The year’s receivables turnover was only 12.7 times. The poor performance and the economic challenges in 2008 prompted the company to restructure its business and amend the credit facilities in order to provide stability. The impacts of these changes were directly reflected on the subsequent year’s receivable turnover. In 2009, this ratio was 28.3 times and in 2010, it greatly increased to 31.39 times, the best so far in the four-year period.
Financial Stability/Leverage/Gearing or long-term Solvency Ratios
Leverage Ratio
Formula
2007
2008
2009
2010
Debt ratio
Total Liabilities / Total assets
1,810.9 /
4,156.3
= 0.44:1
1,598.7 /
3,153.9
= 0.51:1
1,172.4 /
2,795.6
= 0.42:1
980.6 /
2,724.6
= 0.36:1
Equity ratio or Proprietary ratio
Total shareholders’ equity / Total assets
2,345.4 / 4,156.3
= 0.56
1,555.2 / 3,153.9
= 0.49
1,623.2 / 2,795.6
= 0.58
1,744.0 / 2,724.6
= 0.64
Leverage ratios measure the extent to which a firm is financed by the non-owners (Steven, 2006). Debt ratio indicates the percentage of the company’s assets that are provided by the creditors and the extent of using gearing. The debt ratio calculated above shows that in the last four years, the extent to which the company’s assets were financed by the non-owners was not great. The year 2008 indicates highest assets financing by the creditors, with a percentage of 51%. As the company’s change strategies were implemented in 2009, i.e. the amendment of the credit facilities in order to provide stability, the level of financing by the non-owners substantially reduced to 42% from the previous year’s 51%. In 2010, only 36% of the company’s assets were financed by the non-owners; the greatest performance so far in the four year period.
Equity ratio, as a measure of the leverage, measures the percentage of assets that are provided by the company’s shareholders and the extent of using gearing. From the calculation, it is evident that the company’s shareholders finance majority of the assets. It is only in 2008 when the outsiders financed the assets more than the owners. The years 2009 and 2010 shows an improved level of asset financing by the shareholders, as indicated by equity ratios of 58% and 64% respectively.
Summary of financial performance, financial position, and financial adaptability of Persimmon Plc
According to the analysis herein, it is evident that Persimmon Plc had an excellent performance as compared to the previous years. The company’s performance portrays maximization of sales revenue through an excellent and efficient use of the assets in generating sales, strong cash generation, and firm cost control. The year’s margins and profits, revenue, and legal completions substantially increased. At the same time, the debt was greatly reduced.
Going by the trend, the company can be said to be profitable, as shown by the profitability ratios. The company is also liquid and able to meet its short term financial obligations as depicted by the current ratio. However, to meet its unexpected demands using the liquid current assets, the company needs to improve. This is shown by low values of the quick ratio. The company’s asset utilization is also great as indicated by the turnover ratios. The assets are efficiently and effectively used in generating sales. However, the rate of sale of the inventory is still low as depicted by low inventory turnover ratios. The company needs an improvement on this. Finally, the company can be said to be financially stable considering its gearing or leverage ratios. Its assets and operations are mainly financed by the owners. The company is therefore not vulnerable to the non-owners.
An appreciation as to the possible limitations of financial reporting techniques
Generally, the company’s financial reports are prepared and presented in the best manner that enhances the use of such reports to all the stakeholders. The reports are prepared in a manner consistent with the company’s accounting policies. However, some limitations exist, which in one way or another can give misinformation. The directors have made estimates and assumptions regarding assets and liabilities, and the amounts of revenue and expenses during the reported period. Despite these assumptions being based on the directors’ best knowledge, actual results may differ from the estimates.
Even though the financial statements are prepared in accordance with IFRS as adopted by the European Union, no sufficient information is contained in them to authenticate their compliance with IFRS. In these reports, the company failed to apply some of the new and revised IFRSs and IFRICs that are EU endorsed like the Related Party Disclosures, Classification of Rights Issues, and Extinguishing Financial Liabilities with Equity Instruments.
In general, these reports are simple and informative to all the stakeholders as they include the company’s business activities, the future developments and the factors that are most likely to affect these developments, the financial performance, and the financial position of the company.
A recommendation as to whether a client should buy, sell or hold the shares
The most important variable that all the investors consider is the earnings per share. Earnings per share is defined as the portion of the profit of the company, which is allocated to each outstanding common stock share. The main objective of investing in a business is to get returns and the higher the returns, the better. Before a client decides to buy, sell, or hold the shares, he/she should have a clear image of the company’s performance and the future anticipations. If the company has an improvement in its performance, then, the value of its shares definitely rise. The earnings per share also rise with improved performance of the company. It is the earnings per share that is mostly used in determining the share prices. Increase in EPS results in a substantial increase in the share prices.
Based on the given reports, Persimmon Plc’s performance has greatly improved in the last two years. In 2009, the earnings per share was £24.5p and in 2010, it increased to £38.1p. The performance of the company is projected to improve in the following years as a result of the restructuring and the amendment of the credit facilities to provide stability. The company also intends to intensify its focus on the basics of running an efficient house building operation and at the same time invest in new sites. With this objective, the performance of the company is expected to improve further.
Because of the anticipated improvement in the company’s performance, it is a good idea for the shareholders to hold their shares. This would result into maximization of the gains. However, if a shareholder bought the shares in the previous years and is compelled to sell them, he/she can go ahead and sell the shares. Such a client will also make reasonable gains due to the increased earnings per share of £38.1p. A client who wants to buy the company’s shares can go ahead and make the purchases since the company is expected to perform better in future. However, due to the company’s improved profitability, the current share prices are high and purchasing the shares costs relatively more. Even though the future performance of the company can be predicted, it is not definite. Nevertheless, Persimmon Plc is expected to have outstanding performance in the following years.
Works Cited
Bernstein, L. and John, W., 2000. Analysis of Financial Statements. McGraw-Hill
Daniel, L., 1997. Advanced Accounting. McGraw-Hill College Publishing.
Gray, A., 2011. “Persimmon boosted by sales pick-up.” Financial Times April 21 2011 09:33. Retrieved at http://www.ft.com/intl/cms/s/0/20a29bbe-6be0-11e0-b36e-00144feab49a.html#axzz1c4wCjXb6
Hammond, E., 2011. “First-time buyers boost Persimmon.” Financial Times August 23, 2011 5:21 pm. Retrieved at http://www.ft.com/intl/cms/s/0/a63aa1ca-cd85-11e0-b267-00144feabdc0.html#axzz1c4wCjXb6
Neely, A., 2002. Business Performance Measurement: Theory and Practice, Andy Neely editor. Cambridge University Press.
Persimmon Plc . Financial reports. Retrieved at http://corporate.persimmonhomes.com/
Persimmon Plc. Fame report. Retrieved at https://fame2.bvdep.com/version-20111021/Report.serv?context=MRBZ757KJGCF0V6&_cid=110
Steven, M. B., 2006. Business Ratios and Formulas: A Comprehensive Guide. 2nd edition, Wiley.
Steven, M. B., 2006. Financial Analysis: A Controller's Guide. 2nd edition, Wiley
