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FINANCIAL ANALYSIS AND ASSSESSING THE SUCCESS AND FAILURE RATIOS

The ratio analysis analyzes the success, failure and the current position of the firms. The ratio analysis for around 10 years 2001 to 2009 has been done and the report has been given below. Here, the analysis is done for Gearing Ratio and Returns on Capital Employed (ROCE). (Appendices)

1.1 GEARING RATIO

It explains the ability of the firm to manage the margin when the company sale or buy products. If the company possess high gearing ratio, then the company is under high risk.

The gearing ratio of Persimmon and its competitors are given below

YEAR

PERSIMMON PLC

TAYLOR WIMPEY PLC

BARRATT DEVELOPMENTS PLC

2001

0.6817

0.3478

0.1545

2002

0.4025

0.3885

0.1768

2003

0.3103

0.6172

0.8900

2004

0.2545

0.5546

0.1056

2005

0.2487

0.5113

0.7860

2006

0.4444

0.4721

0.1433

2007

0.3844

0.6013

0.5759

2008

0.6254

1.7710

0.7139

2009

0.3793

1.0854

0.7935

TABLE: Gearing Ratios of Persimmon and its competitors

During the financial years 2001 to 2005, there is a fall in gearing ratio from 0.6817 to 0.2487, because the company, Persimmon prefers shareholders equity funding rather than debt funding. This reduces the interest payments and the long-term debt in balance sheet. The ratio increases to 0.4444 in 2006 as the company have borrowed and financed non-equity shares in order to acquire Westbury. Due to the adequate flow of cash from its new brand, in 2007, the ratio gets reduced to 0.3844. Because of economic crisis, the ratio got increased to 0.6254 in 2008. As there was continuous cash generation in the firm, during 2009, the ratio again got reduced to 0.3793, so Persimmon was able to pay their debts. When comparing to its competitors, Taylor Wimpey and Barratt Developments, there is a rise in their gearing ratio because they have borrowed and financed shares substantially. The graph is given below.

GRAPH: Gearing Ratios of Persimmon and its competitors

1.2 RETURN ON CAPITAL EMPLOYED

It measures the overall profitability performance of the business. It indicates how much earning the management had made with the investments of shareholders or how efficiently the firm have utilized the capital to generate the revenue.

The ROCE of Persimmon along with its competitors are given below

YEAR

PERSIMMON PLC

TAYLOR WIMPEY PLC

BARRATT DEVELOPMENTS PLC

2001

13.18

17.54

24.94

2002

19.94

12.85

24.92

2003

23.37

12.08

28.82

2004

26.76

11.75

30.49

2005

23.72

15.69

27.97

2006

19.79

14.18

22.31

2007

18.70

13.17

9.38

2008

- 32.77

- 0.33

3.25

2009

3.67

- 43.73

- 16.27

TABLE : ROCE of Persimmon and its competitors

The ratios during the financial years, 2001 to 2004 increases from 13.18 to 26.76 as the company’s rate of borrowing is less, hence the shareholders' earnings is high because of the adequate flow of cash. This shows that Persimmon is utilizing its capital invested in an efficient way to generate the revenue. From the financial year 2004 to 2009, the ratio decreases from 23.72 and this reaches even below zero due to global economic down turn leading to an unstable market; the company have also borrowed non-equity shares from other firms for acquiring new firms. By utilizing the invested capital, from 2001 to 2007, the competitors, Barratt developments and Taylor Wimpey, earned more than Persimmon, but have fallen down from 2008 as it is unable to sustain in the economic crisis. But the latest research has clearly claims, though there is an instantaneous fall of the ratio in 2008 due to the global economic problems, Persimmon in moving forward by earning cash flow and paid off its debts. The graph is given below

GRAPH: ROCE of Persimmon and its competitors

1.3 Current Ratio

This is used to evaluate if there is enough availability of current assets for the firm to pay back its short term liabilities. If the current value is high, then the firm possesses a better position its obligations.

The Current ratio of Persimmon along with its competitors are given below

YEAR

PERSIMMON PLC

TAYLOR WIMPEY PLC

BARRATT DEVELOPMENTS PLC

2001

3.28

2.32

2.18

2002

3.22

3.34

2.15

2003

3.42

3.04

2.06

2004

3.26

3.35

2.12

2005

3.59

3.56

2.12

2006

3.69

3.45

2.57

2007

3.43

3.73

3.25

2008

3.50

3.82

2.74

2009

3.53

3.69

4.38

TABLE : Current Ratio of Persimmon and its competitors

The decrease in current ratio is because the firm, persimmon is paying some of the debts

GRAPH : Current Ratio of Persimmon and its competitors

LIQUID RATIO

YEAR

PERSIMMON PLC

TAYLOR WIMPEY PLC

BARRATT DEVELOPMENTS PLC

2001

0.30

0.41

0.19

2002

0.25

0.64

0.22

2003

0.22

0.45

0.17

2004

0.28

0.44

0.27

2005

0.18

0.55

0.25

2006

0.23

0.54

0.08

2007

0.18

0.31

0.21

2008

0.21

0.66

0.08

2009

0.28

0.30

0.31

ANALYSIS WITH RESPECT TO ECONOMIC AND REGULATORY CONDITIONS

2.1 INTEREST RATES

The fall of the interest rates since 2009 was due to the fact that the company, Persimmon has taken up bank loans and borrows mainly for making a series of acquisitions like Ideal homes, John Laing PLC, etc and also for funding the projects taken by its own brands, namely, Persimmon homes, Charles Church and Westbury Partnerships. The interest rate of UK is tabulated below.

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2011

0.50

0.50

2010

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

2009

1.75

1.25

0.75

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

2008

5.50

5.38

5.25

5.13

5.00

5.00

5.00

5.00

5.00

4.75

3.75

2.50

For instance, from the income statement (Appendix ), during the financial years 2005, GBP 33200 was paid as the interest rate which substantially increases to GBP 75800 in 2009. This statistical report clearly shows that the profit of the company got declined due to the high interest rates payments to bank loans and debtors.

The graph below clearly explains the continuous fall of interest rate over a period of time.

2.2 INFLATION RATE

The investment will fall down due to high inflation rate. There is an uncertainty about the future prices and costs. Persimmon have general economic uncertainty. The UK construction company contributes 9.2% of nations GVA (Gross Value Added) in 2007. The economic crisis affects Persimmon’s growth as the inflation rate of UK is growing gradually and it reaches 3.1% in 2010 and was 5.20% in fourth quarter of 2008. This affects Persimmon’s sales by 58% with ROCE in negative flow. The economic performance The inflation rate of UK is tabulated below.

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2011

4.00

2010

3.50

3.00

3.40

3.70

3.40

3.20

3.10

3.10

3.10

3.20

3.30

3.70

2009

3.00

3.20

2.90

2.30

2.20

1.80

1.80

1.60

1.10

1.50

1.90

2.90

2008

2.20

2.50

2.50

3.00

3.30

3.80

4.40

4.70

5.20

4.50

4.10

3.10

LEVEL OF CONSUMER CONFIDENCE

The consumer confidence level in UK is below zero because the consumers are cautious to buy a new house property. From the tabulated value it is clearly analyzed, the reduced value of consumer confidence (even in negative state) claims that the consumers’ ability of gaining money through their jobs are less. Halifax Building Society reported, though the price of house in UK have fallen by 1.3% in 2009, which is three times more than the expected, the consumers felt unsecured about their jobs and economic down turns, they were not very cautious in investing money in buying houses. This affects the strategy of Persimmon PLC, as they have spent lots of money in building the houses but the consumers were not in a status to buy the house. The datas in balance sheet shows, the sales rate of the firm was GBP 2285700 in 2005 and it got hike to GBP 3141900 in 2006, due to the acquisition of West Bury. From 2008, there is a drastic fall down of 58.21% due to the contraction in the economy in the country which in turn affects the gearing ratio of the firm.

The tabulated value of consumer confidence of UK is shown below.

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2011

-29.00

-28.00

2010

-17.00

-14.00

-15.00

-16.00

-18.00

-19.00

-22.00

-18.00

-20.00

-19.00

-21.00

-21.00

2009

-37.00

-35.00

-30.00

-27.00

-27.00

-25.00

-25.00

-25.00

-16.00

-13.00

-17.00

-19.00

2008

-13.00

-17.00

-19.00

-24.00

-29.00

-34.00

-39.00

-36.00

-32.00

-36.00

-35.00

-33.00

The graph below explains the consumer confidence of UK.

*

LEVEL OF UNEMPLOYMENT

The Interest rate graph clearly reveals the current economic condition of the country. The unemployment rate during the year 2006 gets reduced to 13.58%, because of the acquisition of the firm, West Bery. But from 2007, the unemployment rate got increased to 66% due to global economic recession. Persimmon was greatly affected because of the fall in interest rates and poor consumer confidence. The people were not boosted to buy the houses, thereby reduces the firms construction work, which reflects the employment of firm. So Persimmon has reduced the number of employees of the company.

The table is given below

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2010

7.80

8.00

8.00

7.90

7.80

7.80

7.80

7.70

7.70

7.90

7.90

2009

6.60

6.80

7.10

7.30

7.60

7.80

7.90

7.90

7.80

7.90

7.80

7.80

2008

5.20

5.20

5.20

5.30

5.20

5.40

5.50

5.70

5.90

6.00

6.20

6.40

CONCLUSION

From the financial analysis, it is clearly reveled, Persimmon PLC stood good in financial turnover with 1412 £m. The latest report states, during the first half 2010, the Persimmon net debt was reduced to 399 £m from 960 £m, thereby significantly expected to reduce the borrowing less than 400 £m; during second half, firm have decided to buy 2850 plots. The simultaneous decrease in gearing ratio states that the company possesses a better sustainability due to reduced debts. Although there is a heavy competition, Persimmon with a decreased ROCE ratio, moves forward by earning cash flow, paid off its debts and sustain as one of the league firm after global economic problems.

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