Analysis of Annual Financial Reports Assignment Sample

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Introduction

Ratio analysis refers to the quantitative method of determining the firm’s liquidity, efficiency, solvency and profitability position over the years. It is the crucial process which creates awareness among the stakeholders regarding the firm’s profitability and long-term stability. Barratt Development Plc is one of the largest houses building organization of UK which was established in 1958 at Coalville, England. Firm generated annual revenue of 5267.9 million and employed more than 6564 employees in the year of 2023 (Description of Barratt developmental, 2023). The current report is based on analysing the financial statement of Barratt Developmental Plc by using ratios analysis as to depict the firm’s overall position. It also includes suggestion for Ali shah (neighbour) whether he should keep share of the firm or not. Students requiring assignment help writing can refer to this analysis for academic support.

Main Body

Ratio explanation

Gearing ratio: This financial metric describes the amount of firm’s assets that financed through the means of debt and equity. This ratio is used to compare the firm’s leverage position with other companies.

Analysis of Annual Financial Reports Assignment Sample

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Debt/equity ratio: It is another ratio which defines the relative proportion of debt and shareholder equity used in company. This ratio indicates capital structure of the firm and defines overall risk and cost of the company.

Interest coverage ratio: This ratio defines organisation’s capability in paying out the entire interest obligation by using the firm’s profit (Haralayya, 2021). By this, investors and creditors can assess or evaluate the borrowing capability of company.

Return on investment: It is another ratio which helps in calculating the financial benefits that investor will receive by investing in the particular assets.

Dividend per share: This ratio denotes the total amount of dividend received by the individual through making investment in the company’s shares.

Price-earnings ratio: It is the most popular stock valuation method which indicates whether the stock at current price is cheap or expensive (Cipta, Bagia and Atidira, 2020).

EPS: It is another significant metric which denotes the earning generated by each outstanding share of the company.

Gross yield: This ratio supports in determining the overall return on investment before deducting all the expenses and tax. This ratio supports in comparing relative investment of various mutual funds, bonds and property.

Interpretation of various ratio

Following is the in-depth interpretation of the Barratt Developmental Plc’s financial statements:

Gearing Ratio; It has been identified that Barratt Developmental is having constant gearing ratio over the years which denotes the firm’s efficiency in managing the effective balance between the debt and assets (OTSE, 2021). This is optimum position as the firm’s assets are financed through equity which reduces the overall; debt obligation of the company.

Debt/equity ratio: From the debt equity ratio, it has been found that organization is highly depending on equity fund for carrying out its operations. However, in the current year firm has reduced amount of equity, from £5596.4 to £5439.1 million, but then also it is incapable in attaining the ideal ratio. This ratio is not optimum as it increases the overall cost of firm which leads to reduction in the reducing shareholders’ earning. Further, there is a huge dilution in ownership and control of the company which creates issue in taking the adequate decision (Zhang, 2023). Barratt Developmental should focus on increasing debt in the structure which helps in reducing the tax liabilities and supports in enhancing the shareholder’s satisfaction.

Interest coverage ratio: Outcome of ratio analysis shows deteriorating trend in the interest coverage ratio of Barratt Developmental Plc from 25 to 7 times which is not a positive indicator for stakeholder (Financial statement of Barratt developmental, 2023). In spite of significant decrease, firm is still having effective ICR which helps in fulfilling interest obligation denoting lower risk to the creditors (Fitriani, Izzati and Lestari, 2024). Barratt Developmental should focus on boosting its sales and thereby profitability which aids in effectively covering interest obligations.

Return on investment: In the years of 2023, ROI of the firm was 9.48%, whereas at the end of 2024 it accounted for 2.10% respectively. It has been determined that there is a reduction in the ROI of Barratt Developmental which depicts the ineffective investment decision of the company. It also depicts that do, Abayo and cost of investment is higher than its return which creates negative impact on the organization’s overall profits. This will eventually leads to decreasing earning of the investors which ultimately results in decreasing overall satisfaction (KyanRaphael, 2022). For increasing ROI manager should focus on minimizing investment cost and emphasis over restructuring investment portfolio so that fund are invested in adequate securities.

Dividend per share: On the basis of ratio analysis, it has been depicted that Barratt Developmental is not able to provide increasing dividend on shares which in turn creates negative impact on the overall satisfaction of shareholders. It has also been identified that firm is unable to earn a significant amount of return which leads to declaring lower dividend per share (Ofori-Acquah, Avortri and Preko, 2023). However, it has been depicted that firm has retained higher profit with the purpose of expansion which indicates the high growth prospect of the company. For increasing dividend per share, firm should emphasis over initiating adequate marketing strategy which aids in enhancing profit leading to higher dividend per share.

Price to earnings ratio: It has been identified that firm is having high PE ratio which denotes willingness of investors to pay higher price to purchase shares. This indicates the higher reputation and goodwill of organization due to which investors prefer buying shares of the business entity. However, very high ratio denotes that shares are overvalued at current time which will result in falling share price in upcoming time.

Earnings per share: After calculating ratio of Barratt Developmental, it has been determined that there is reduction in EPS which indicates undervaluation of company. This has been achieved as firm is having low amount of debt which leads to increasing tax liabilities and reducing earning (Al-Hamad, Jebreel and ALDweiri, 2021). Moreover there is a drastic reduction in the overall net income of company resulting in reducing EPS. For increasing EPS, Barratt Developmental should focus on buy back its shares from market which helps in reducing the number of outstanding share. Further, firm should focus on restructuring the capital structure and includes the high amount of debt which ultimately boosts EPS.

Gross yield: After analysing gross profits ratio of Barratt Developmental, it has been identified that firm’s gross profit is reducing over years indicating issue in maintaining long term stability in industry (Nariswari and Nugraha, 2020). It indicates firm’s inefficiency in carrying out the expansion in future denoting inaccurate decision to invest in firm.

Limitation of Ratio analysis 

Below mentioned are various limitation and drawback of the ratio analysis:

• Historical data: Ratio analysis is initiated on the historical or past data which create issue in effectively predicting the current position of the business entity.
• Ignores inflation effect: Financial statements are prepared on the periodic basis which creates obstacle in gaining information regarding current position of organisation (Mahdi and Khaddafi, 2020). Ratio analysis is undertaken on financial statements without considering inflation leading to gaining inaccurate outcome.
• Impacted by manipulation: Ratio analysis is based on financial statement which could be manipulated by company for depicting effective position. This manipulation results in providing inaccurate information related to firm’s position leading to creating issue in taking informed decision.

Specific limitation

Below are the specific limitation related to the ratio analysis of Barratt Developmental:

Ignores qualitative information: While calculating dividend per share, it has been identified that firm is providing lower dividend which result into lower level of satisfaction among the shareholders (Binsaddig et al, 2022). However, this does not include the fact that dividend is retained for the growth purpose which denotes higher return to the shareholders in the upcoming time.

Ignore economic situation: It has been identified that there is increasing inflation within UK which creates issue in effectively determining overall performance of the organization.

Recommendation

After evaluating different type of investment ratio, it has been determined that Ali Shah should sell out the shares at the current time, as it will not provide required outcome in the upcoming time. It has been determined that firm is not having effective amount of debt which results in reducing their earning. Moreover, ROI of firm is also reducing over the years which denote inefficiency of the company in earning profits which leads decline in the overall profitability of the organization (Semerci and Yurt, 2023). Additionally, firm is offering fewer dividends on each share which leads to decreasing overall return to Ali Shah. Further, it has been identified that currently stock are overvalued which indicates that prices of share is estimated to reduce in upcoming time resulting in gaining less profits. Lastly, earning per share of shareholder is also decreasing which indicates ineffective decision of Ali Shah to invest in shares of Barratt Developmental.

Conclusion

By summing up the report, it has been identified that ratio analysing support in effectively determining overall liquidity, solvency, profitability and efficiency position of the organization. It has suggested that Ali Shah should sell out its shares as Barratt Developmental is not having adequate debt equity ratio. Moreover, company is having less amount of debt in capital structure which increases tax liability and reduces overall EPS for shareholders. Further, firm has not taken adequate investment decision which reduces their return and creates issue in providing optimum return to investors. Additionally, PE ratio of firm is very high which denotes future expectancy of decreasing price of share which is not a good indicator for shareholders.

References

Books and Journals

• Haralayya, B., 2021. Ratio Analysis at NSSK, Bidar. Iconic Research And Engineering Journals, 4(12), pp.170-182.
• OTSE, A.E., 2021. Approach to public expenditure management and the effect of treasury single accounts system on public university administration: a case study of north central universities in Nigeria. Asian Journal of Advances in Research, pp.582-591.
• Zhang, M., 2023. Analysis of Nike’s Performance Based on Its Financial Accounts and Ratios. Advances in Economics, Management and Political Sciences, 3, pp.616-624.
• Fitriani, D., Izzati, N. and Lestari, P.P., 2024. EFFECTS OF CASH, ACCOUNTS RECEIVABLE AND CORPORATE PAYMENTS ON PROFITABILITY OF DRINKING WATER SUPPLIES. JEES: Journal of Economic Empowerment Strategy, 7(2), pp.33-46.
• Kyando, A., Abayo, A. and Raphael, G., 2022. Determinants of the extent of usage of accounting information by Public Accounts Committee in Tanzania public corporations: Moderating role of effective communication. International Journal of Research in Business and Social Science (2147-4478), 11(9), pp.205-221.
• Ofori-Acquah, C., Avortri, C. and Preko, A., 2023. Taking stock of policies, regulations, and initiatives that leverage technology to build trust: Lessons from Ghana’s financial sector. Global Social Welfare, 10(1), pp.9-17.
• Al-Hamad, A.A.S., Jebreel, R.M. and ALDweiri, M., 2021. The Role of Financial Inclusion Contribution on The Financial Performance at Commercial Jordanian Banks. Academy of Strategic Management Journal, 20, pp.1-11.
• Nariswari, T.N. and Nugraha, N.M., 2020. Profit growth: impact of net profit margin, gross profit margin and total assests turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), pp.87-96.
• Mahdi, M. and Khaddafi, M., 2020. The influence of gross profit margin, operating profit margin and net profit margin on the stock price of consumer good industry in the Indonesia stock exchange on 2012-2014. International Journal of Business, Economics, and Social Development, 1(3), pp.153-163.
• Binsaddig, R., Ali, A., Al-Alkawi, T. and Ali, B.J., 2022. Do Activity Ratios Relate to Gross Profit Margin? Evidence from Communication Sector in Bahrain. International Journal of Economics and Finance Studies, 14(4), pp.292-308.
• Semerci, A. and Yurt, İ., 2023. Cost and gross profit analysis in oily Sunflower (Helianthus Annuus, L.) Production: the case of Canakkale province, Turkey. Custos e@ gronegócio on line, 19(3), pp.2-39.
• Cipta, W., Bagia, I.W. and Atidira, R., 2020, December. The influence of accounts receivable turnover, current ratio, credit growth on profit at savings and loans cooperatives in Buleleng District. In 5th International Conference on Tourism, Economics, Accounting, Management and Social Science (TEAMS 2020) (pp. 279-284). Atlantis Press.

Online

• Description of Barratt developmental. 2023. Online. Available through: < https://www.globaldata.com/company-profile/barratt-developments-plc/#:~:text=Barratt%20Developments%20Plc%3A%20Overview&text=It%20designs%2C%20builds%20and%20sells,the%20Wilson%20Bowden%20Developments%20brand.>
• Financial statement of Barratt developmental. 2023. Online. Available through: < file:///C:/Users/HP/Downloads/barrattar2024754%20(2).pdf>