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Financial health of a company
1. Depending on your review of the financial statements, suggest a fundamental insight about the financial health of the company. Speculate on the likely reaction to the financial statements from various stakeholder groups (employee, investors, shareholders). Provide support for your rationale
Universal Health Services is a publicly traded company and know for operating acute care hospitals, surgical and behavioral health centers. The firm also operates in ambulatory surgery as well as radiation centers. The company is recognized as the largest hospital management in the United States having more than 240 acute care hospitals and employing more than 74,000 workers (UHS, 2016).
Based in Pennsylvania, the firm is known to register billions in earnings enabling it to be classified as a top performer. This has also allowed the company to create franchises in rapidly-growing markets. However, the efforts are owed to its management which works on the principle of integrity to effectively be competent and compassionate. As such, most of its revenues are gotten from its various departments with acute care hospitals bringing in 73% of income (UHS, 2016).
Nonetheless, it is believed that behavioral health services bring in more than hospitals due to the high occupancy rate. In other words, it could be said that the behavioral centers bring in the highest amount of revenue than hospitals. The fact that the health management is large in size, there are bound to be numerous accounting concepts.
Since the financial statement is helpful in monitoring the financial health of a company, integrity should be applied. Accurate financial information gives the position of the firm in the market. According to the recorded UHS’S financials, the company’s revenue have been increasing.
Nonetheless, the business should make correct entries on the financial statements especially when recognizing income and expenses. Therefore, it could be said that the financial health of the company is stable but may be complicated with the numerous acquisitions. However, the higher returns on investments have been attracting investors.
Current Industry Trends
There is no doubt that firms get into business in a bid to make money rather than meeting the full needs of the market. This is no different from the health care industry where the industry players are focusing on financial aspects instead of providing quality care to their patients (UHS, 2016). More so, what is taught in schools also involve economic aspects as part of its curriculum.
What people fail to apprehend is that quality care attracts more people and eventually increasing the amount of revenues. At the same time, having more patients and clients raises the spending of resources raising the overall costs (Kaplan & Witkowski, 2014). Besides, hospitals are turning to technology, and this also increases the overall costs and stakeholders are not left behind (Jena & Philipson, 2013).
In fact, they are behind every planning, developing, and implementation of hospital projects. Therefore, the trend that hospitals are now following is not new but something that is rapidly gaining acclamation in the industry. Additionally, the future health direction the industry players are taking is gaining momentum (Gengler, 2011). All in all, what is more, important is that lack of quality care in hospitals affects the firm’s financial performance.
Sadly developing sound business practices does not stick with the industry players. Gambling with people’s health in a bid to reduce hospital costs is undesirable and a recipe for disaster. It is, therefore, essential for hospitals and health care providers to practice good business ethics that entails focusing on providing quality care to patients.
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3. As the CFO, suggest one (1) basic strategy that you might use in order to improve the financial performance of the organization. Recommend an approach to implementing the proposed plan. Provide support for your recommendation.
For the above reasons, it is my responsibility as the CFO to ensure that individual and organizational goals are aligned. In turn, this translates to increased revenues since both employees and the employers would be satisfied. Better still, there would be increased customer loyalty and brand image. It is crucial to note that stimulating individual motives will lead to greater motivation and will to work efficiently.
This, therefore, means that core values have to be instilled as a culture that appreciates everyone’s efforts is cultivated (Baker & Baker, 2013). This is so because formal business policies will integrate both individual and organizational goals towards one direction. Still, group objectives should be recognized as essential for success and continuity of business growth. In turn, the organization’s missions and vision will be met entirely as the strategies would be linked to the goals.
In essence, if personal objectives would be fulfilled, group goals would be easy to attain. For instance, if UHS decides to align its overall goal of increasing revenue with individual needs of providing quality care, there would be smooth operations. As such, the strategy is found to be useful in all types of organizations. While little is being done on performance, the critical focus is lost. In our case, the focus should be on creating a balance between providing good quality health care and make more revenues at the same time.
In as much, as it is a medical institution, it operates as a business and requires funding as other firms do. However, even though there is no harm in wanting more money, it should be made clear that patient health outcomes matter. In supporting this performance program, the health care provider should ensure they include customer and business profitability is achieved through proper alignment of goals and strategies. As a result, there will be reduced costs, increased efficiency, and increased income levels.
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Acquisition Planning
In this case study acquisition would be an appropriate option because the supply and demand calculations to determine the company equilibrium both in short-run as well as long-run shown that acquisition is a favorable option, and it is essential for the effective measures or interventions to be implemented. This is due to the fact that, this approach is highly imperative to ensure that the company maintains its competitiveness in the market (Andreyeva, Long & Brownell, 2014).
As a result, increased capital investment in R&D in order to come up with high quality methods and procedures in the Bio Sensor Virus Detector (BSVD) program is highly encouraged. This calls for the need for the company to embark on a continuous and an aggressive process of making sure that there is a consistent improvement of the quality of its products and methods (Saito, 2013). This is a vital consideration with regards to the federal government directive in 2010, in which GAO was given the mandate to conduct an examination of how civilian agencies were undertaking their acquisition planning for services contracts (Saito, 2013).
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In particular, there was a concern on the extent of spending by these agencies in terms of acquisition planning with respect to professional, management and administration to support these services (Saito, 2013). As a result, there was a recommendation for these challenges to be resolved through an elaborate acquisition planning procedure including: cost estimation, written acquisition plans, as well as incorporation of requirements development (Andreyeva, Long & Brownell, 2014).
Thus, it is clearly evident that these elements are critical for planning, and acquisition planning ought to be closely aligned with elements stipulated in the FAR. Finally, the case study reveals the need to adopt several practices in attempts towards curbing the identified limitations including hiring personnel who have procurement specialization, especially with regards to business issues and cost and price analysis as a key strategy towards providing a guideline in helping to prepare key documents concerned with acquisition planning.
References
Andreyeva, T., Long, M. W., & Brownell, K. D. (2014). The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food. American Journal of Public Health, 100(2), 216-222. doi:10.2105/AJPH.2008.151415.
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Return on Equity: Financial Statement Interpretation
Volkswagen
The German automobile company was created in 1937 under the Volkswagen group of companies and is recognized as one of the top-selling automakers in the entire world. In fact, it is considered to be the second largest automobile manufacturing company in the automotive industry. As such, three of its products are in the top ten of bestselling cars. Better still, the company recorded $244.985 billion in revenues as of 2014. With a workforce of 588,902 employees and $424.982 billion in total assets, the company generated $13.393 billion profits (Morrow, 2016).
The company has focused its primary goal to double its market share in the United States. Through this, the firm would be focusing on its vision of becoming the world’s largest manufacturer of automobiles by the year 2018. In keeping faithful to this vision, they are expanding to bigger markets with the major ones being Germany and China (Morrow, 2016).
Return on Equity
Return on equity checks the return on the shareholders’ equity. In simpler terms, it measures the firm’s efficiency in earning profits from every unit of the shareholder’s equity. This means that a company needs to invest funds in an appropriate manner for them to get growth in their earnings. It is essential to note that measuring consistent margins in earnings per share does not sufficiently explain the performance. Therefore, Return on equity serves to be the best profitability ratio in measuring efficiency in performance. In this case, Volkswagen’s Return on equity ROE using the Du Point analysis for the last two years would be;
ROE using the DuPont method = (net income/revenue) * (income/assets) * (assets/equity)
High return on equity mean that firms are not capital intensive. However, even if there are high returns with leverage in 2016, there is still a solid balance sheet. This means that the firm has utilized little of its capital this year on income-generating investing as opposed to 2015. All in all, it is critical to invest in firms with high Return on equity as they fluctuate due to company earnings or cycles when looking at long-term investments. For that reason, investors should look at investing in this year’s company ventures for them to get high returns.
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Microsoft
Microsoft is an American technology company that deals with the manufacture and distribution of computer software, electronics, as well as services. It is also recognized as the world’s largest software company and the most valuable. Founded in 1975, the company had its headquarters in Washington and recorded a revenue of $93.58 billion by 2015. It is also noted that the company has produced billionaires and millionaires from its 118,584 employees. More so, the firm is known to register high profits with a net income of $12.19 in 2015. As such, the company continues to grow to be a major player in the computer and electronics industry.
Return on Equity
ROE using the DuPont method = (net income/revenue) * (revenues/assets) * (assets/equity)
As stated earlier, firms that have registered high ROE often generate more cash rather than investing it. Even though, higher Return on equity show that the company is making good use of their equity in making more income, they are not exhausting their full potential in investments. In this case, Microsoft’s 2015’s Return on equity is lower than in 2014 by 9.36%. This means that they have been investing more rather than making profits. As a result, their balance sheet is not rigid since cash is always flowing in and out of investments. Better still, the higher rates of ROE show that the company is making good use of efficiency in utilizing their capital or shareholders’ equity in generating more income.
Walmart
In the same sense as Microsoft, Walmart is an American company but classified under the retail industry where it manages hypermarkets, departmental stores, and groceries. The firm has grown to establish 11,543 stores in 28 countries with its main operations being in the United States and Canada. The company has a registered revenue of $482.13 billion by 2016 thereby being recognized as the world’s largest firm by revenue. The family-owned business is also the most valuable enterprise through its attractive market value.
Being the biggest grocery retailer in the United States, its net income adds up to $14.694 billion even though it has employed 2.2 million people in all its global branches. However, it struggles to get a bigger market share by venturing into the growing and emerging Chinese and another Asian market. Also, they set low prices for their products in order to get a large customer base. Additionally, since the business is the biggest private employer in the United States, its turnover rate significantly affects the unemployment rates. In the same regard, they have faced numerous charges ranging from lawsuits to labor strikes.
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Return on Equity
ROE using the DuPont method = (net income/revenue) * (income/assets) * (assets/equity)
Businesses that have higher returns on equity are focused on protecting their net income in facing the competition. This is so since they generate more income with little need of reinvesting it yet they have the ability to increase their business value. Still, higher Return on equity means having good business value since the stock prices will appreciate in a bid to trade with the firm’s growing value.
But, is having more shares worthwhile than investing the gained income? In the above recordings, it is clear that Walmart is making god use of their shareholders’ equity in generating more income for the business. However, the generated income is to place the company at the top of their rivals and in the stock market. Fortunately, the Return on equity decreased from 20.10% in 2015 to 18.24% in 2016 due to further reinvestment of their gained earnings.
From the above statistics, it is clear that both Microsoft and Walmart understand the importance of reinvesting their income in profitable ventures rather than having a solid balance sheet. On the other hand, Volkswagen is increasing their Return on equity perhaps to recapture their market position. The firm might also have decided not to reinvest their earnings probably to increase their value and better trading stocks in the stock market.
Company Analysis
Current Ratio
The current ratio measures a organization’s ability to offset its short-term debts or meeting its obligations. It gives the efficiency of a company’s operations to turn the product into cash. This is understood through the fact that businesses that are unable to pay their short-term debts often have liquidity problems.
It is given as; Total current liabilities/total current liabilities
For the first quarter in 2016;
Volkswagen – 179895.323/177672.61 = 1.01
Walmart – 59097/70282 = 0.84
Microsoft – 128421/44354 = 2.90
(Financials are given in millions)
The higher the ratio is, the more likely a company is able to pay its short-term debt. Therefore, a current ratio that is under 1 means that the establishment is having difficulties in paying off its obligations. Even though this is an indication the firm is not in good financial vigor, it does not inevitably mean that they will go broke (Christensen, Baker & Cottrell, 2014).
This means that Walmart’s first quarter performance is not good since they are having difficulties paying off their short-term debt. However, if the company has satisfying long-term projections, it may be able to borrow and pay off its obligations. In the same sense, Microsoft proves to be most efficient in paying off its short-term liabilities compared to the rest.
Quick Ratio
Though almost similar to current ratios, quick ratios show the practice’s ability to meet its short-term debt through its most liquid assets such as cash. As a result, inventories are excluded since they are less liquid.
For that reason, it is given through;
(Total current assets – portfolio)/ total current liabilities
Generally, a low quick ratio is an indication that a company is over-leveraged or is finding it hard to increase its sales, pay bills or is collecting their income slowly. From the other perspective, a higher quick ratio shows that a business is able to meet its financial obligations (Christensen, Baker & Cottrell, 2014). As such, they often have a faster inventory with fast conversion cash cycles. In this regard, Both Volkswagen and Walmart and struggling to meet their financial obligations. They cannot fully pay their current debt. Conversely, Microsoft shows good financial strength in its short term.
Net Profit Margin
Net margin is often used in assessing a company’s profitability and value estimation but is not entirely reliable. This is so because they can be easily manipulated by changing the methods of depreciation or altering the standard accounting practices. They are given through;
Net profit margin – net income/revenue
For the first quarter in 2016;
Volkswagen – 2630.290/56752.784 = 4.63
Walmart – 3079/115904 = 2.66
Microsoft – 3756/20531 = 18.29
(Financials are given in millions)
In this case, Microsoft company is the most profitable firm in the sense has it has the highest net profit margin with Walmart having the least profit margin. Microsoft is, therefore, ranked as having a net margin higher than 79% of the companies in the global software and infrastructure industry. In the same regard, Walmart was 68% higher in the retail industry while Volkswagen was 83% higher in net margins in the automotive industry.
Asset Utilization
Asset utilization involves the calculation of returns on Assets which measures the efficiency in which a firm uses their assets to generate income (Christensen, Baker & Cottrell, 2014). In short, it shows how well a company uses what it has to generate income. Therefore, it is given by;
Asset utilization – (net income/revenue) * (revenue/average total assets)
Similar to the return on equity, asset utilization can be affected by dynamic business cycles. Due to this, the ratio becomes crucial when looked at in the long-term perspective. Due the many factors such as stock buyback, may make the ROA not reflect the specific earning authority of the assets. ROA and ROE should not be used in the comparison of firms that are in different industries (Christensen, Baker & Cottrell, 2014). Microsoft’s ROA is higher than the rest of the companies even though they are in different industries.
Financial leverage
Financial leverage is recognized as the ability of an enterprise to use its debt in acquiring assets. It is also commonly known as trading on equity. It is given through;
Financial leverage – average of the total assets/average of the total equity
For the first quarter in 2016;
Volkswagen – 429031.724 / 97714.633 = 4.391
Walmart – 199143/77864.5 = 2.558
Microsoft – 180983.5/75793 = 2.388
When the value of assets falls, the financial leverage may fail to be beneficial. They do not guarantee the success of any business (Christensen, Baker & Cottrell, 2014). Volkswagen is, therefore, risking due to its high financial leverage in the event of having a decline in sales. From the above recordings, Microsoft is taking less risky investments of using debt to acquire assets as opposed to Walmart and Volkswagen.
Conclusion
Comparing companies in different industries is not always easy due to the variety of factors that involve the various operations that are undertaken. As stated above, ROE and ROA will not be useful when comparing the companies since they are from various industries (Christensen, Baker & Cottrell, 2014). In the same regard, manufacturing companies will have different accounting methods.
The allocation of resources and elements will be different. The service industry often has little overhead costs that lead to higher revenues that are converted to profit. On the other hand, manufacturing companies have higher revenues due to the variety of products and the costs. It is also to note that the difference in accounting is due to the standards applied. Inventory costs in IFRS are not allowed as opposed to GAAP standards.
Similarly, write-downs are reversed under the IFRS while it is not allowed in under GAAP. The IFRS are based on principles while the U.S. GAAP focus on rules. Therefore, IFRS better present economic transactions. However, all companies have shown efficiency in using their working capital even though they are done in different degrees (Christensen, Baker & Cottrell, 2014). All in all, Microsoft proves to be most efficient and having more financial strength.
References
Christensen, T. E., Baker, R. E., & Cottrell, D. M. (2014). Advanced Financial Accounting. The McGraw-Hill Companies, Inc.
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Cash Flow Analysis
Business Analysis Report:
Abstract
This report provides an exhaustive comparative appraisal of the fiscal position, cash flow, performance, and evaluation of Bellway PLC and Redrow PLC. These are two companies that both operate in United Kingdom’s real estate industry. The report sought to answer the following questions: Is Bellway in a better financial position than Redrow? Which company is more profitable for investors between Bellway and Redrow? Which of these two companies is better positioned to exploit the opportunities in its environment? The results indicate that Bellway is better positioned fiscally than Redrow in case an emergency situation comes up. All the same, Redrow is better positioned to exploit the opportunities in its environment than Bellway.
Business analysis report
Introduction
This report provides an in-depth comparative appraisal of the fiscal position, cash flows, performance, and evaluation of two companies that operate within the same industry. In analyzing the main financial statement of the two companies, the researcher uses ratio analysis, vertical analysis, and horizontal/trend analysis. The selected firms are Bellway PLC and Redrow PLC. Both of these companies operate in the United Kingdom’s home construction industry. This appraisal comprises SWOT analysis for both Bellway and Redrow.
The two selected companies are described briefly in the introduction section and a fuller description is found at the Study section. Redrow PLC is an organization that is based in Britain and is involved in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016; Cahill 2012). Bellway PLC is a holding company also based in Britain. It owns subsidiary undertakings and it mainly engages in building houses in Britain (Bellway 2016).
Research questions
Is Bellway in a better financial position than Redrow?
Which company is more profitable for investors between Bellway and Redrow?
Which of these two companies is better positioned to exploit the opportunities in its environment?
Literature Review
The selected companies: Redrow PLC and Bellway PLC
Redrow PLC is a firm that is based in the United Kingdom. It is engaged in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016). Redrow PLC is involved primarily in construction and building of residential properties. It provides its services only within the United Kingdom. Redrow PLC has a land bank of over 12,000 development lots giving the firm about 4-year supply of buildable land, which provides a buffer against abrupt increases in land prices (Redrow 2016).
Bellway PLC is a holding company that is based in the United Kingdom. It owns subsidiary undertakings and it largely engages in contructing houses in the United Kingdom (Bellway 2016). Bellway PLC has quite a few subsidiaries the main one being Bellway Properties Limited. Bellway PLC operates in England, Scotland and Wales only. It does not have operations in Northern Ireland. The land bank owned and controlled by Bellway PLC is roughly 34,070 plots (Bellway 2016).
In the 2015 financial year, Bellway sold in excess of 7,760 houses at an average price of roughly £224,000; about eighty percent of which were sold privately and the remainder being sold as social housing. Bellway PLC gives emphasis to sales volume growth and it frequently buys land particularly at low-cost at locations where it can develop (Bloomberg 2016).
Industry: Home Construction / Real Estate
Bellway PLC and Redrow PLC both operate in the United Kingdom’s home construction industry. This is because both companies are engaged in the construction of buildings: that is, they build and develop houses and homes. They construct and develop houses and homes of different types and sizes for diverse markets (Cave 2015; Lai 2013). The housing market in the United Kingdom has been growing steadily (Willer 2016). This steady growth is largely attributed to the aging UK population which increases demand for property overall (Everett & Duval 2010; Stewart 2013).
The long-term trend for house prices in Britain is upwards, although changes in the prices of houses are very cyclical (Cave 2015; Brennan 2013). In the housing market of the United Kingdom, about 250,000 new homes are needed to be built annually in order to stay abreast of the demand (Bourke 2012; Elliot 2013). Even though the construction sector in general in Britain has slowed down, the homebuilding sub-sector has seen a rise in the construction of new homes (Canocchi 2016; Cunningham 2012; Roxburgh 2011).
SWOT analysis
SWOT – strength, weakness, opportunity and threat – analysis is utilized in evaluating a company’s position and guide strategy going forward. Strengths – these are the qualities which determine a company’s success. Strengths allow an organization to attain its mission. Strengths could be intangible or tangible and include qualities and traits that staff members have as well as their flair which offers the company consistency (Everett 2014). Examples of strengths include no debt, workers who are committed, and huge monetary resources.
Weaknesses – these refer to the qualities which impede the productivity of a company preventing the company from attaining its mission and achieving its full potential. Even so, weaknesses can be controlled and the impact and magnitude of the damage could be decreased. SWOT analysis helps not just to identify the weaknesses of a company, but also provides a chance of reversing those weaknesses (Everett 2014).
Opportunities – there are an extensive range of opportunities present in the environment where the company operates. An organization could always benefit from such opportunities, which could arise out of the market, technology or competition. It is notable that existing opportunities could be the utilization of novel technology, exploiting the company’s untapped resources, and failure of a competitor (Fine 2011).
Threats – these are the elements of vulnerability which could jeopardize the organization’s profitability and reliability. They are unavoidable and cannot be controlled. They have to be addressed so as to find a practicable solution (Pickton & Wright 2014).
Fine (2011) noted that a SWOT analysis is a vital part of the strategic planning process of an organization as offers a good all-round perspective of the forward-looking and current situation of the business. The Weaknesses and Strengths sections provide a look at the current position of the company whereas the Threats and Opportunities sections help in projecting challenges as well as possibilities going forward (Bensoussan 2013). SWOT analysis is a suitable tool for strategic planning.
As a result of the analysis, the business owner would be able to set organizational goals and objectives and obtain a clearer picture for basing his decisions on (Lu 2010). In addition, SWOT analysis helps the business owner to utilize a strategy to match the company’s opportunities and threats, and utilize those strategies to convert the threats and weaknesses of the company into its opportunities and threats (Bensoussan 2013). Although a SWOT analysis allows a business owner to identify and understand important issues that affect the company, SWOT analysis does not essentially provide solutions (Fine 2011).
Ratio Analysis Theory
This theory is relevant to the present research paper. Analysis of fiscal reports necessitates skill of statistical tools, accountancy, and mathematics. There are several fundamental ratios that could help anyone in analyzing an organization’s Profit & Loss Account and Balance Sheet for instance current ratio, provisioning coverage ratio, credit deposits ratio, debtors turnover ratio among others. A wide range of fiscal data could be obtained from Annual Reports, Profit and Loss Account, Audit Report, Balance Sheet, Bank Loan Statement, Bank Account Statement, and Income Tax Return.
Financial Statements
Common fiscal statements include cash flow statement, balance sheet, and income statement, and they are all interconnected. The cash flow statement explains cash outflows as well as cash inflows, and it reveals the amount of money which the business has available on hand, which is reported in the balance sheet also. The income statement is used in describing the way liabilities and assets were utilized in the stated accounting period (Routh 2014).
Every financial statement by themselves only offer a portion of the story of the fiscal condition of the business. When taken together however, the fiscal statements offer a more comprehensive picture (Putra 2015). Potential creditors and stockholders usually analyze the fiscal statements of a business organization and compute several fiscal ratios with the data they contain with the aim of identifying the fiscal weaknesses and strengths of the company and establish whether or not the firm is actually a good investment/credit risk (Kumara 2012). In addition, the fiscal statements of a company are usually utilized by the managers as it aids them in making decisions (Routh 2014).
One particular significant way in which the three fiscal statements are utilized together is in calculating free cash flow (FCF). Investors who are smart prefer business organizations which generate lots of FCFs. This is primarily because it signals the ability of the firm to pay off its debt as well as dividends, facilitate the company’s growth, and buy back stock – all vital undertakings from the perspective of an investor (Routh 2014). Even so, whilst free cash flow is an essential gauge of the health of the business, it actually has its limits; as Lan (2014) pointed out, free cash flow is really not immune to accounting trickery.
Financial Statement Analysis
Financial analysis or financial statement analysis is the process in which the fiscal statements of a company are reviewed in order to make better financial decisions. Financial analysis focuses on analyzing a company’s income statement and balance sheet to interpret the business as well as the company’s fiscal ratios for fiscal forecasting, business evaluation, and even fiscal representations (Grimm & Blazovich 2016).
The main fiscal statements include Statement of Cash Flows, Balance Sheet, and Income Statement (Routh 2014). Financial analysis is a process or technique that involves certain methods for assessing fiscal health, performance, risks, as well as the company’s future prospects.
Financial statement analysis is utilized by many stakeholders including equity and credit investors, decision-makers with the company, the public, and even the government. These different stakeholders have various interests and they apply dissimilar techniques in meeting their needs (Lan 2014). Creditors, for example, want to ensure the principal and interest is paid on the debt securities of the organization whenever due.
Equity investors are interested in the organization’s long-term earnings power and the growth and sustainability of dividend payments. Some of the common financial analysis methods include DuPont analysis, fundamental analysis, vertical and horizontal analysis, as well as the use of financial ratios. To project performance of the future, historical information combined with several adjustments and suppositions to the fiscal information might be utilized.
Methods of financial analysis
Ratio analysis
Financial ratios are essential tools for performing analysis of financial statements quickly. There are 4 different classifications of financial ratios: leverage, activity, profitability, and liquidity ratios. These financial ratios are usually analyzed across competitors within the industry and over time (Routh 2014). In analyzing the financial statement of a company using the ratio analysis method, various types of ratios are used.
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Liquidity Ratios: these are utilized in determining how fast an organization is able to turn its assets into cash in the event that the business faces insolvency or fiscal challenges. In essence, liquidity ratios are a measure of the capacity of an organization to remain in business (Routh 2014). Some of the liquidity ratios include the liquidity index and the current ratio.
Current ratio is used to measure the current assets of an organization against the organization’s current liabilities (Altman 2012). The current ratio is used in measuring the amount of liquidity that is available to pay for liabilities (Lan 2014). It is notable that the current ratio indicates whether or not the corporation is capable of paying off its short-term liabilities during a situation of emergency through liquidating its current assets (Lan 2014).
A low current ratio means that the company might find it difficult to pay its current liabilities within the short run hence it should be investigated more. If the current ratio is less than one for example, it indicates that even when the firm liquidates its entire current assets, it will still not be able to pay off its current liabilities (Routh 2014).
Quick ratio helps to compare the accounts receivable, short-term marketable securities, and the cash to the company’s current liabilities. If quick ratio is 0.55 for example, it means that the firm is only able to cover 55 percent of current liabilities by monetizing accounts receivable, liquidating short-term marketable securities, and utilizing all cash-on-hand (Lan 2014).
Cash ratio is computed as cash and short-term marketable securities divided by organization’s current liabilities. It is worth mentioning that a cash ratio of 0.31 will mean that the firm could only pay off 31 percent of its current liabilities with the use of its short-term marketable securities as well as cash.
Liquidity index is also one of the liquidity ratios although is not very popular. It is used to measure the period of time that is needed for converting assets into cash (Batta, Ganguly & Rosett 2014).
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Activity Ratios: these ratios essentially demonstrate how well the company’s top executives are managing the resources of the organization. Accounts receivable turnover and accounts payable turnover are some of the common activity ratios. They show the period it takes for an organization to get payments and how long it takes for an organization to pay off its accounts payable (Routh 2014). Other activity ratios include sales to working capital ratio, fixed asset turnover ratio, working capital turnover ratio, and inventory turnover ratio.
Profitability Ratios: these are ratios which show how profitable an organization is. The gross profit ratio and the breakeven point are some of the common profitability ratios. The breakeven point is used in computing the amount of money which the organization has to generate in order for it to break even with its start up costs (Knežević, Rakočević & Đurić 2011). The gross profit ratio shows a quick snapshot of the anticipated revenues.
Leverage Ratios: these show how much an organization depends on its debt in funding its operations. The debt-to-equity ratio is a popular leverage ratio utilized in analyzing financial statements (Johnson 2013). The debt-to-equity ratio depicts the degree to which the company’s top executives are willing to utilize debt in funding the company’s operations. It is computed as follows: (Leases + Short-term debt + Long-term debt) / Equity (Lan 2014).
Vertical analysis
Besides ratio analysis, the other method that can be used to analyze financial statements is the use of vertical and horizontal analysis. Vertical analysis, as Lan (2014) pointed out, reiterates every figure in the income statement as a percentage of net sales. Vertical analysis is important as it allows the top managers to understand if expenses such as Cost of Goods Sold (COGS) are very high in comparison to sales (Andrijasevic & Pasic 2014).
In essence, vertical analysis is the proportional analysis of a fiscal statement in which every line item on the fiscal statement is listed as a percentage of another item (Routh 2014). This essentially implies that each line item on the balance sheet is stated as a percentage of total assets whilst on the income statement, each line item is stated as a percentage of gross sales (Teodor & Radu 2013). All in all, vertical analysis brings about common-size fiscal statements. Boyd et al. (2014) noted that common-size income statements present each of the amount in the income statement as a proportion of sales.
This is used to compare ratios and account balances over various periods of time. It can be used, for instance, in comparing a company’s sales in 2012 to the company’s 2013 sales (Boyd et al. 2014).The financial analysis for the two companies is illustrated exhaustively in the Study section. The analysis includes the horizontal/trend analysis, vertical analysis, and ratio analysis (Monea 2013). The horizontal analysis entails comparing fiscal information over a number of reporting periods. Horizontal analysis is therefore the review of the results of several periods of time (Luypaert, Van Caneghem & Van Uytbergen 2016).
Financial statement analysis is important due to several advantages it presents to an organization. Firstly, financial analysis offers an idea to investors about deciding on investing their money in a certain business organization (Damjibhai 2016). Secondly, various regulatory authorities such as IASB could ensure that the business organization is in fact following the necessary accounting standards (Routh 2014).
Therefore, the analysis enables the company to remain compliant (Ednlister 2012). Thirdly, the analysis of financial statements helps government agencies to analyze the taxation that is owed to the company (Beutler 2014). Fourthly, financial statement analysis enables the company to analyze its own performance over a certain period of time (Routh 2014).
References
Altman, EI 2012, ‘Financial ratios, discriminant analysis and the prediction of corporate bankruptcy’, Journal Of Finance, 23, 4, pp. 589-609, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Andrijasevic, M, & Pasic, V 2014, ‘A blueprint of ratio analysis as information basis of corporation financial management’, Problems Of Management In The 21St Century, 9, 2, pp. 117-123, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Barnard, L 2011, ‘bellway jv reaches into barking’, Estates Gazette, 733, p. 04, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Batta, G, Ganguly, A, & Rosett, J 2014, ‘Financial statement recasting and credit risk assessment’, Accounting & Finance, 54, 1, pp. 47-82, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Bensoussan, BE 2013, Analysis without paralysis: 12 tools to make better strategic decisions. Oxford, England: Oxford University Press.
Beutler, IF 2014, ‘What Makes Wealth Grow? A Wealth Sensitive Financial Statement Analysis’, Journal Of Financial Counseling & Planning, 25, 1, pp. 90-104, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Bourke, C 2012, ‘Further losses for major housebuilders’, Estates Gazette, 836, p. 54, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Boyd, K., Epstein, L., Holtzman, M., & Loughran, M 2014, Horizontal and vertical analysis. Coventry, England: John Wiley & Sons.
Brennan, H 2012, ‘NewBuy rates do not reflect scheme’s risk profile, says Redrow’, Money Marketing (Online Edition), p. 5, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Cahill, J 2012, ‘Hammonds partner quits for Redrow in-house role’, Lawyer, 16, 44, p. 3, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Cave, A 2015, Redrow Cuts Exposure to London Values, Daily Telegraph.
Cunningham, D 2012, ‘Bellway appoints Ayres as chief executive’, Estates Gazette, 1232, p. 03, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Damjibhai, SD 2016, ‘Performance Measurement Through Ratio Analysis: The Case of Indian Hotel Company Ltd’, IUP Journal Of Management Research, 15, 1, pp. 30-36, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Ednlister, RO 2012, ‘An empirical test of financial ratio analysis for small business failure prediction’, Journal Of Financial & Quantitative Analysis, 7, 2, pp. 1477-1493, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Elliott, G 2013, ‘Redrow and place of supply’, Accountancy, 125, 1281, p. 138, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Everett, R, & Duval, C 2010, ‘Some considerations for the use of strategic planning models’, Proceedings For The Northeast Region Decision Sciences Institute (NEDSI), pp. 525-530, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Everett, RF 2014, ‘A Crack in the Foundation: Why SWOT Might Be Less Than Effective in Market Sensing Analysis’, Journal Of Marketing & Management, Special 1, pp. 58-78, Business Source Complete, EBSCOhost, viewed 13 July 2016.
Fine, LG 2011, The SWOT Analysis: Using your strength to overcome weaknesses, using opportunities to overcome threats. Coventry, England: SAGE Publications.
Furber, S 2014, ‘Bellway toasts 11.7% NAV rise’, Estates Gazette, 1442, p. 03, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Grimm, S, & Blazovich, J 2016, ‘Developing student competencies: An integrated approach to a financial statement analysis project’, Journal Of Accounting Education, 35, pp. 69-101, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Jagger, S 2015, Redrow Poised To Finalise Pounds 34.5m ICI Land Bank Deal. Daily Telegraph
Johnson, CG 2013, ‘Ratio analysis and the prediction of firm failure’, Journal Of Finance, 25, 5, pp. 1166-1168, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Knežević, S, Rakočević, S, & Đurić, D 2011, ‘Implementation and Restraints of Ratio Analysis of Financial Reports in Financial Decision Making’, Management (1820-0222), 61, pp. 24-31, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Kumara S 2012, ‘Ethic – based management vs corporate misgovernance — new approach to financial statement analysis’, Journal Of Financial Management & Analysis, 25, 2, pp. 29-38, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Lai, S 2013, ‘Redrow Homes Ltd and Another v Bett plc and Another [1998] 1 All ER 385’, Journal Of Financial Crime, 6, 3, p. 252, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Lan, J 2014, Financial ratios for analyzing a company’s strengths and weaknesses. AAII Journal, 3(7):1-13.
Lundholm, R., & Sloan, R 2011, Equity Valuation and Analysis, 2nd edn (McGraw-Hill Irwin, New York, NY).
Luypaert, M, Van Caneghem, T, & Van Uytbergen, S 2016, ‘Financial statement filing lags: An empirical analysis among small firms’, International Small Business Journal, 34, 4, pp. 506-531, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Lu, W 2010, ‘Improved SWOT Approach for Conducting Strategic Planning in the Construction Industry’, Journal Of Construction Engineering & Management, 136, 12, pp. 1317-1328, Business Source Complete, EBSCOhost, viewed 30 June 2016.
McClary, S 2014, ‘Redrow doubles net debt’, Estates Gazette, 1436, p. 54, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Monea, M 2013, ‘Information system of the financial analysis’, Annals Of The University Of Petrosani Economics, 13, 2, pp. 149-156, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Pickton, D, & Wright, S 2014, ‘What’s swot in strategic analysis?’, Strategic Change, 7, 2, pp. 101-109, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Putra, LD 2015, Horizontal vs vertical analysis of financial statements. Accounting and Financial Tax, 2(9): 11-19
Robinson, TR 2011, International Financial Statement Analysis, Hoboken, N.J.: Wiley, eBook Collection (EBSCOhost), EBSCOhost, viewed 30 June 2016.
Routh, B 2014, Financial statement analysis: Vertical analysis. Oxford, England: Oxford University Press.
Roxburgh, H 2011, ‘Builders seek £840m to fix finances’, Estates Gazette, 938, p. 46, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Stewart, A 2013, ‘The storm before the calm’, Estates Gazette, 831, p. 37, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Teodor, H, & Radu, M 2013, ‘Diagnosis of financial position by balance sheet analysis – case study’, Annals Of The University Of Oradea, Economic Science Series, 22, 2, pp. 530-539, Business Source Complete, EBSCOhost, viewed 30 June 2016.
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Performance Analysis
Business Analysis Report:
Abstract
This report provides an exhaustive comparative appraisal of the fiscal position, cash flows, performance, and evaluation of Bellway PLC and Redrow PLC. These are two companies that both operate in United Kingdom’s real estate industry. The report sought to answer the following questions: Is Bellway in a better financial position than Redrow? Which company is more profitable for investors between Bellway and Redrow? Which of these two companies is better positioned to exploit the opportunities in its environment? The results indicate that Bellway is better positioned fiscally than Redrow in case an emergency situation comes up. All the same, Redrow is better positioned to exploit the opportunities in its environment than Bellway.
Business analysis report
Introduction
This report provides an in-depth comparative appraisal of the fiscal position, cash flows, performance, and evaluation of two companies that operate within the same industry. In analyzing the main financial statement of the two companies, the researcher uses ratio analysis, vertical analysis, and horizontal/trend analysis. The selected firms are Bellway PLC and Redrow PLC. Both of these companies operate in the United Kingdom’s home construction industry. This appraisal comprises SWOT analysis for both Bellway and Redrow.
The two selected companies are described briefly in the introduction section and a fuller description is found at the Study section. Redrow PLC is an organization that is based in Britain and is involved in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016; Cahill 2012). Bellway PLC is a holding company also based in Britain. It owns subsidiary undertakings and it mainly engages in building houses in Britain (Bellway 2016).
Research questions
Is Bellway in a better financial position than Redrow?
Which company is more profitable for investors between Bellway and Redrow?
Which of these two companies is better positioned to exploit the opportunities in its environment?
Literature Review
The selected companies: Redrow PLC and Bellway PLC
Redrow PLC is a firm that is based in the United Kingdom. It is engaged in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016). Redrow PLC is involved primarily in construction and building of residential properties. It provides its services only within the United Kingdom. Redrow PLC has a land bank of over 12,000 development lots giving the firm about 4-year supply of buildable land, which provides a buffer against abrupt increases in land prices (Redrow 2016).
Bellway PLC is a holding company that is based in the United Kingdom. It owns subsidiary undertakings and it largely engages in contructing houses in the United Kingdom (Bellway 2016). Bellway PLC has quite a few subsidiaries the main one being Bellway Properties Limited. Bellway PLC operates in England, Scotland and Wales only. It does not have operations in Northern Ireland. The land bank owned and controlled by Bellway PLC is roughly 34,070 plots (Bellway 2016).
In the 2015 financial year, Bellway sold in excess of 7,760 houses at an average price of roughly £224,000; about eighty percent of which were sold privately and the remainder being sold as social housing. Bellway PLC gives emphasis to sales volume growth and it frequently buys land particularly at low-cost at locations where it can develop (Bloomberg 2016).
Industry: Home Construction / Real Estate
Bellway PLC and Redrow PLC both operate in the United Kingdom’s home construction industry. This is because both companies are engaged in the construction of buildings: that is, they build and develop houses and homes. They construct and develop houses and homes of different types and sizes for diverse markets (Cave 2015; Lai 2013). The housing market in the United Kingdom has been growing steadily (Willer 2016). This steady growth is largely attributed to the aging UK population which increases demand for property overall (Everett & Duval 2010; Stewart 2013).
The long-term trend for house prices in Britain is upwards, although changes in the prices of houses are very cyclical (Cave 2015; Brennan 2013). In the housing market of the United Kingdom, about 250,000 new homes are needed to be built annually in order to stay abreast of the demand (Bourke 2012; Elliot 2013). Even though the construction sector in general in Britain has slowed down, the homebuilding sub-sector has seen a rise in the construction of new homes (Canocchi 2016; Cunningham 2012; Roxburgh 2011).
SWOT analysis
SWOT – strength, weakness, opportunity and threat – analysis is utilized in evaluating a company’s position and guide strategy going forward. Strengths – these are the qualities which determine a company’s success. Strengths allow an organization to attain its mission. Strengths could be intangible or tangible and include qualities and traits that staff members have as well as their flair which offers the company consistency (Everett 2014). Examples of strengths include no debt, workers who are committed, and huge monetary resources.
Weaknesses – these refer to the qualities which impede the productivity of a company preventing the company from attaining its mission and achieving its full potential. Even so, weaknesses can be controlled and the impact and magnitude of the damage could be decreased. SWOT analysis helps not just to identify the weaknesses of a company, but also provides a chance of reversing those weaknesses (Everett 2014).
Opportunities – there are an extensive range of opportunities present in the environment where the company operates. An organization could always benefit from such opportunities, which could arise out of the market, technology or competition. It is notable that existing opportunities could be the utilization of novel technology, exploiting the company’s untapped resources, and failure of a competitor (Fine 2011).
Threats – these are the elements of vulnerability which could jeopardize the organization’s profitability and reliability. They are unavoidable and cannot be controlled. They have to be addressed so as to find a practicable solution (Pickton & Wright 2014).
Fine (2011) noted that a SWOT analysis is a vital part of the strategic planning process of an organization as offers a good all-round perspective of the forward-looking and current situation of the business. The Weaknesses and Strengths sections provide a look at the current position of the company whereas the Threats and Opportunities sections help in projecting challenges as well as possibilities going forward (Bensoussan 2013). SWOT analysis is a suitable tool for strategic planning.
As a result of the analysis, the business owner would be able to set organizational goals and objectives and obtain a clearer picture for basing his decisions on (Lu 2010). In addition, SWOT analysis helps the business owner to utilize a strategy to match the company’s opportunities and threats, and utilize those strategies to convert the threats and weaknesses of the company into its opportunities and threats (Bensoussan 2013). Although a SWOT analysis allows a business owner to identify and understand important issues that affect the company, SWOT analysis does not essentially provide solutions (Fine 2011).
Ratio Analysis Theory
This theory is relevant to the present research paper. Analysis of fiscal reports necessitates skill of statistical tools, accountancy, and mathematics. There are several fundamental ratios that could help anyone in analyzing an organization’s Profit & Loss Account and Balance Sheet for instance current ratio, provisioning coverage ratio, credit deposits ratio, debtors turnover ratio among others. A wide range of fiscal data could be obtained from Annual Reports, Profit and Loss Account, Audit Report, Balance Sheet, Bank Loan Statement, Bank Account Statement, and Income Tax Return.
Financial Statements
Common fiscal statements include cash flow statement, balance sheet, and income statement, and they are all interconnected. The cash flow statement explains cash outflows as well as cash inflows, and it reveals the amount of money which the business has available on hand, which is reported in the balance sheet also. The income statement is used in describing the way liabilities and assets were utilized in the stated accounting period (Routh 2014).
Every financial statement by themselves only offer a portion of the story of the fiscal condition of the business. When taken together however, the fiscal statements offer a more comprehensive picture (Putra 2015). Potential creditors and stockholders usually analyze the fiscal statements of a business organization and compute several fiscal ratios with the data they contain with the aim of identifying the fiscal weaknesses and strengths of the company and establish whether or not the firm is actually a good investment/credit risk (Kumara 2012). In addition, the fiscal statements of a company are usually utilized by the managers as it aids them in making decisions (Routh 2014).
One particular significant way in which the three fiscal statements are utilized together is in calculating free cash flow (FCF). Investors who are smart prefer business organizations which generate lots of FCFs. This is primarily because it signals the ability of the firm to pay off its debt as well as dividends, facilitate the company’s growth, and buy back stock – all vital undertakings from the perspective of an investor (Routh 2014). Even so, whilst free cash flow is an essential gauge of the health of the business, it actually has its limits; as Lan (2014) pointed out, free cash flow is really not immune to accounting trickery.
Financial Statement Analysis
Financial analysis or financial statement analysis is the process in which the fiscal statements of a company are reviewed in order to make better financial decisions. Financial analysis focuses on analyzing a company’s income statement and balance sheet to interpret the business as well as the company’s fiscal ratios for fiscal forecasting, business evaluation, and even fiscal representations (Grimm & Blazovich 2016).
The main fiscal statements include Statement of Cash Flows, Balance Sheet, and Income Statement (Routh 2014). Financial analysis is a process or technique that involves certain methods for assessing fiscal health, performance, risks, as well as the company’s future prospects.
Financial statement analysis is utilized by many stakeholders including equity and credit investors, decision-makers with the company, the public, and even the government. These different stakeholders have various interests and they apply dissimilar techniques in meeting their needs (Lan 2014). Creditors, for example, want to ensure the principal and interest is paid on the debt securities of the organization whenever due. Equity investors are interested in the organization’s long-term earnings power and the growth and sustainability of dividend payments. Some of the common financial analysis methods include DuPont analysis, fundamental analysis, vertical and horizontal analysis, as well as the use of financial ratios. To project performance of the future, historical information combined with several adjustments and suppositions to the fiscal information might be utilized.
Methods of financial analysis
Ratio analysis
Financial ratios are essential tools for performing analysis of financial statements quickly. There are 4 different classifications of financial ratios: leverage, activity, profitability, and liquidity ratios. These financial ratios are usually analyzed across competitors within the industry and over time (Routh 2014). In analyzing the financial statement of a company using the ratio analysis method, various types of ratios are used.
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Liquidity Ratios: these are utilized in determining how fast an organization is able to turn its assets into cash in the event that the business faces insolvency or fiscal challenges. In essence, liquidity ratios are a measure of the capacity of an organization to remain in business (Routh 2014). Some of the liquidity ratios include the liquidity index and the current ratio.
Current ratio is used to measure the current assets of an organization against the organization’s current liabilities (Altman 2012). The current ratio is used in measuring the amount of liquidity that is available to pay for liabilities (Lan 2014). It is notable that the current ratio indicates whether or not the corporation is capable of paying off its short-term liabilities during a situation of emergency through liquidating its current assets (Lan 2014).
A low current ratio means that the company might find it difficult to pay its current liabilities within the short run hence it should be investigated more. If the current ratio is less than one for example, it indicates that even when the firm liquidates its entire current assets, it will still not be able to pay off its current liabilities (Routh 2014).
Quick ratio helps to compare the accounts receivable, short-term marketable securities, and the cash to the company’s current liabilities. If quick ratio is 0.55 for example, it means that the firm is only able to cover 55 percent of current liabilities by monetizing accounts receivable, liquidating short-term marketable securities, and utilizing all cash-on-hand (Lan 2014).
Cash ratio is computed as cash and short-term marketable securities divided by organization’s current liabilities. It is worth mentioning that a cash ratio of 0.31 will mean that the firm could only pay off 31 percent of its current liabilities with the use of its short-term marketable securities as well as cash.
Liquidity index is also one of the liquidity ratios although is not very popular. It is used to measure the period of time that is needed for converting assets into cash (Batta, Ganguly & Rosett 2014).
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Activity Ratios: these ratios essentially demonstrate how well the company’s top executives are managing the resources of the organization. Accounts receivable turnover and accounts payable turnover are some of the common activity ratios. They show the period it takes for an organization to get payments and how long it takes for an organization to pay off its accounts payable (Routh 2014). Other activity ratios include sales to working capital ratio, fixed asset turnover ratio, working capital turnover ratio, and inventory turnover ratio.
Profitability Ratios: these are ratios which show how profitable an organization is. The gross profit ratio and the breakeven point are some of the common profitability ratios. The breakeven point is used in computing the amount of money which the organization has to generate in order for it to break even with its start up costs (Knežević, Rakočević & Đurić 2011). The gross profit ratio shows a quick snapshot of the anticipated revenues.
Leverage Ratios: these show how much an organization depends on its debt in funding its operations. The debt-to-equity ratio is a popular leverage ratio utilized in analyzing financial statements (Johnson 2013). The debt-to-equity ratio depicts the degree to which the company’s top executives are willing to utilize debt in funding the company’s operations. It is computed as follows: (Leases + Short-term debt + Long-term debt) / Equity (Lan 2014).
Vertical analysis
Besides ratio analysis, the other method that can be used to analyze financial statements is the use of vertical and horizontal analysis. Vertical analysis, as Lan (2014) pointed out, reiterates every figure in the income statement as a percentage of net sales. Vertical analysis is important as it allows the top managers to understand if expenses such as Cost of Goods Sold (COGS) are very high in comparison to sales (Andrijasevic & Pasic 2014).
In essence, vertical analysis is the proportional analysis of a fiscal statement in which every line item on the fiscal statement is listed as a percentage of another item (Routh 2014). This essentially implies that each line item on the balance sheet is stated as a percentage of total assets whilst on the income statement, each line item is stated as a percentage of gross sales (Teodor & Radu 2013). All in all, vertical analysis brings about common-size fiscal statements. Boyd et al. (2014) noted that common-size income statements present each of the amount in the income statement as a proportion of sales.
This is used to compare ratios and account balances over various periods of time. It can be used, for instance, in comparing a company’s sales in 2012 to the company’s 2013 sales (Boyd et al. 2014).The financial analysis for the two companies is illustrated exhaustively in the Study section. The analysis includes the horizontal/trend analysis, vertical analysis, and ratio analysis (Monea 2013). The horizontal analysis entails comparing fiscal information over a number of reporting periods. Horizontal analysis is therefore the review of the results of several periods of time (Luypaert, Van Caneghem & Van Uytbergen 2016).
Financial statement analysis is important due to several advantages it presents to an organization. Firstly, financial analysis offers an idea to investors about deciding on investing their money in a certain business organization (Damjibhai 2016). Secondly, various regulatory authorities such as IASB could ensure that the business organization is in fact following the necessary accounting standards (Routh 2014).
Therefore, the analysis enables the company to remain compliant (Ednlister 2012). Thirdly, the analysis of financial statements helps government agencies to analyze the taxation that is owed to the company (Beutler 2014). Fourthly, financial statement analysis enables the company to analyze its own performance over a certain period of time (Routh 2014).
References
Altman, EI 2012, ‘Financial ratios, discriminant analysis and the prediction of corporate bankruptcy’, Journal Of Finance, 23, 4, pp. 589-609, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Andrijasevic, M, & Pasic, V 2014, ‘A blueprint of ratio analysis as information basis of corporation financial management’, Problems Of Management In The 21St Century, 9, 2, pp. 117-123, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Barnard, L 2011, ‘bellway jv reaches into barking’, Estates Gazette, 733, p. 04, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Batta, G, Ganguly, A, & Rosett, J 2014, ‘Financial statement recasting and credit risk assessment’, Accounting & Finance, 54, 1, pp. 47-82, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Bensoussan, BE 2013, Analysis without paralysis: 12 tools to make better strategic decisions. Oxford, England: Oxford University Press.
Beutler, IF 2014, ‘What Makes Wealth Grow? A Wealth Sensitive Financial Statement Analysis’, Journal Of Financial Counseling & Planning, 25, 1, pp. 90-104, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Bourke, C 2012, ‘Further losses for major housebuilders’, Estates Gazette, 836, p. 54, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Boyd, K., Epstein, L., Holtzman, M., & Loughran, M 2014, Horizontal and vertical analysis. Coventry, England: John Wiley & Sons.
Brennan, H 2012, ‘NewBuy rates do not reflect scheme’s risk profile, says Redrow’, Money Marketing (Online Edition), p. 5, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Cahill, J 2012, ‘Hammonds partner quits for Redrow in-house role’, Lawyer, 16, 44, p. 3, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Cave, A 2015, Redrow Cuts Exposure to London Values, Daily Telegraph.
Cunningham, D 2012, ‘Bellway appoints Ayres as chief executive’, Estates Gazette, 1232, p. 03, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Damjibhai, SD 2016, ‘Performance Measurement Through Ratio Analysis: The Case of Indian Hotel Company Ltd’, IUP Journal Of Management Research, 15, 1, pp. 30-36, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Ednlister, RO 2012, ‘An empirical test of financial ratio analysis for small business failure prediction’, Journal Of Financial & Quantitative Analysis, 7, 2, pp. 1477-1493, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Elliott, G 2013, ‘Redrow and place of supply’, Accountancy, 125, 1281, p. 138, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Everett, R, & Duval, C 2010, ‘Some considerations for the use of strategic planning models’, Proceedings For The Northeast Region Decision Sciences Institute (NEDSI), pp. 525-530, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Everett, RF 2014, ‘A Crack in the Foundation: Why SWOT Might Be Less Than Effective in Market Sensing Analysis’, Journal Of Marketing & Management, Special 1, pp. 58-78, Business Source Complete, EBSCOhost, viewed 13 July 2016.
Fine, LG 2011, The SWOT Analysis: Using your strength to overcome weaknesses, using opportunities to overcome threats. Coventry, England: SAGE Publications.
Furber, S 2014, ‘Bellway toasts 11.7% NAV rise’, Estates Gazette, 1442, p. 03, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Grimm, S, & Blazovich, J 2016, ‘Developing student competencies: An integrated approach to a financial statement analysis project’, Journal Of Accounting Education, 35, pp. 69-101, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Jagger, S 2015, Redrow Poised To Finalise Pounds 34.5m ICI Land Bank Deal. Daily Telegraph
Johnson, CG 2013, ‘Ratio analysis and the prediction of firm failure’, Journal Of Finance, 25, 5, pp. 1166-1168, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Knežević, S, Rakočević, S, & Đurić, D 2011, ‘Implementation and Restraints of Ratio Analysis of Financial Reports in Financial Decision Making’, Management (1820-0222), 61, pp. 24-31, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Kumara S 2012, ‘Ethic – based management vs corporate misgovernance — new approach to financial statement analysis’, Journal Of Financial Management & Analysis, 25, 2, pp. 29-38, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Lai, S 2013, ‘Redrow Homes Ltd and Another v Bett plc and Another [1998] 1 All ER 385’, Journal Of Financial Crime, 6, 3, p. 252, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Lan, J 2014, Financial ratios for analyzing a company’s strengths and weaknesses. AAII Journal, 3(7):1-13.
Lundholm, R., & Sloan, R 2011, Equity Valuation and Analysis, 2nd edn (McGraw-Hill Irwin, New York, NY).
Luypaert, M, Van Caneghem, T, & Van Uytbergen, S 2016, ‘Financial statement filing lags: An empirical analysis among small firms’, International Small Business Journal, 34, 4, pp. 506-531, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Lu, W 2010, ‘Improved SWOT Approach for Conducting Strategic Planning in the Construction Industry’, Journal Of Construction Engineering & Management, 136, 12, pp. 1317-1328, Business Source Complete, EBSCOhost, viewed 30 June 2016.
McClary, S 2014, ‘Redrow doubles net debt’, Estates Gazette, 1436, p. 54, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Monea, M 2013, ‘Information system of the financial analysis’, Annals Of The University Of Petrosani Economics, 13, 2, pp. 149-156, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Pickton, D, & Wright, S 2014, ‘What’s swot in strategic analysis?’, Strategic Change, 7, 2, pp. 101-109, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Putra, LD 2015, Horizontal vs vertical analysis of financial statements. Accounting and Financial Tax, 2(9): 11-19
Robinson, TR 2011, International Financial Statement Analysis, Hoboken, N.J.: Wiley, eBook Collection (EBSCOhost), EBSCOhost, viewed 30 June 2016.
Routh, B 2014, Financial statement analysis: Vertical analysis. Oxford, England: Oxford University Press.
Roxburgh, H 2011, ‘Builders seek £840m to fix finances’, Estates Gazette, 938, p. 46, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Stewart, A 2013, ‘The storm before the calm’, Estates Gazette, 831, p. 37, Business Source Complete, EBSCOhost, viewed 30 June 2016.
Teodor, H, & Radu, M 2013, ‘Diagnosis of financial position by balance sheet analysis – case study’, Annals Of The University Of Oradea, Economic Science Series, 22, 2, pp. 530-539, Business Source Complete, EBSCOhost, viewed 30 June 2016.
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Financial Statement Analysis
Business Analysis Report:
Abstract
This report provides an exhaustive comparative appraisal of the fiscal position, cash flows, performance, and evaluation of Bellway PLC and Redrow PLC. These are two companies that both operate in United Kingdom’s real estate industry. The report sought to answer the following questions: Is Bellway in a better financial position than Redrow? Which company is more profitable for investors between Bellway and Redrow? Which of these two companies is better positioned to exploit the opportunities in its environment? The results indicate that Bellway is better positioned fiscally than Redrow in case an emergency situation comes up. All the same, Redrow is better positioned to exploit the opportunities in its environment than Bellway.
Business analysis report
Introduction
This report provides an in-depth comparative appraisal of the fiscal position, cash flows, performance, and evaluation of two companies that operate within the same industry. In analyzing the main financial statement of the two companies, the researcher uses ratio analysis, vertical analysis, and horizontal/trend analysis. The selected firms are Bellway PLC and Redrow PLC. Both of these companies operate in the United Kingdom’s home construction industry. This appraisal comprises SWOT analysis for both Bellway and Redrow.
The two selected companies are described briefly in the introduction section and a fuller description is found at the Study section. Redrow PLC is an organization that is based in Britain and is involved in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016; Cahill 2012). Bellway PLC is a holding company also based in Britain. It owns subsidiary undertakings and it mainly engages in building houses in Britain (Bellway 2016).
Research questions
Is Bellway in a better financial position than Redrow?
Which company is more profitable for investors between Bellway and Redrow?
Which of these two companies is better positioned to exploit the opportunities in its environment?
Literature Review
The selected companies: Redrow PLC and Bellway PLC
Redrow PLC is a firm that is based in the United Kingdom. It is engaged in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016). Redrow PLC is involved primarily in construction and building of residential properties. It provides its services only within the United Kingdom. Redrow PLC has a land bank of over 12,000 development lots giving the firm about 4-year supply of buildable land, which provides a buffer against abrupt increases in land prices (Redrow 2016).
Bellway PLC is a holding company that is based in the United Kingdom. It owns subsidiary undertakings and it largely engages in contructing houses in the United Kingdom (Bellway 2016). Bellway PLC has quite a few subsidiaries the main one being Bellway Properties Limited. Bellway PLC operates in England, Scotland and Wales only. It does not have operations in Northern Ireland. The land bank owned and controlled by Bellway PLC is roughly 34,070 plots (Bellway 2016).
In the 2015 financial year, Bellway sold in excess of 7,760 houses at an average price of roughly £224,000; about eighty percent of which were sold privately and the remainder being sold as social housing. Bellway PLC gives emphasis to sales volume growth and it frequently buys land particularly at low-cost at locations where it can develop (Bloomberg 2016).
Industry: Home Construction / Real Estate
Bellway PLC and Redrow PLC both operate in the United Kingdom’s home construction industry. This is because both companies are engaged in the construction of buildings: that is, they build and develop houses and homes. They construct and develop houses and homes of different types and sizes for diverse markets (Cave 2015; Lai 2013). The housing market in the United Kingdom has been growing steadily (Willer 2016). This steady growth is largely attributed to the aging UK population which increases demand for property overall (Everett & Duval 2010; Stewart 2013).
The long-term trend for house prices in Britain is upwards, although changes in the prices of houses are very cyclical (Cave 2015; Brennan 2013). In the housing market of the United Kingdom, about 250,000 new homes are needed to be built annually in order to stay abreast of the demand (Bourke 2012; Elliot 2013). Even though the construction sector in general in Britain has slowed down, the homebuilding sub-sector has seen a rise in the construction of new homes (Canocchi 2016; Cunningham 2012; Roxburgh 2011).
SWOT analysis
SWOT – strength, weakness, opportunity and threat – analysis is utilized in evaluating a company’s position and guide strategy going forward. Strengths – these are the qualities which determine a company’s success. Strengths allow an organization to attain its mission. Strengths could be intangible or tangible and include qualities and traits that staff members have as well as their flair which offers the company consistency (Everett 2014). Examples of strengths include no debt, workers who are committed, and huge monetary resources.
Weaknesses – these refer to the qualities which impede the productivity of a company preventing the company from attaining its mission and achieving its full potential. Even so, weaknesses can be controlled and the impact and magnitude of the damage could be decreased. SWOT analysis helps not just to identify the weaknesses of a company, but also provides a chance of reversing those weaknesses (Everett 2014).
Opportunities – there are an extensive range of opportunities present in the environment where the company operates. An organization could always benefit from such opportunities, which could arise out of the market, technology or competition. It is notable that existing opportunities could be the utilization of novel technology, exploiting the company’s untapped resources, and failure of a competitor (Fine 2011).
Threats – these are the elements of vulnerability which could jeopardize the organization’s profitability and reliability. They are unavoidable and cannot be controlled. They have to be addressed so as to find a practicable solution (Pickton & Wright 2014).
Fine (2011) noted that a SWOT analysis is a vital part of the strategic planning process of an organization as offers a good all-round perspective of the forward-looking and current situation of the business. The Weaknesses and Strengths sections provide a look at the current position of the company whereas the Threats and Opportunities sections help in projecting challenges as well as possibilities going forward (Bensoussan 2013). SWOT analysis is a suitable tool for strategic planning.
As a result of the analysis, the business owner would be able to set organizational goals and objectives and obtain a clearer picture for basing his decisions on (Lu 2010). In addition, SWOT analysis helps the business owner to utilize a strategy to match the company’s opportunities and threats, and utilize those strategies to convert the threats and weaknesses of the company into its opportunities and threats (Bensoussan 2013). Although a SWOT analysis allows a business owner to identify and understand important issues that affect the company, SWOT analysis does not essentially provide solutions (Fine 2011).
Ratio Analysis Theory
This theory is relevant to the present research paper. Analysis of fiscal reports necessitates skill of statistical tools, accountancy, and mathematics. There are several fundamental ratios that could help anyone in analyzing an organization’s Profit & Loss Account and Balance Sheet for instance current ratio, provisioning coverage ratio, credit deposits ratio, debtors turnover ratio among others. A wide range of fiscal data could be obtained from Annual Reports, Profit and Loss Account, Audit Report, Balance Sheet, Bank Loan Statement, Bank Account Statement, and Income Tax Return.
Financial Statements
Common fiscal statements include cash flow statement, balance sheet, and income statement, and they are all interconnected. The cash flow statement explains cash outflows as well as cash inflows, and it reveals the amount of money which the business has available on hand, which is reported in the balance sheet also. The income statement is used in describing the way liabilities and assets were utilized in the stated accounting period (Routh 2014).
Every financial statement by themselves only offer a portion of the story of the fiscal condition of the business. When taken together however, the fiscal statements offer a more comprehensive picture (Putra 2015). Potential creditors and stockholders usually analyze the fiscal statements of a business organization and compute several fiscal ratios with the data they contain with the aim of identifying the fiscal weaknesses and strengths of the company and establish whether or not the firm is actually a good investment/credit risk (Kumara 2012). In addition, the fiscal statements of a company are usually utilized by the managers as it aids them in making decisions (Routh 2014).
One particular significant way in which the three fiscal statements are utilized together is in calculating free cash flow (FCF). Investors who are smart prefer business organizations which generate lots of FCFs. This is primarily because it signals the ability of the firm to pay off its debt as well as dividends, facilitate the company’s growth, and buy back stock – all vital undertakings from the perspective of an investor (Routh 2014). Even so, whilst free cash flow is an essential gauge of the health of the business, it actually has its limits; as Lan (2014) pointed out, free cash flow is really not immune to accounting trickery.
Financial Statement Analysis
Financial analysis or financial statement analysis is the process in which the fiscal statements of a company are reviewed in order to make better financial decisions. Financial analysis focuses on analyzing a company’s income statement and balance sheet to interpret the business as well as the company’s fiscal ratios for fiscal forecasting, business evaluation, and even fiscal representations (Grimm & Blazovich 2016).
The main fiscal statements include Statement of Cash Flows, Balance Sheet, and Income Statement (Routh 2014). Financial analysis is a process or technique that involves certain methods for assessing fiscal health, performance, risks, as well as the company’s future prospects.
Financial statement analysis is utilized by many stakeholders including equity and credit investors, decision-makers with the company, the public, and even the government. These different stakeholders have various interests and they apply dissimilar techniques in meeting their needs (Lan 2014). Creditors, for example, want to ensure the principal and interest is paid on the debt securities of the organization whenever due. Equity investors are interested in the organization’s long-term earnings power and the growth and sustainability of dividend payments. Some of the common financial analysis methods include DuPont analysis, fundamental analysis, vertical and horizontal analysis, as well as the use of financial ratios. To project performance of the future, historical information combined with several adjustments and suppositions to the fiscal information might be utilized.
Methods of financial analysis
Ratio analysis
Financial ratios are essential tools for performing analysis of financial statements quickly. There are 4 different classifications of financial ratios: leverage, activity, profitability, and liquidity ratios. These financial ratios are usually analyzed across competitors within the industry and over time (Routh 2014). In analyzing the financial statement of a company using the ratio analysis method, various types of ratios are used.
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Liquidity Ratios: these are utilized in determining how fast an organization is able to turn its assets into cash in the event that the business faces insolvency or fiscal challenges. In essence, liquidity ratios are a measure of the capacity of an organization to remain in business (Routh 2014). Some of the liquidity ratios include the liquidity index and the current ratio.
Current ratio is used to measure the current assets of an organization against the organization’s current liabilities (Altman 2012). The current ratio is used in measuring the amount of liquidity that is available to pay for liabilities (Lan 2014). It is notable that the current ratio indicates whether or not the corporation is capable of paying off its short-term liabilities during a situation of emergency through liquidating its current assets (Lan 2014).
A low current ratio means that the company might find it difficult to pay its current liabilities within the short run hence it should be investigated more. If the current ratio is less than one for example, it indicates that even when the firm liquidates its entire current assets, it will still not be able to pay off its current liabilities (Routh 2014).
Quick ratio helps to compare the accounts receivable, short-term marketable securities, and the cash to the company’s current liabilities. If quick ratio is 0.55 for example, it means that the firm is only able to cover 55 percent of current liabilities by monetizing accounts receivable, liquidating short-term marketable securities, and utilizing all cash-on-hand (Lan 2014).
Cash ratio is computed as cash and short-term marketable securities divided by organization’s current liabilities. It is worth mentioning that a cash ratio of 0.31 will mean that the firm could only pay off 31 percent of its current liabilities with the use of its short-term marketable securities as well as cash.
Liquidity index is also one of the liquidity ratios although is not very popular. It is used to measure the period of time that is needed for converting assets into cash (Batta, Ganguly & Rosett 2014).
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Activity Ratios: these ratios essentially demonstrate how well the company’s top executives are managing the resources of the organization. Accounts receivable turnover and accounts payable turnover are some of the common activity ratios. They show the period it takes for an organization to get payments and how long it takes for an organization to pay off its accounts payable (Routh 2014). Other activity ratios include sales to working capital ratio, fixed asset turnover ratio, working capital turnover ratio, and inventory turnover ratio.
Profitability Ratios: these are ratios which show how profitable an organization is. The gross profit ratio and the breakeven point are some of the common profitability ratios. The breakeven point is used in computing the amount of money which the organization has to generate in order for it to break even with its start up costs (Knežević, Rakočević & Đurić 2011). The gross profit ratio shows a quick snapshot of the anticipated revenues.
Leverage Ratios: these show how much an organization depends on its debt in funding its operations. The debt-to-equity ratio is a popular leverage ratio utilized in analyzing financial statements (Johnson 2013). The debt-to-equity ratio depicts the degree to which the company’s top executives are willing to utilize debt in funding the company’s operations. It is computed as follows: (Leases + Short-term debt + Long-term debt) / Equity (Lan 2014).
Vertical analysis
Besides ratio analysis, the other method that can be used to analyze financial statements is the use of vertical and horizontal analysis. Vertical analysis, as Lan (2014) pointed out, reiterates every figure in the income statement as a percentage of net sales. Vertical analysis is important as it allows the top managers to understand if expenses such as Cost of Goods Sold (COGS) are very high in comparison to sales (Andrijasevic & Pasic 2014).
In essence, vertical analysis is the proportional analysis of a fiscal statement in which every line item on the fiscal statement is listed as a percentage of another item (Routh 2014). This essentially implies that each line item on the balance sheet is stated as a percentage of total assets whilst on the income statement, each line item is stated as a percentage of gross sales (Teodor & Radu 2013). All in all, vertical analysis brings about common-size fiscal statements. Boyd et al. (2014) noted that common-size income statements present each of the amount in the income statement as a proportion of sales.
This is used to compare ratios and account balances over various periods of time. It can be used, for instance, in comparing a company’s sales in 2012 to the company’s 2013 sales (Boyd et al. 2014).The financial analysis for the two companies is illustrated exhaustively in the Study section. The analysis includes the horizontal/trend analysis, vertical analysis, and ratio analysis (Monea 2013). The horizontal analysis entails comparing fiscal information over a number of reporting periods. Horizontal analysis is therefore the review of the results of several periods of time (Luypaert, Van Caneghem & Van Uytbergen 2016).
Financial statement analysis is important due to several advantages it presents to an organization. Firstly, financial analysis offers an idea to investors about deciding on investing their money in a certain business organization (Damjibhai 2016). Secondly, various regulatory authorities such as IASB could ensure that the business organization is in fact following the necessary accounting standards (Routh 2014).
Therefore, the analysis enables the company to remain compliant (Ednlister 2012). Thirdly, the analysis of financial statements helps government agencies to analyze the taxation that is owed to the company (Beutler 2014). Fourthly, financial statement analysis enables the company to analyze its own performance over a certain period of time (Routh 2014).
References
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Depreciation is the allowance given on the wear and tear of property; an income tax is usually set aside for most assets to cater for the cost of assets (Aizenman, Hutchison and Jinjarak, 2013, p.38). The computation is done annually and for depreciation to be done a taxpayer must own the property and make sure that the property is used for business purposes and the property must have a useful life of more than one year.
This is done on tangible assets that lose value such as buildings, machines, vehicles, and equipment. It is also done on intangible property such as copyrights, patents and also computer software. Depreciating starts when the property is put to use for production of income, and it ends when the property fully recovers its cost or can no longer be used to do business (Bhandari, 2014, p. 42).
Property depreciating depends on the method, the property life, the basis of the ownership reduction and also the fact that the taxpayer has listed the property for repayment. Others factors determining depreciating are the first year of depreciation in that some properties don’t qualify for a discount for the first year.
Since dep is a cost, it has to be included in the calculation of the national income. GDP is perceived as the measure of the market good (Bhandari, 2014, p. 42). As such when calculating national income capital depreciation is deducted from GDP. This because it gives us the market value of the property. On the other hand, depreciating is added to national income when computing GDP. In this case, Depreciation is added to the net domestic product as capital consumption allowance to get the gross domestic product. This because depreciation reduces the stock of capital and therefore it must be accounted.
Reference List
Aizenman, J., Hutchison, M. and Jinjarak, Y., 2013. What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk. Journal of International Money and Finance, 34, pp.37-59.
The ability of an individual to pay debt and implement successful projects determines his financial strength. Financial strength is measured using the credit report which is used to stipulate the credit worthiness of an individual. To be successful in implementing and maintenance of a viable investment, cash is required. On the other hand, when debt is decreased, credit worthiness subsequently increases making it possible for a firm or an individual to seek extra finance to take on huge projects.
Moreover, when the debt is decreased, an individual can peacefully concentrate on taking other investments or personal assets such as mortgage or vehicles that would not have been possible with the existence of the debt. Therefore, after receiving $5,000, it is advisable to lower the debt since it translates to a positive credit score in the long run.
The terms of credit and available credit are influenced by a firm’s credit score. Lenders use the credit score to determine the financial health of a firm by ordering a credit report. The report indicates the amount of risk that the bank would be taking if it sources finance to the firm. According to FICO (2015), a credit score is a summary of a firm’s or an individual’s credit risk for a specific period and it is used by lenders to assess the credit report.
The $5,000 received by the firm should be used to lower the debt for a positive credit score. Though credit rating would not increase immediately, consistent payment of the debts would lead to a rise of the score. Investing is risky especially when returns are not guaranteed plus the cash was received unexpectedly, so there hadn’t been any plans to facilitate successful investment.
Effects of donating to Charities and nonprofit organizations
This paper intends to analyze the effects of donating to charities along with donating to nonprofit organizations. Charity refers to giving help voluntarily, which characteristically is in monetary form, to people who are in need. In contrast, nonprofit organizations are organizations whose main purpose is not to make profits. Mostly, nonprofit organizations dedicate their efforts at furthering an exact social cause or to advocate for a certain opinion.
Effects of donating to charities
Donating to charities has a number of effects. Among the effects is a tax deduction on the charity giver. Notably, when one donates to a charity which is approved by IRS, then writing off of a person’s tax return is allowed. In addition, donating to charities helps in improving a person’s personal management of their money (Chin, G. pg 596). A person is more likely to budget his/her finances to ensure that they don’t default giving monthly donations.
Moreover, openly donating to charity motivates people close to the person donating to make charity donations themselves. However, donating to charity also has adverse effects. In some cases, donated goods do not reach the recipients who are intended. Moreover, charities may miss the target. An example is when a teddy bear is given to a sick person instead of medicine (Kajonius, Petri, pg 43).
Effects of donating to nonprofit organizations
Donating to a nonprofit organization gives one the chance for supporting an important cause. Notably, many people feel that certain causes are relevant though they don’t have enough time to get involved with the cause through volunteering (Kristmundsson, Ómar H. and Steinunn Hrafnsdóttir, pg 567). Therefore, donating to a nonprofit organization enables one to get involved without being there physically.
Moreover, when one donates to a nonprofit organization, one gets a feeling of satisfaction. However, donating to a nonprofit organization also has negative effects. In some cases, this might lead to learned helplessness. An example is when a country has little incentive for growth due to the constant supply of donations from nonprofit organizations (Mulder, Mark R. and Jeff Joireman, pg 240).
The paper above has shown that there are positive effects of donations and charities along with negative effects. For instance, there is a positive effect of a tax deduction and a negative effect of charities not reaching the recipients who are intended.
Work Cited
Chin, G. “How To Increase Charitable Donations“. Science, vol 346, no. 6209, 2014, pp. 596-596. American Association For The Advancement Of Science (AAAS), doi:10.1126/science.346.6209.596-h.
Kajonius, Petri. “The Effect Of Information Overload On Charity Donations”. International Journal Of Psychology And Behavioral Sciences, vol 4, no. 1, 2014, pp. 41-50. Scientific And Academic Publishing, doi:10.5923/j.ijpbs.20140401.06.
Kristmundsson, Ómar H. and Steinunn Hrafnsdóttir. “What Is The Value Of Volunteers For Non-Profit Organizations?”. Veftímaritið Stjórnmál Og Stjórnsýsla, vol 9, no. 2, 2013, p. 567. Institute Of Public Administration And Politics – Icelandic Review Of Politics And Administration, doi:10.13177/irpa.a.2013.9.2.16.
Mulder, Mark R. and Jeff Joireman. “Encouraging Charitable Donations Via Charity Gift Cards: A Self-Determination Theoretical Account”. Journal Of Nonprofit & Public Sector Marketing, vol 28, no. 3, 2016, pp. 234-251. Informa UK Limited, doi:10.1080/10495142.2015.1129249.
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