Financial Analysis of Persimmon Plc

This assignment tasks students with conducting a thorough financial analysis of Persimmon Plc using various ratio analysis techniques. The analysis should cover key aspects such as liquidity, profitability, and efficiency. Students are also required to examine the company's dividend policy and funding strategies, comparing them to Barratt Development Plc. The report will culminate in conclusions about Persimmon Plc's financial health and recommendations for improvement.

Financial Management in Organization

Table of Contents
INTRODUCTION...........................................................................................................................1
Analyzing the financial performance of Persimmon Plc.............................................................1
Justifying possible purchase price for Persimmon Plc by using business valuation techniques. 5
Alternative methods available to Barratt for financing the purchase..........................................8
Dividend policies of two companies............................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Finance is considered as one of the most influential part of business. Financial
management means applying general principles in the organization in order to manage monitory
resources effectively (Muchapondwa and et.al, 2016). Present report is based on the Barratt
developments which is popular for building highest quality national houses. Current assignment
will analyse financial performance of persimmon homes. It will justify possible purchase price
for the target company by using several business valuation techniques. Furthermore, assignment
will critically appraise alternative methods available to the Barratt for financing the purchase. In
addition, it will discuss relevance of two company's dividend policies.
Analyzing the financial performance of Persimmon Plc
Ratio analysis is the most effectual financial tools which in turn help in evaluating and
summarizing the financial position of the business unit. By using such technique investors can
make idea about the extent to which profitability and liquidity position of Persimmon plc is
sound. On the basis of cited case situation, before taking purchasing decision Barratt
development wishes to evaluate the financial position and performance of Persimmon plc.
Ratio analysis of Persimmon Plc for the year of 2015
Profitability ratio analysis
Ratios Formulas 2015
Net sales 2,902
Gross profit
737
(Financial
statements
of
Persimmo
n Homes
plc of
2015, n.d.)

Operating profit 615
Net profit 522
Gross profit ratio GP/ net sales * 100 25.40%
Operating profit ratio Operating profit / net sales * 100 21.58%
Return on equity 22.46%
Net profit ratio Net profit / net sales * 100 17.99%
Gross profit
ratio Operating
profit ratio Return on
equity Net profit ratio
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2015
2015
Interpretation: By doing financial statement analysis, it has been assessed that GP
margin of Persimmon Plc was 25.40% at the end of 2015. The main reasons behind such lower
GP margin are that high direct expenses were incurred by the firm. Hence, to enhance such
financial performance business unit sis required to enhance sales revenue by placing emphasis on
promotional aspects. In addition to this, operating and net profit margin of the Persimmon Plc
accounts for 21.58% & 17.99% respectively. As compared to GP level, operating and net margin
generated by the corporation is good. It shows that effectual control exerted by the firm on the
level of indirect expenses. By considering this, it can be stated that profitability aspect of
Persimmon Plc is moderate. Further, results of ratio analysis shows that return on equity of
Persimmon Plc implies for 22.46%. Hence, it can be said that company is required to make

modification in the existing framework which in turn enables them to generate high margin by
using shareholders fund.
Liquidity ratio analysis
Ratios Formulas 2015
Current assets
3,30
7
Current liabilities 931
Inventory
2,64
5
Prepaid expenses 7
Current ratio current assets / current liabilities 3.55
Quick ratio
Current assets – (stock + prepaid expenses) / current
liabilities 0.70
Current ratio Quick ratio
0
0.5
1
1.5
2
2.5
3
3.5
4
2015
2015
Interpretation: Graphical presentation shows that in the year of 2015 current ratio of
Persimmon Plc was 3.55:1. It shows that company has enough current assets such as cash,

inventory etc that can be used for meeting financial obligations. Moreover, as per the standards
current ratio of the firm must be 2:1. Further, it has been assessed that quick ratio of Persimmon
plc was .70:1. By considering this, it can be presented that business unit is highly capable in
relation to meeting quick obligation from current assets except prepaid expenses and inventory.
Hence, by keeping such aspect in mind it can be said that liquidity position of Persimmon Plc
was sound and it is highly able to meet obligations on time.
Solvency ratio analysis
Ratios Formulas 2015
Debt -
Shareholders’ equity 2,456
Debt- equity ratio Debt / shareholders equity -
Interpretation: Outcome of ratio analysis shows that in 2015 Persimmon Plc was free
from debt obligation. In the period of 2015, shareholders equity was 2456 respectively and debt
was NIL. On the basis of standard criteria company should maintain ideal ratio of .5:1 which
entails that company should issue 2 equities in against to 1 debt instrument. Thus, it is suggested
to Persimmon plc to ensure proper balance in debt and equity instrument for maintaining sound
solvency position or aspect.
Efficiency ratio analysis
Ratios Formulas 2015
Receivable turnover ratio 57.35
Inventory turnover ratio COGS / average inventory
.58
times
Fixed assets turnover ratio Net sales / fixed assets
.18
times
Asset turnover ratio Net sales / average total assets .80

times
Interpretation: In the year of 2015, assets and fixed assets turnover ratio was .80 & .18
times. This aspect presents that during the accounting year 2015 Persimmon plc failed to make
optimum use of fixed assets. Thus, firm is required to encourage its personnel for making
optimum use of fixed assets. Besides this, by making focus on the maintenance of fixed assets
company can generate high sales revenue from it. Further, inventory turnover ratio of Persimmon
Plc was .58 times which is good. Hence, by undertaking inventory control tools and technique
firm can make effectual control on cost level. Further, receivable turnover ratio of Persimmon
Plc was 57.35 days. As compared to payable period, company received amount from debtors
after long duration. Moreover, as per the financial statements payment was given by the
company to creditors within the period of 33 days. In contrast to this, firm has to wait for 57days
to receive payment from debtors. Thus, for making effectual management of working capital
Persimmon Plc is required to make modifications in credit policies.
Justifying possible purchase price for Persimmon Plc by using business valuation techniques
Specifically, there are mainly three techniques that can be undertaken to determine the
business value or purchase price. It includes asset based, earning value and market value
approaches which in turn help in determining the suitable value of business. Asset based
valuation approach is highly significant that can be done through either going concern or
liquidation basis. In accordance with such aspect, business entity is required to assess net balance
sheet value by subtracting the value of liabilities from assets (3 Business Valuation Methods,
2017). Liquidation asset based approach also helps in identifying the value of cash that can be
received by selling assets and making payment of liabilities.
Particulars
Figures
(in £)
Assets
Cash 570
Accounts Receivable 58

Inventory (very important comment box) 2,645
Other Current Assets 34
Total Current Assets 3,307
Long-Term Investments 191
Fixed Assets 515
Intangibles -
All Other Assets -
Total Assets 4,013
Liabilities and Net Worth
Account Payable 210
Notes Payable (Due within one year) 78
Other Current Liabilities 642
Total Current Liabilities 930
Long-Term Liabilities 436
Loans from Stockholders 2,456
Total Liabilities 3,822
Net Worth 191
Total Liabilities and Net Worth 4,013
(Source: Financial statements of Persimmon Homes plc of 2015, n.d.)

Particulars Figures
% of book which will be received by the firm
(inventory) 90%
% of accounts receivable would you collect 60%
Fixed assets as per balance sheet £ 515
Real market value of fixed assets £ 490
Value of an investment as per balance sheet £ 191
Real value of an investment £ 188
Sales and profit trend of Persimmon Plc from 2013 to 2015
Years
Sales (in
£)
Profit
before tax
(in £)
2015 2,902 630
2014 2,574 467
2013 2,086 337
The above depicted table shows that sales and profit level of Persimmon Plc is
continuously increasing. In 2013, sales revenue of Persimmon Plc was £2086, whereas it reached
on £2902 at the end of 2015. Along with sales, profit margin of the firm increased from £337 to
£630 respectively. By taking into account such aspects it can be said that Persimmon plc is
continuously growing and helps Barratt development Plc in attaining success.
Business Valuation
Method Value
Liquidation Value £2,306

Discounted Future Earnings £2485
Assets and Earnings £2395
From assessment, it has been identified that value on which Barratt Development Plc
should purchase Persimmon plc accounts for £2395 respectively. On the basis of discounted
future earnings method, when PV factor is 13% then purchase price will be £2485 significantly.
Further, as per the liquidation method business value of Persimmon Plc accounts for £2306.
Hence, Barratt Development Plc should consider asset based approach which in turn helps in
determining suitable purchase price for acquiring other business. Moreover, it presents suitable a
as well as fair view of business value and thereby helps in taking appropriate decision.
Alternative methods available to Barratt for financing the purchase
Barratt developments is working since long period in the field of building development, it
has great experience and knowledge of market (Rethel, 2016). Over the past few decades'
property rates of residential and commercial properties have been increased to great extent thus,
now builders have to invest huge amount to purchase new properties in the UK market. There are
several internal and external sources of finance that can be undertaken by Persimmon Homes Plc
to meet the financial requirements. Barratt developments have many options through which it
can finance the purchase. These are described as below:
Personal investments
Barratt developments are passionate about its business and has potential to earn more
profit in coming years. Cited firm can invest its own capital in order to purchase more properties.
It is considered as one of the most common financial source that helps organization in
conducting operations smoothly (Jones-Evans, 2015). That will be beneficial for entity as it will
be able to get more profit. In the personal investment owner needs not to pay interest to any
lender so that company would be able to make effective control over its liabilities. On other hand

it is essential that owner of Barratt developments invest amount carefully because small mistake
can harm the financial position of entrepreneur.
Bank loan
Business loan is another source of finance available to Barratt developments. Financial
institute’s grand loan to business for further development and purchasing material. Cited firm is
operating in the development field thus, it can take bank loan to purchase homes. Bank pass the
loan after looking upon creditability and earning capabilities of the person (Torvanger, Narbel
and Lund, 2015). By taking loan cited firm can gather huge amount and can fulfil its long term
financial needs easily. In bank loan company is required to pay interest monthly to financial
institution which is affordable for the Barratt developments. Thus, it is most suitable source of
finance available to the business. Advantage of taking loan from financial institution is that, in
this company needs not to share its ownership with lender. So decision making power will be ion
the hand of entrepreneur (Asongu and Nwachukwu, 2015).
Venture Capitalist (VC)
These are such firms which investment in other organization in exchange to get share of
the company. If Barratt developments opt this option then cited firm will have to share
ownership with the venture capitalist. Apart from this, capitalist will get rights to attend board
meetings and opinion of the person needs to be considered by the organization. These investors
invest huge amount after looking upon financial position of the firm so that they can get high
return over their investments (Financial Management, 2017). It is good sources because cited
firm would be able to get sufficient monitory resources to purchase the new homes.
Retained earning
It is kind of internal source of finance which is part of profit. This is own capital of the
organization thus Barratt developments needs not to pay interest to lender. Profit can be further
used to buy more properties so that it can earn more profit. It is effective and suitable source of
finance because by this way ownership will remain in the hand of entrepreneur and company will
not have to share its product with any lenders (Jones-Evans, 2015).

Dividend policies of two companies
Barratt developments and persimmon homes both have dividend policy. Barratt
developments give importance to dividend to share holders and capital growth.
Dividend policy of Barratt developments
Dividend is most important part of business that helps in increasing confidence of
shareholders. Records show that Barratt developments continuously increase its dividend. In the
year of 2014 it has given 0.06 dividend, in 2015 it was 0.11, whereas in the year 2016 it has
announced dividend to its share holders 0.16. Statically records show that cited firm is applying
increasing dividend policy in the organization. As its profit is increasing rapidly so it offers more
profit to its shareholders in form of dividend (Muchapondwa and et.al, 2016). Barratt
developments are giving dividend to its stakeholder by using regular dividend policy. This policy
of the organization helps in establishing profitability records. In addition, it develops confidence
of stakeholders of the company and they keep connected with Barratt developments for longer
duration. It helps in stabilises market value of share as well. One of the major benefits of using
regular dividend policy is that it aids in long term financing of the company. Barratt
developments have make changes in its interim dividend policy and have increased it by more
than fifth to 7.3p a share.
Dividend policy of Persimmon homes
Persimmon homes have given dividend in the year 2007 to its stakeholders 051. In 2008
it has reduced the dividend 0.38. Furthermore, in the year 2010 it has announced 0.04 dividend
rate. But in 2012 it has again reduced the dividend. In 2016 it has given 1.10 dividends to its
valuable stakeholders. From the data it is shown that Persimmon homes apply irregular dividend
policy in the organizations (Persimmon PLC PSN, 2017). There is no mandatory rule to give
dividend every year to its stakeholders. If cited firm has abnormal profit in any fiscal year then
management gives interim dividend. In this management circulate the information that amount
will be use for further expansion of business. Persimmon homes earning is irregular thus its
dividend in also irregular. Company has lack of liquid resources thus it becomes quite difficult
for the entity to give regular dividend to its shareholders.

Barratt developments are acquiring the Persimmon homes thus it would be beneficial for
the stakeholders of Persimmon homes (Financial Management, 2017). Because by this way
shareholders of this company will get continuous dividend. That would help in resolving
financial issues of the Persimmon homes easily.
CONCLUSION
From the above report, it has been concluded that ratio analysis is the significant tool that
helps in getting information about financial position. Besides this, it can be inferred that liquidity
aspect of Persimmon Plc was sound. It also has been articulated that profitability and efficiency
aspect of the firm is good. However, business unit is required to undertake suitable measure for
making improvement in the financial aspects. It can be summarized from the report that by
undertaking both internal and external sources of finance Barratt can finance the purchase. Along
with this, it can be presented that both the companies are employing fluctuating dividend
policies. From the year of 2013 to 2015 no dividend offered by Persimmon Plc. On the contrary
to this, during 2013 to 2015 dividend was offered by Barratt Development Plc to the investors on
increasing rate. Thus, it can be said that both the companies are not following stable dividend
policy.

REFERENCES
Books and Journals
Asongu, S.A. and Nwachukwu, J., 2015. Finance and inclusive human development: Evidence
from Africa.
Jones-Evans, D., 2015. Access to finance to SMEs at a regional level–the case of Finance
Wales. Venture Capital. 17(1-2). pp.27-41.
Muchapondwa, E. and et.al., 2016. ‘Ground-Truthing’Chinese Development Finance in Africa:
Field Evidence from South Africa and Uganda. The Journal of Development Studies. 52(6).
pp.780-796.
Rethel, L., 2016. 6 Islamic Finance in Malaysia: Global Ambitions, Local Realities. The
Everyday Political Economy of Southeast Asia. pp.116.
Torvanger, A., Narbel, P. and Lund, H. F., 2015. Estimating mobilized private climate finance
for developing countries-A Norwegian pilot study. CICERO Report.
Online
3 Business Valuation Methods. 2017. [Online] Available through:
<https://www.thebalance.com/business-valuation-methods-2948478>. [Accessed on 2nd
August 2017].
Annual report of Persimmon Homes Plc. N.d. [pdf] Available through:
<https://www.persimmonhomes.com/corporate/media/282046/annual-report-2015.pdf>.
[Accessed on 2nd August 2017].
Financial Management, 2017. [Online] Available through:
<https://sol.du.ac.in/mod/book/view.php?id=829&chapterid=488>. [Accessed on 2nd
August 2017].
Persimmon PLC PSN, 2017. [Online] Available through: <https://www.youinvest.co.uk/market-
research/LSE:PSN?tab=11&SecurityToken=0P00007OQH%5D3%5D0%5DE0EXG
%24XLON&Id=0P00007OQH&ClientFund=0&CurrencyId=GBP&ms-redirect-path=
%2F1c6qh1t6k9default.aspx>. [Accessed on 2nd August 2017]