Understanding Financial Statements and Valuation Methods for Investment

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Executive Summary
This report helps to learn various outcomes concerning understanding financial statements. The
report discusses a major issue that is required to be understood by the investor while investing in
such a company. Every investor must keep in mind whether the company is financially viable or
not. To determine whether a company is financially viable or not, some key metrics are required
to be used. Key metrics include ratio analysis, analysis of person involved in decision making, the
employee working in the people, government regulation which may impact the position of
financial statement and financial performance of the company.
It also considers how to determine the price of shares of the company. There are two methods
given in the report and the detailed analysis of the valuation method has been given.

Contents
Introduction.......................................................................................................................................4
Part-1.................................................................................................................................................5
An evaluation of profitability........................................................................................................5
An evaluation of the financial position from both a short-term (liquidity) and a long-term
(gearing) perspective.....................................................................................................................8
An evaluation of performance from equity shareholders perspective.........................................12
An evaluation of the overall performance and position of the business.....................................13
Part-2...........................................................................................................................................15
The valuation of the company is done using the forecast dividend growth model.....................15
References:......................................................................................................................................20

Introduction
The company subject to this assignment is Perrison Plc and St. Modwen Homes Plc. This report
discussed what evaluation is to be done by shareholders/ investors before any investment to be
made. To analyze the financial performance and financial position of the company, we had
discussed the ratio analysis and common size statement analysis.
Ratio analysis has been done in detail by explaining the current ratio, quick ratio, return on
equity, net profit margin, return on investment, debt-equity ratio, leverage ratio, and others.
The common size statement analysis has been describing the reason for variation in the
percentage of expenses on sales and percentage of change in financial position components such
as current assets, non-current assets, current liability, and non-current liabilities. The ratio
analysis will play a major role in analyzing the financial statement. Such a ratio will reveal
several weaknesses in the financial statement.
Further, the valuation method is given in assignment I,e forecast dividend discount method has
been explained. Generally, the dividend discount method is the same as the discounted cash flow
method. Such a method can be useful in case of company operating is in a stable situation.

Part-1
An evaluation of profitability
We have to analyze the profitability ratio of the company to evaluate whether the company is
profitable or not. Profit cannot be considered as an indicator of determining efficiency. Hence,
Low profit does not indicate the organization is sick and high profit can not be referred to as
better efficiency of organization Tulsiyan (2014).
There are several method has been adopted to analyze. While analyzing the profitability
ratio of the company the following ratios should be analyzed.
(a) Gross profit margin: it is calculated by taking a division of gross profit and sales.
(b) Net Profit Margin: It is calculated by taking a division of profit before tax and sales.
(c) Return on capital employed: It shows whether the asset is generating better earning. It
indicates the relationship between profit and the amount of capital employed.
(d) Operating Profit: It considers only operational profit while determining the probability
of the company.
(e) Return on equity: It shows whether the organization using its investment to grow in
earnings. An increase in such ratio indicates the company's asset is sufficiently
generating income for equity holders.

The ratio of the given company is as follows:
St. Modwen Properties
PLC
Persimm
on Plc |
Profitability
Ratio Formula 2018 2017 2018 2017
Operating
Profit Margin
Net Income/
Total Revenue 32.10% 38.95% 31.72% 30.05%
Net Profit
Margin
Net profit
before tax/Total
revenue 16.72% 22.07% 29.18% 26.85%
Return on
Equity
Net profit after
tax/ Equity 5.76% 5.97% 28.26% 25.15%
Return on
Asset
Net profit/
Average of
Total asset 3.70% 3.53% 19.19% 18.09%
Based on the above analysis, it is observed that the profitability ratio of the company
Persimmon Plc has been increased from the year 2018 to the year 2017. However, in the
case of St. Modwen Properties PLC profitability ratio has been decreased.
Further point of detailed view of profitability ratio it is analyzed that all ratios such as
operating profit margin, net profit margin, return on equity and return on asset has been