MG5556 Financial Resources Management: Company Performance Analysis

This report provides a comprehensive analysis of the financial performance and valuation of two UK-listed companies, Persimmon Plc and St. Modwen Properties Plc. The analysis begins with an executive summary and introduction, followed by a detailed examination of profitability ratios, including gross profit margin, net profit margin, return on equity, and return on assets. The report then assesses the financial position from both short-term (liquidity) and long-term (gearing) perspectives, utilizing ratios such as the current ratio, quick ratio, debt ratio, and debt-equity ratio. Furthermore, the report evaluates the companies' performance from an equity shareholder's perspective, focusing on return on equity. The study concludes with a comparative analysis of the overall performance and financial position of the businesses, recommending the more suitable company for investment based on the findings. Finally, the valuation of the company is done using the forecast dividend growth model.

Title:
Student ID:

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

gone down in the case of St. Motown properties Plc in comparison to last year. It is also
analyzed that such a ratio is less in comparison to Permission Plc. Hence, it can be said
that Permission Plc is more profitable than St. Modwen Properties Plc.

An evaluation of the financial position from both a short-term (liquidity) and a long-term
(gearing) perspective
Short term Perspectives:
To analyze the company's liquidity position, we have to analyze the short term debt. The
company should use the liquidity ratio to determine whether the company can make
payment of short term debt and obligations. Liquidity ratio consists two another ratios
such as short term liquidity ratio which is also known as solvency ratio and another one is
long term liquidity ratio which is also known as debt management ratios.
Short term liquidity ratios help to determine whether the company can make payment of
the obligation in respect of supply from the supplier and short term credit and any other
bill payments.
It consists of another two ratios namely the current ratio and another quick ratio. The
current ratio is a division of current assets and current liabilities. The quick ratio is the
same as the current ratio however it ignores the inventory while calculating current assets.
An increase in such ratio indicates that better company and able to make payment of short
term lenders on time. The investors should keep in mind that the current asset may be
inflated or current liabilities will be ignored for manipulating the current ratio by
organization. Accordingly, he should be careful that no short term lender remains to be
booked; all transactions must be completely recorded.

Liquidity ratios (short-terms solvency ratios) are of particular concern to short-term
lenders and suppliers who provide products and services to the firm on credit. They want
to be sure the company can pay its debts. Liquidity Ratios include the Current Ratio and
the Quick or Acid Test Ratio.
Current ratio: This is calculated as a division of current assets and current liabilities.
Where the current ratio falls below 1, it indicates that the company is not properly making
payoff of its short term lender. A decrease in such ratios indicates the company is facing
issues of liquidity crunch.
Quick Ratio: It is the same as the current ratio. However, it ignores the inventory while
calculating current assets. It states that inventory could not be realized immediately to
make payment to short term lenders.
Long term perspectives:
To analyze the long term liabilities, we should determine the gearing ratio. Leverage ratio is such
which helps to analyze how much percentage of the capital structure contains long term loans and
it also helps to determine whether an organization can make payment of long term perspectives.
The gearing ratio helps to determine whether the firm is financially viable or not. There are
several ratios have been used to analyze the gearing ratios. The gearing ratios include debt-equity
ratio, leverage ratio, debt ratio, and equity ratio Mohammed (2014)
The debt ratio indicates the weight of debt in the total asset of the company, whereas the equity
ratio indicates that the weight of equity in the total asset of the company.

The debt-equity ratio is calculated as debt divided by equity. The high debt-equity ratio indicates
a more risky company and a low debt-equity ratio indicates low risky company.
The ratio is given as follows:
St. Modwen Properties PLC Persimmon Plc |
Formula 2018 2017 2018 2017
Liquidity
Ratio
Current Ratio
Current Asset/
Current liabilities 1.91 2.27 3.75 3.53
Quick Ratio
(Current Asset-
Inventory)/ Current
liabilities 0.50 0.39 1.03 1.17
Gearing Ratio
Debt Ratio Debt/ (Debt + Equity) 32% 42% 31% 33%
Equity Ratio
Equity / (Debt +
Equity) 68% 58% 69% 67%
Debt-Equity
Ratio Debt/ Equity 0.47 0.71 0.46 0.49
Leverage Ratio
Long term liabilities/
Stock holders equity 23% 52% 10% 11%
On the analysis of the above ratio, it is found that

(i) The current and quick ratio of persimmon Plc has been increased from last year as
well as St. Modwen Properties Plc. Here, the quick ratio of St. Modwen Properties
Plc is less than 1, which shows its current asset is not much capable to make
payment of short term obligation.
(ii) Gearing ratio, where only 10% leverage ratio in case of instead of Persimmon Plc
23% in St. Modwen Properties. It shows that St. Modwen Properties is risky in
comparison to Persimmon Plc.

An evaluation of performance from an equity shareholders perspective
To determine the ratio of the financial performance of the company from a viewpoint of
shareholders, we are required to analyze the investment ratios. Investment ratios are those
ratios that help an investor to determine whether the financial of a company is viable or
not.
Several ratios can be used to analyze the performance of the company from equity
shareholder's perspectives which include dividend payout ratio, P/E ratio and Return on
equity. (Ichsani & Suhardi 2015)
Return on equity:
St. Modwen Properties
PLC
Persimmo
n Plc |
Profitability
Ratio Formula 2018 2017 2018 2017
Return on
Equity
Net profit after
tax/ Equity 5.76% 5.97% 28.26% 25.15%
Here, it is analyzed that return form persimmon Plc is 28.26 which are increased from
25.15% of the year 2017 as compared to 5.76% in the case of St. Modwen Properties.

An increase in such ratios indicates that a company's asset is generating earning an
inappropriate manner for the Shareholder.
An evaluation of the overall performance and position of the business
The financial performance can be understood as income statement where we have to analyze the
various things such as gross profit margin, net profit margin, percentage increase or decrease in
major expense of company following their standards. Such as salary and wages as a percentage of
sales and others.
This type of analysis can be done through a common size income statement analysis. It helps to
determine the reason for the variation in profit of the company.
The financial position can be termed as a Balance sheet of the company. It is divided into two
parts I.e. Asset and Liability. Further Asset has been categorized as a current asset and noncurrent
asset. Current assets are those assets which can be realized during the current period or not more
than 12 months. Noncurrent assets are assets other than current assets.
Liability can be again divided into current and long term liability and Equity. The financial
position can be analyzed through a common size statement analysis. It will help to understand
percentage change in asset and liability as well as to determine the current ratio, solvency ratio,
debt ratio, equity ratio, debt-equity ratio and other financial ratios MCCLURE (2019).
As shown above, under the Gearing ratio, the debt ratio of both companies has been gone down in
compared to last year and the equity ratio of the company has been increased. It states that the
company is paying its long term liability and issuance of equity shares.

Based on your analysis and discussion above recommend the best company for investment
Based on the above analysis and above discussed, the following findings indicate that it is
better to invest in Perissimon Plc is rather than investing in St. Modwen properties Plc.
(a) The current and quick ratio of persimmon Plc has been increased from last year
as well as St. Modwen Properties Plc. Here, the quick ratio of St. Modwen
Properties Plc is less than 1, which shows its current asset is not much capable
to make payment of short term obligation. This is calculated as the division of
current assets and current liabilities. Where the current ratio falls below 1, it
indicates that the company is not properly making payoff of its short term
lender. A decrease in such ratios indicates the company is facing issues of
liquidity crunch.
(b) Gearing ratio, where only 10% leverage ratio in case of instead of Persimmon
Plc 23% in St. Modwen Properties. It shows that St. Modem Properties is risky
in comparison to Persimmon Plc.
(c) That all ratios of profitability such as operating profit margin, net profit
margin, return on equity and return on asset has been gone down in the case of
St. Motown properties Plc in comparison to last year. It is also analyzed that
such a ratio is less in comparison to Permission Plc. Hence, it can be said that
Permission Plc is more profitable than St. Modwen Properties Plc.

(d) Return form persimmon Plc is 28.26 which are increased from 25.15% of the
Year 2017 as compared to 5.76% in the case of St. Modwen Properties.
An increase in such ratios indicates that the company's asset is generating
earning appropriately for the Shareholder.
Part-2
The valuation of the company is done using the forecast dividend growth model +
which is as follows:
Pemission Plc
Calculation of Growth of the
Company:
2014 2015 2016 2017 2018
Dividend - - 110.00 135.00 110.00
Growth in dividend 23% -19%
Average Rate of Growth 2%
Market price of Share 1900
Calculation of cost of capital:
Permission Plc
Cost of Equity Rate Weight R* W
( DPS/ MPS)+G 8% 69% 5.42%

Cost of Debt
(Interest/ Debt)(1- tax rate) 4% 31% 1.15%
Weighted cost of capital 6.58%
Share Price Under Dividend Growth
Model
Dividend in next year(D1) 112.2
Cost of Capital 6.58%
Growth 2%
Price per shares 2509.585533
No. Of shares 31756006
Value of the company 79694413248
Value of company in Million GBP 79,694.41
St. Modwen Properties
Calculation of Growth Rate:
2014 2015 2016 2017 2018
Dividend 4.00 5.04 5.79 6.08 7.36
Growth in dividend 26% 15% 5% 21%
Average Rate of Growth 13%

Market price of Share 382.2
Calculation of cost of capital:
St. Modwen Properties
Cost of Equity Rate Weight R* W
( DPS/ MPS)+G 15% 68% 10.38%
Cost of Debt
(Interest/ Debt)(1- tax rate) 10% 32% 3.08%
Weighted cost of capital 13.46%
Share Price Under Dividend Growth
Model
Dividend in next year(D1) 8.61
Cost of Capital 10.38%
Growth 13%
Price per shares
-
286.697
No. Of shares
Value of the company
Value of company in Million GBP

The advantage of the dividend discount model is that it provides a baseline for the valuation of
the company based on growth. The second advantage is that it maintains the consistent
information extracted from financial information. It is that type of fact that dividend seems to be
consistent for over the period.
The disadvantage of the dividend discount model is that such a model can be used for limited
companies that are consistent in their financial position. It means that the company is stability
position. It is not so much useful for the company which is volatile to the market. It requires a lot
of assumptions for the finalization of the share price.
The valuation of a company is made by taking a dividend from sources: yahoo.finance.com
concerning both companies. The growth rate of dividends is calculated by taking the average
dividend for the 5 years. The cost of equity is calculated based on dividend per share divided by
market price share and growth rate is added further. The cost of debt is calculated as a division of
interest and long term borrowing and thereafter it is deducted at the rate of tax (assuming @19%).
The formula used to calculate the price of share under the dividend discount model is as
follows:
Dividend on next year (D1)/ (Cost of equity capital- Growth Rate)
Under the dividend discount model shown above, the price of shares of Pemission Plc resulted in
GBP 2509.59, whereas the actual market price as on 30.11.2018 is GBP 1900. It can be said that
the share is undervalued. In case undervalued situation, investors are suggested to buy shares.
However, in the case of St. Modwen Properties Plc, the growth rate exceeds the cost of equity
capital. In a case where the cost of equity capital is less than the growth rate, the share price will
result negative. It states that the company is not paying more dividends and they are interested to

make reinvestment. Under this situation, the share price cannot be determined based on the
dividend discount model. MCCLURE (2019)

References:
[1] Ichsani, Sakina & Suhardi, Rinta Agartha (2015) ‘The effect of Return on equity
and return on investment on trading volume'. Procedia social and behavioral
science, p. 897. Available at: https://cyberleninka.org › article [Accessed: 17
September 2019]
[2] MCCLURE, BEN. (2019) ' How to analyze the company's financial position',
Investopedia. Available at:
https://www.investopedia.com/articles/fundamental/04/063004.asp,[Accessed: 08
February 2019]
[3] MCCLURE, BEN. (2019) 'Digging into the dividend discounting model',
Investopedia. Available at:
https://www.investopedia.com/articles/fundamental/04/041404.asp[Accessed: 25
June 2019]
[4] Nuhu, Mohammed (2014),'Role of Ratio Analysis in Business Decisions’, A Case
Study NBC Maiduguri Plant, Volume 4 (5), pp. 113-114. Available
at:www.mcser.org › journal › index.php › article › download. [Accessed: 17
September 2019]. Doi:10.5901/jesr.2014.v4n5p105
[5] Tulsiyan, Dr.Monica. (2014),’Profitability Analysis’, A comparative study of SAIL
& TATA Steel, Volume 3 (2), pp. 19-22. Available at:
http://www.iosrjournals.org/iosr-jef/papers/vol3-issue2/Version-1/C03211922.pdf
[Accessed: 17 September 2019]

[6] Persimmon plc (2018) Annual Report 2018. Available at:
https://www.persimmonhomes.com/corporate/media/370173/persimmon_ar18.pdf
(Accessed: 30 Nov 2018).
[7] Persimmon plc (2017) Annual Report 2017. Available at:
https://www.persimmonhomes.com/corporate/media/340484/annual-report-2017.pdf
(Accessed: 30 Nov 2017).
[8] St. Modwen Properties Plc (2018) Annual Report 2018. Available at:
https://www.stmodwen.co.uk/uploads/documents/annual-report2018.pdf
(Accessed: 30 Nov 2018).
[9] St. Modwen Properties Plc (2017) Annual Report 2017. Available at:
https://www.stmodwen.co.uk/wp-content/uploads/2018/05/annual-report2017.pdf
(Accessed: 30 Nov 2017).