1.0 INTRODUCTION

This report describes an analysis and evaluation of the current and prospective profitability, liquidity

and financial stability of Bellway Plc. The different methods of analysis include trend, horizontal and

vertical analyses as well as ratios such as Current and Quick ratios and compared the performance with the

industry using different financial tools such as working capital position efficiency and assessment of

corporate governance statement. On the other hand director’s report is also taken into consideration which is

explained in the report.

1.1 Company Profile:

Bellway Plc (2009)

The company was established in 1946 by John T. Bell & Sons and since its foundation they are providing

quality homes and services to their customers of which the biggest example is that they have built 100,000

homes till now. The company is located in Newcastle, England which functions through a divergent

structure of the company as a whole. The company has 13 regional divisions in all over UK which is

responsible for making their own decisions in particular areas like housing types and design, materials and

purchasing, construction methods, pricing, and sales which allows them to know their customer

requirements in better way. (Bellway, 2010)

In 1979 it was listed on the London stock exchange (Londonstockexchange, 2010). The company group

pre-tax profit exceeded by £100 million in the year 2001 which was the biggest achievement ever seen in

their long history progress (Thefreelibrary, 2010). According to Dohetry (2007), Bellway builds houses at

lower price that they sell for an average of £173,000.

According to Annualreport (2009), a survey was undertaken by company and they got 300 positive

responses at the end of March 2009, 89% (2008 – 80%) in which the customers on account of their

satisfaction would recommend their friend to go for bellway homes. This reflects the goodwill of the

company in the present housing market.

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2.0 ANALYSIS OF FINACIAL POSITION OF COMPANY:

In the financial analysis ratios plays an important role which helps financial analysts to implement plans that

can improve financial structure and interest coverage. (Accountingissue, 2009)

2.1 PROFITIBAILITY RATIOS:

This ratio is more specific analysis of profit margin (Elliot and Elliot, 2004). The profitability ratio is the

primary factor for a business. Profitability ratios are concerned with the effectiveness of the business in

generating profit. (Atrill and McLaney, 2004)

RETURN ON CAPITAL EMPLOYED (ROCE):

This ratio explains the performance and earning power of the business. It considers the size of the profit

relevant to the size of the business and shows how efficiently funds are being utilised in the business during

that period. (Atrill and Mclaney, 2006)

Operating profit * 100

Capital employed

Note:: Capital employed = share capital + Reserves + Non-current liabilities

2008 2009

Return on capital employed 4.17 (1.94)

The company is having a negative return on capital employed of (1.94) % as compared to positive return of

4.17% in the previous year. This means that the company is having a poor return on its funds employed. The

reason for the change is that the company’s sales were down by 41% as they have sold 4380 homes which is

33% lower and the average selling prices of house has fallen by nearly 9.26% as compared to last year.

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There is a revaluation in work in progress and stock (land) due to the current market condition.

(Annualreport, 2009)

The fall in operating profit is also due to discounts and the incentives have increased as they were necessary

to generate sales (BBC, 2008).

GROSS PROFIT MARGIN:

According to Alexander and Nobes (2007) ‘gross profit is the difference between the sales price and the cost

of the goods sold. The gross profit margin is an indication of the extra inflow from an extra unit of sales’.

Gross profit margin =

2008 2009

Gross profit margin 9.82 3.04

From the working notes it could be seen that Bellway experiences a downfall in the gross profit margin of

around 3.04% compared to previous year it had a positive figure of 9.82%. The exceptional amount

amounted to £66.3m which is 49.3% less than previous year. The gross profit is also down from last year

before inclusion of exceptional as the sales is down by 41% as they have sold less number of homes, the

company has given discount and incentives to generate sales. According to the chairman statement in the

annual report another factor for less home sales was the major recession with a deteriorating economy, low

consumer confidence and poor mortgage availability. The mortgage approvals have fallen down by nearly

3300 since august 2008. (Annualreport, 2009)

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Gross profit * 100

sales

During this year Bellway’s other competitor Redrow also suffered losses of £140.8m (BBC, 2009).

Due to credit crunch and the press article clearly states that the mortgages lender are not funding up to 100

% of the amount required as they need some deposit (BBC, 2008).

NET PROFIT MARGIN:

According to Alexander and Nobes (2007), the net profit margin shows the amount of net profit a company

makes for every £1 generated in revenue.

Net Profit Margin =

Net profit Sales

2008 2009Net profit margin 4.70 (3.03)

The company is also having a negative return on net profit margin of (3.03) % as compare to positive return

of 4.70% in the previous year it means that company is not earning high profit margins at the expenses of

other aspects (Annualreport, 2009).

In comparison to 2008 the turnover of the company for 2009 is £683.8m with total expenses being £704.5m

whereas it is noticeable that expenses of £1095.4m are lesser than the revenue of £1149.5m in the year 2008.

Since the last five years it is observed for the first time that the company has experienced expenses in access

of turnover (Bellwaycorporate, 2010).

There is a revaluation in work in progress and stock (land) due to the current market condition which has

resulted in exceptional charge of £66.3m. The pension cost for 2009 has increased by £32m as compared to

year 2008 and because of that expenditure has increased and it affected the administrative expenses

(Annualreport, 2009).

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2.2 LIQUIDITY RATIO’S:

Acoording to Atrill and Mclaney (2004) this is concerned with the ability of the business to meet its short

term financial obligation. The ratios which are widely used are as follows.

CURRENT RATIO:

‘Current ratio is calculated by dividing current assets by current liabilities’

The current ratio measures the relationship between an organisation’s current assets and its current liabilities

(Brigham and Ehrhardt, 2007)

Current Ratio = Current Assets

Current Liabilities

2008 2009Current Ratio 4.95:1 5.30:1

It can be seen that the current ratio for the company is 5.30: 1 times in current year as compared to 4.95: 1 in

previous year. It means in year 2009 for every 1 pound liability the company has 5.30 times the current

assets. The rise in the ratios is seen as the company has increase its cash with cash generation and less

commitment towards land deals which have reduced current liability. They have reduced their expense also

by reducing headcount which will generate cash in near term. In comparison to the last year the trade

receivable has increased by 26.71% hence significantly raise the current assets. The company is going to

receive tax receivables what will lead to further cash flow in the operation (Annualreport, 2009).

We can compare and contrast the Bellway performance with their competitor companies in the industry as

follows: Year(2009)

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It can be seen that the company is having more or less the same ratio as per the industry and companies such

as Barrat plc.

Acid Test Ratio

Brighan and Houston (2009) suggests that acid test ratio is calculated by subtracting stock from current

assets and dividing the remainder by current liabilities.

Acid test ratio illustrates the company’s ability to repay immediate commitments using cash or near cash .The results of this ratios are more acceptable in terms of liquidity of the company .During the year 2008 the margin was approximately 0.48 but it was decreased to 0.38 by June 2009 it shows that Bellway has 0.38 pence of quick assets to meet £1 pound of current liability. During the end of the financial year the company has 650 units of closing stock in hand. Thus this has increased the volume of the inventories. The company has charged deposit from potential customers for registrations of land which has heightened the current liabilities under 'payment in advance'. (Annualreport, 2009)

The ratio for this industry when compared with other company is as follows. Year (2009)

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Bellway Plc 5.30:1Persimmon 3.53:1Barrat 4.37:1Bovis homes 8.64:1

Current assets – Inventories Current liabilities

2008 2009

Acid Test Ratio 0.48:10.38:1

Bellway Plc 0.38:1Persimmon 0.16:1Barrat 0.31:1Bovis homes 1.62:1

2.3 WORKING CAPITAL RATIO:

‘Working capital is the difference between a firm’s current assets and its current liabilities. The current ratio

also called the working capital ratio, is current assets divided by current liabilities’. (Stickeny et al., 2009)

Stock days:

This ratio explains how many days the stock is held before the sale takes place (Atrill and Mclaney, 2006).

Stock Days = Stock * 365 days

Cost of Sales

It is noticed from working notes that the stock days for year 09 are 667 days and for year 08 is 530 days. The

changes in the stocks days is that the company had to value their land again as the housing prices slumped

by nearly 9.26 % last year. During this year the company had closing stock of 650 units which reflects and

appreciation to inventories. (Annualreport, 2009)

Debtor Days:

According to Atrill and Mclaney (2006) This ratio explains how long the debtors take to make the payment.

This also says which credit policy the company is having and how effective it is. This average time taken by

debtor to pay the amount sometimes varies as the good debtor pays faster sometimes few debtors will delay

the payment.

= Trade Receivables * 365 days

Credit Sales

The trade debtors are paying in 6 days as compared to 4 days in previous year the company is not able to

collect its funds from debtors quickly. Bellway has brought a new scheme in housing market called Opening

Doors. In which the company agreed to receive three-fourth of selling value and the remainder to be paid

when the client is able to sell or re-mortgage. It reflects an increment in debtors. While looking into the

balance sheet it can be seen the trade receivables are higher this year as compared to previous year.

(Annualreport, 2009)

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Creditor Days:

This ratio’s explains how long the company takes to make its payment to the suppliers.

(Atrill and Mclaney, 2004)

Trade Payables * 365 day

Credit Purchases

It shows how many days the company is enjoying free finance. The company is making its payments to its

suppliers in 29 days as compared to 26 days previous year. The reduction in this is due to reduction in sale

and the cost of sales is done by 36% compared to last year. The management has gone for less number of

contracts commitments in the current market situation. The company has received at small deposit of £250

for registering the land of their interest and this has increased the creditors account under payment in

advance. (Annualreport, 2009)

2.4 LONG TERM SOLVENCY RATIO:

Long term solvency ratio are concerned with how a company is dealing with the long term debt or what measure is adopted for long term financing activities like issue of shares ,loans and so .

Gearing Ratio

The gearing ratio measures the contribution of long term lenders to the long term capital structure of the

business (Atrill and McLaney (2004). It shows how much the company is financed in terms of debt and

equity.

Long term debt + Preference share capital * 100

Share capital + Reserves + Long term debt

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The company is nearing less gearing ratio in current fiscal at 9.43% as compared to 22.76% in previous

year. As compared to previous year share capital has increased from 14372 to 14375 which shows that total

equity of the company has raised. In addition to that the company has paid the debts on bank borrowings

which have reduced the long term debt significantly by £180.9m than the value of total equity. The gearing

ratio is less for 2009 which shows that the position of the equity is stronger than the debt position.

(Annualreport, 2009).

INTEREST COVER RATIO:

This ratio measures the amount of profit available to cover the interest payable (Atrill and McLaney, 2004).

It has been observed that in year 2008 Belway had 2.84 time to cover interest payables portion and in the

year 09 the company has made an under recovery of interest to tune of (1.31) times. This is due to the

operating loss reported by the company after the inclusion of exceptional item.Due to inclusion of written

down value on option cost and part exchange properties the company has confronted operating loss which

has resulted in negative value of interest cover ratio. (Annualreport, 2009)

3.0 CORPORATE GOVERNANCE ASSESSMENT.

At the date 31th July 2009, the Board of Bellway Plc comprises of one Non-Executive Chairman, 3

Executive Directors, 3 independent Non-Executive Directors .The chairman of the board is Howard

Dawe who is the dependent executive director. The structure of the Board and the integrity of individual

Directors is such that no single individual or group dominates the decision making process.

(Annualreport, 2009)

As per the combine code [A.3.2] there is a balance in the number of the executive and non executive

independent directors (FRC, 2010).

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According to corporate governance all Directors have to submit themselves for re-election at least in

every three years, if they wish to continue and eligible according to the Board. It can be seen that the

roles of Chairman and chief executive director are separated where the primary responsibility of

Chairman is to run the Board, and chief Executive has responsibility to result and operate the Board, and

making proposals to the Board for the strategic development of the Group. In the year end 31 st July 2009

board scheduled eleven meetings in which four meetings were audit committee meetings and seven

meetings for Board Committee on Executive Directors’ Remuneration. (Annualreport, 2009)

According to FRC (2010), this criterion is in compliance with the provision A.2.2 of Combined Code

June 2008.

Bellway corporate governance comprises of

3.1 Audit Committee (All independent Non-Executive Directors)

It is responsible to review the financial statement, Group’s internal control and risk assurance process, to

consider the appointment of the external auditors, their report to committee and their independence, which

includes an assessment of their appropriateness to conduct any non-audit work, and to review the program of

Internal Audit. There are three non executives directors in the audit committee where Mr. Johnson is the

senior independent chairman of the audit committee.

According to FRC (2010), this condition satisfies the provision C.3.1 of Combined Code.

This year total 4 meetings were arranged by this committee as well as other 2 meetings done with the

external auditors KPMG Audit Plc. It can be seen that throughout the year group has maintained

whistleblowing arrangement to ensure an avoidance of malpractice. (Annualreport, 2009)

3.2 Nomination Committee ( David G Perry and 4 Non-Executive Directors)

According to Annualreport (2009), only two Nomination Committee meetings were held throughout the

year. The Nomination committee is combination of Chairman who is a non-executive director and other

three are independent non-executive directors, in which David Perry is the Committee’s chairman. The

committee has considered the appointment of new chairman in advance to replace Mr. Perry without using

recruiting agency or open advertising.

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It is responsible to lead the process for the Board appointment and re-election of directors, and to make

recommendations on membership of the statutory committees.

According to FRC (2010), this situation is in agreement with combined code [A.4.6].

3.3 Remuneration Committee (All independent Non-Executive Directors)

It is responsible to determine and recommend to the Board the remuneration policy for the Executive

Directors of the Company, to ensure the levels and structure of remuneration is designed to attract and

motivate, and to monitor the level and structure of remuneration for senior management.

According

to FRC (2010), the condition is in compliance main principle of B.1 of combined code.

There were altogether 7 meetings on executive directors’ remuneration and 1 for the non executive

directors’ remuneration. The company faced the problem when the share holders revolted against the bonus

payment to executive directors. As per shareholders Bellway did not consult them while giving the directors

salaries. (Annualreport, 2009)

Bellway admitted that they should have consulted shareholders in advance over the proposals

(Costello, 2009).

4.0 CONCLUSION

The financial report of Bellway Plc was analyzed with the help of ratio analysis and Corporate

governance performance was evaluated for the year 2009 as compared to year 2008. The company ratio

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says that because of some major factor their performance was down from the last year but the company

board is balanced.

5.0 REFRENCES:

ACCOUNTINGISSUE.2009. Accounting Ratios. [WWW]

http://www.accountingissue.info/accounting-ratios-analysis.html (31st March 2010)

ANNUALREPORT. 2009. Bellway Annual Report and Accounts 2009. [WWW]

http://www.bellwaycorporate.com/pdf/bellway_ar09.pdf (31st March 2010)

ATRILL, P. and MCLANEY, E. 2004. Accounting and Finance for non-specialists. 4th edition. England:

Prentice Hall

ALEXANDER, D. and NOBES, C. 2007. Financial Accounting. 3rd edition. England: Prentice Hall

ATRILL, P and MCLANEY, E. 2006. Accounting and Finance for non-specialists. 5th edition. England:

Pearson education limited

BBC.2008. Slump delays 'Cheesegrater' plans. BBC NEWS.[Online newspaper]

http://news.bbc.co.uk/1/hi/business/7560509.stm (4th April 2010)

BBC.2008.House prices down 2.2% in October. BBC NEWS.[Online newspaper]

http://news.bbc.co.uk/1/hi/business/7712590.stm (4th April 2010)

BBC.2009. Housebuilders look to raise cash.bbc news.[Online newspaper]

http://news.bbc.co.uk/1/hi/business/8270187.stm

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BRIGHAM, E. and HOUSTON, J. 2007. Fundamentals of financial management. 11th edn. USA: Thomson

Higher Education

BELLWAY. 2010. Corporate. [WWW]

http://www.bellway.co.uk/BottomNav/Corporate/tabid/60/Default.aspx (31st March 2010)

BELLWAYCORPORATE.2010. Bellway. [WWW]

http://www.bellwaycorporate.com/profitandloss (31st March 2010)

BRIGHAM, E. and EHRHARDT, M. 2007. Financial Management: Theory and Practice. 12th edn. USA:

South-Western College Pub.

COSTELLO, M. 2009. Bellway investors reject chief's six-figure bonus. [WWW] http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article5533101.ece (20th April 2010)

DOHETRY, A. 2007. Bellway warns of slowing sales. Financial Times. [Online newspaper]

http://www.ft.com/cms/s/0/205be04a-a3cd-11dc-a28d-0000779fd2ac.html (31st March 2010)

ELLIOT, B and ELLIOT, J. 2004. FINANCIAL ACCOUNTING AND REPORTING. 8th edition. Harlow.

Essex .

FRC. 2010. Combined Code June 2008. [WWW]

http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code

%20Web%20Optimized%20June%202008(2).pdf (20th April 2010)

LONDONSTOCKEXCHANGE. 2010. Company Information. [WWW]

http://www.londonstockexchange.com/exchange/prices-and-news/stocks/summary/company-

summary.html?fourWayKey=GB0000904986GBGBXSTMM (31st March 2010)

STICKNEY, C., FRANCIS, J., SCHIPPER, K. and WEIL, R. 2009. Financial Accounting: An Introduction

to Concepts, Methods and Use 13th edn. USA: South-Western Pub.

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THEFREELIBRARY. 2010. NATIONAL HOUSEBUILDER BELLWAY p.l.c. [WWW]

http://www.thefreelibrary.com/NATIONAL+HOUSEBUILDER+BELLWAY+p.l.c.-a079155959

(31st March 2010)

6.0 Appendix

PROFITABILITY RATIOS:

ROCE:

YEAR 2009

___(20733)____* 100 = (1.94)%

(965012+100000)

YEAR 2008

_____54130_____*100 = 4.18%

(1001084+295000)

GROSS PROFIT MARGIN:

14

YEAR 2009

____20821____* 100 = 3.04%

683813

YEAR 2008

_____112891_____*100 = 9.82%

1149541

NET PROFIT MARGIN

YEAR 2009

____(20733)____* 100 = (3.03)%

683813

YEAR 2008

_____54130_____*100 = 4.70%

1149541

LIQUIDITY RATIOS:

CURRENT RATIO:

YEAR 2009

____1306157____ = 5.30:1

15

246147

YEAR 2008

_____1667745____ = 4.95:1

336901

ACID TEST RATIO:

YEAR 2009

__1306157 - 1211351_ = 0.38:1

246147

YEAR 2008

_1667745 - 1503936___ = 0.48:1

336901

WORKING CAPITAL RATIO:

STOCK DAYS:

YEAR 2009

16

1211351_ *365 = 667 days

662992

YEAR 2008

_1503936_ *365 = 530 days

1036650

DEBTOR DAYS:

YEAR 2009

__11032__ *365 = 6 days

683813

YEAR 2008

__13,644__ *365 = 4 days

1149541

CREDITOR DAYS:

YEAR 2009

__52610__ *365 = 29 days

662992

YEAR 2008

17

__75075__ *365 = 26 days

1036650

LONG-TERM SOLVENCY RATIOS

GEARING RATIO:

YEAR 2009

__100,000_ *100 = 9.38%

965,012 + 100,000

YEAR 2008

_ 275,000+20,000_*100 =22.76%

1,001,084 + 295,000

INTEREST COVER RATIO:

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YEAR 2009

__(20,733)__ = (1.31) times

15,818

YEAR 2008

__54,130__ = 2.84 times

19,052

Reflective journal

1. What did I learn from producing the coursework?

Answer:

This was my first time when I was doing the financial analysis for any company though I am not from commerce background but I was fully able to analyse financial concept with a practicable applicability and it helped me how to carry on with research works .After producing the coursework now it would be easy for me to go in more details about the financial concept. The work also helped me to realise my potential in critical thinking and reasoning.

2. What problems did I encounter when completing the assignment (if any)?

Answer: Nothing because I have attended all the classes so my concept was clear about it.

3. What would I do differently next time and what would have enabled me to do a better job ?

Answer: Firstly I will see what mistakes I have done and will try to correct it as well as will go for deeper study, with seeking advice from experts so that I can sense the practical difficulties in research and analysis during the business of a company.

4. When completing the assignment, which learning outcomes did I find easiest / perform best at ?

Answer: Ratio analysis and corporate governance are the two main areas of my research.

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5. When completing the assignment, which learning outcomes did I find most difficult / perform worst at?

Answer: While doing the ratio analysis and corporate governance, I have noticed that companies are having different financial year closings. As well as learned about board of directors that how they operate the huge business. The other thing was, to see whether a company board is balanced and independent or not .

6. Do I honestly believe that I have performed to the best of my ability?

Answer: Yes, I do believe that the input of work in this report was the best to my ability.

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