Introduction
The Berkeley Group Holdings plc is a Britain property Developer Company, with several subsidiaries located within the region. The company builds and develops residential and commercial properties. Some of the developments that the company has done include executive homes, high specification apartment towers, and skyscrapers, among others. Also, the company has been involved in community development and has built community villages, parks, and other community facilities. The company’s vision is to continue providing homes and community places.
The below report evaluates the financial performance for Berkeley Group Holdings plc for the last five the year 2015-2019. The report assesses the potential investment opportunities for the company to decide on whether to acquire another company in the construction industry as part of its expansion plans. The Financial analysis gives a baseline for investors to analyze financial reports to access the financial health of securities. The financial ratios are used as a tool to plan and assess the firm’s efficiency. Investing decisions are made based on the company’s balance sheet, cash flow statement, and income statement. Additionally, the qualitative data below give an estimate of the value of investment required.
Evaluate financial performance
Financial Ratio analysis- Profitability
The gross profit ratio analysis indicates the company’s financial health for the last five years. From the study (Table 1: Appendices C), Berkeley’s profit margin has been steady since the year 2016 to 2018 and dropped in the year 2019 from 35.0% to 31.3%. According to the Annual reports for the year 2019, the decrease was a due mix of properties sold in the year (Annual Report | Berkeley Group, 2019). It indicates that after paying the cost of goods sold, the company can make a profit of 31.3%. A high-profit margin shows that Berkeley was more efficient in the year 2018 than in the year 2019, though the level of efficiency depends on the company and industry (Wilkinson, 2013). However, using a profit margin entirely is believed to include some production costs that are not variables.
Financial Ratio analysis- Liquidity
The liquidity ratio measures the company’s viability and ability to meet its obligations. Where the liquidity of the current asset meets the requirements of current liabilities, then the firm’s management is termed to be efficient (Carlson, 2019). From (table 2), the Berkeley group can meet its short term debt obligation over 2.0 times. For an instant, the company’s current assets can pay 2.8 times its current liability. It indicates that with the ongoing operations and for the last five years, the company has paid its current commitment internally, without depending on external debts. The company’s solvency level has increased from the year 2015 to 2018, meaning the Berkeley increased its liquidity in 2019.
Financial Ratio analysis- Efficiency
Assessing the company’s efficiency is essential because it encompasses different business players. Efficiency analysis demonstrates how different player’s interests are affected, and it motivates them to implement new strategies (Yu et al. 2014). The above ratios show both short term and current performance of Berkeley. According to (table 3), for every Euro in the asset, Berkeley makes an average of 5.1 cents (Appendices A). It is an indication that Berkeley has efficiently allocated its resources, and it was making a profit from the operations (Nickolas, 2020). From the year 2015 to 2017, the revenue generated; each Euro in the asset was more than 5 euros of sales earned. While in the year 2018 and 2019, the earning per Euro has declined to a rate of 4.58 and 4.65 respectfully. It implies that the company has failed to employ its assets effectively.
Financial Ratio analysis- Financial Gearing
Financial gearing for Berkeley shows the comparison of shareholder’s equity to the company’s financial stability. It determines the company’s financial health. A high gearing ratio indicates that the company has an upper portion of debt compared to equity (BOYTE-WHITE, 2019). From the year 2015 – 2017, Berkeley’s equity ratio ranged from 48% to 47% is below 50%, an indication of a stable condition, while the rise in equity ratio in 2018 and 2019 is a scary situation; because of the high leverage.
Evaluation of NPV and IRR
Conclusion and recommendation
The Berkeley group performed well in the past four years, from 2015 to 2018 (Table 1), which changed in the year 2019, though still efficient to expand its operations. However, despite the decline in profit margin, the company can efficiently pay its current liabilities from the existing assets. The company has remained solvent for the past four years, and the level of solvency has gone up in the year 2019 (Table 3). However, the company has not utilized its assets efficiently, since its rate of earning per Euro in assets employed in 2018 and 2019 to 4.58 and 4.65 respectfully. The rise in equity ratio in 2018 and 2019 to a rate of 55% and 60%, respectively, indicates an unstable stable condition (Appendices B). It would mean if Berkeley is not able to finance its expansion internally, outsourcing for external debts will make the company riskier.
Though the financial statement should be relevant to serve a particular purpose, the company should compare its financial statement with other industries or companies with similar concerns (Agarwal, n.d.). As (Appendices A) has indicated analysis of ratios classified under different categories brings a better understanding and meaningful review, the management should note the trends shown on (Appendices B). Therefore, the administration needs to note that these financial analyses are prepared from interim reports; hence the information revealed could be incomplete or thorough. Also, the financial statements are affected by many qualitative factors like customer satisfaction that cannot be articulated in fiscal terms (Agarwal, n.d.). Therefore, the board managers should consider using the available funding to expand or recover the outstanding debts and will increase the amount of cash available, reduce some of the expenses or use new marketing skills to get more customers.