Essay On Financial Performance Analysis Of Redrow Plc And Bellway Plc.

Overview of Redrow plc

Case 1
You have recently joined Persimmon plc, a large UK house builder and property developer, as assistant to the Head of Strategy. After a few weeks in the job you are having a drink after work with your boss and he asks you how you are getting on (to which you are suitably enthusiastic in your reply). He goes on to say that he has been thinking about how the company might develop over the next few years. He is interested in two substantial, albeit smaller, companies in the same industry and says “We have a fair amount of cash, profits are good, and I am sure there are some acquisition opportunities out there. I have been wondering whether we might look more closely at Redrow plc or Bellway plc as possible acquisitions. 
Keep the idea to yourself for the moment – it pays to be discrete in this line of work! You could do some background work for me – I know you are good on the finance side of things, so could you do a preliminary report for me comparing the two companies from a financial perspective- performance, future prospects, financial stability etc. You might also include a comment on their stock market performance –it might be worth a flutter buying a few shares myself at some point! The more I talk about the idea, the keener I am to investigate, so maybe you could make this a priority. Another drink?”
Required:
Prepare a report for your boss on the lines requested. You should explore the financial performance, including stock market performance, financial position and future prospects of both firms and come up with a recommendation of the preferred acquisition target (if any)
Notes for Case 1: • Use the most recent full year annual report and accounts of the companies
• Give your report a title & provide an Executive Summary.
• Give a brief introduction to cover the issues to be analyzed and the approach you will consider.
• Remember a CORE approach is expected.
• What do they need to know to understand the numbers better
• Use strategic models Porter, SWOT etc as appropriate but relate them to the company
• This section should be 500-600 words as a guide
Overview
• A few key figures to paint the broad picture plus a few brief comments Ratios
• Don’t just show lots of calculations, explain what you infer from the numbers and ratios and how they support your conclusions and recommendations.
• Define any non-standard ratios used but demote detailed calculations, etc. to an appendix.
• Evaluation
• Fully consider both financial and non-financial factors.
• Reach a conclusion and give clear advice.
• Cite references, state assumptions made, mention other information that might be useful or further investigations you would have liked to conduct.
• Make your report “as concise as is consistent with clarity”.
• Make use of supportive diagrams
• Comparisons essential where possible.
• Report needs to look professional – Would you give it to your boss!
Case 2: Capital Investment
Case 2 The Battsave Project.
Over the last two years the DLM company has spent £350,000 developing a new product, “Battsave”, which reduces the battery usage on a tablet. It is now ready to go into production and DLM is planning to spend £50,000 on a promotional budget to launch the new product.
The new device will need new equipment costing £330,000 to produce it although £30,000 of this could be saved by utilising some existing packaging machinery. This machinery has been in the company for some years and has a zero net book value, although DLM is currently negotiating to sell it to a nearby online distributor for £8,000. Any new machinery could be sold at the end of the 5 years for £40,000, although it is very possible it could be kept and continue to be used for other products at that time.
Most of the materials necessary to produce the Battsave are readily available at a cost of £4 per unit. In addition a special controller device is needed which costs £1.50 per unit. DLM currently have 5,000 units of these controllers available which have no use elsewhere in the business. A well-known high street electronic store has offered to buy these immediately for £1.25 per unit.
Labour costs amount to £3.50 per unit. The company has no room to manufacture on its existing site, so will need to lease an adjoining factory unit which has just become available for £12,000 per annum (p.a.) Fixed production overheads are estimated at £38,000 p.a. These do not include straight line depreciation on the new machinery but do include a share of the regular cost of running.

Required:
The DLM company wants to check out the viability or otherwise of Battsave before committing further funds and has asked you, as their recently appointed strategy advisor, to produce a report containing relevant calculations and recommendations.

Introduction 

Financial performance analysis is a strategy of assessing and measuring the perdormance and position of the organization from each financial angle. It determines the strengths and weaknesses of the firm by estimating the every last thing of income statement and balance sheet. Monetary investigation can be performed by utilizing numerous methods, for example, ratio analysis, horizontal and vertical analysis, trend analysis and others. The fundamental target of leading the investigation is to assess the money related circumstances of the firm in order to know about its solvency, profitability, liquidity and. The information is gathered from the distributed yearly reports of the organization on its official site and is legitimately assessed for taking suitable decisions (Gibson, 2011). 

The report manages the monetary investigation of Redrow Plc and Bellway Plc for the year 2017 and 2018. It has embraced a CORE approach which gives context, overview, ratios and evaluation of both the organizations' execution amid the years. The report features the issues emerged which influenced the position and performance of the organizations in general. CORE methodology gives the general blueprint of the analysis and is most appropriate for upgrading the understanding of the reader.  

It is the United Kingdom based organization occupied with the residential housing development. The firm is one of the biggest British house manufacturers having 15 operational divisions across the country. The core exercises of the organization include development of private houses all through England and Wales. The product range is centred on the idea of conventional family lodging in its local business. The properties possessed by Redrow include Heritage Collection, Regent Collection, Abode Collection and Bespoke Collection. The organization is listed on London Stock Exchange and is exchanged with a ticker RDW: LSE. The SWOT examination of Redrow Plc is as per the following (FT.com. 2018).

Strengths

• Redrow Plc has a wide system of distribution which ensures that its items are effectively open and accessible to its clients in auspicious way.
• The organization has constructed a solid dealer network by setting up a connection between the dealer and distributer.
• Redrow has strong free cash flow position which empowers it to grow its business in new markets.

Weaknesses

• The organization fizzled at confronting the difficulties given by new contestants in the segment and should centre on enhancing the criticism component internally from the sales team to counter the difficulties.
• Despite making tremendous interest in Research and Development, Redrow can't contend with the main players in the business on the part of advancement.
• The organization isn't great at foreseeing the demand for its products as contrast with its rivals.

Opportunities

• Increase in purchaser spending and moderate growth rate gives a chance to Redrow to expand its client base and piece of the pie.
• The advancement of market will lessen the contender's leeway and empower the organization to enhance its intensity.

Threats

• One of the dangers to the organization is expanded rivalry in the market which can affect the development of its benefits.
• New participants in the market are picking up pieces of the pie and are a risk to Redrow as it can lose its clients to the new players.

It is a residential property designer in Uk which depends on Newcastle upon Tyne. The organization deals in constructing and selling the homes having a range from one bed room lofts to five rooms’ family homes. Likewise, it additionally gives social lodging to-lodging affiliations. It works through 19 exchanging divisions including England, Manchester, Kent, North London and numerous others. Different business contributions of the firm incorporate electrical, kitchens, gardens, washrooms, flooring, fire encompass and fire, fired tiling and others. The organization is listed on London stock trade with a symbol BWY: LSE and was established in 1946 (FT.com. 2018).

Strengths

• The organization has a soliddistribution It has a wide system which enables the firm to reach to the potential market effectively.
• It is has a strong base of dependable providers which empowers the organization to conquer the supply chain bottlenecks.
• Bellway has a solid portfolio and is centred around building the equivalent in order to extend its business.

Weaknesses

• It has confronted issues in moving to other product segments and has a constrained accomplishment outside its centre business.
• The high current and quick ratio recommended that the firm could have utilized its money and fluid assets more productively and viably.
• Not exceedingly good while converging with huge organizations and with the individuals who have distinctive work culture.

Opportunities

• New inclines in consumer spending and conduct can bring about opening up new market for Bellway Plc.
• Encouragement given by the legislature to manufacture more rapidly is required to support growth.
• Strong interest in housing market by the administration can make an open door for Bellway to appreciate achievement and development in future (IBIS World. 2018).

Threats

• Price inflation and uncertain housing prices can have an adverse impact on the company’s profits.
• Cut throat rivalry winning in the housing business can be a risk to the survival of Bellway Plc.
• Entry of new players and utilization of trend setting innovations by the contender is likewise a genuine risk to the organization.

The turnover of Bellway was higher than of Redrow amid the year 2017. Likewise, the operating profit of the organization was higher alongside the cash flow from operations. The net benefit of Bellway was £454 million which was higher than Redrow's benefit worth £253 million. In any case, the firm should focus on paying off its obligation part in order to bring down the level of its financial risk. Notwithstanding that, it needs to improve its liquidity position as a lot of cash in hand can prompt some major issues in the business. Bellway needs to strategize legitimately to make the best use of its fluid assets in setting of organization's development and achievement.

Overview	Redrow	Bellway
	2017	2017
Turnover	1,235.0	2,191.30
Operating profit	322	571.55
Operating cash flow from activities	128	153.1
Profit for the year	253	454
Total debt	966.0	956

SWOT Analysis of Redrow plc

It is a system used to quantify the money related information of the organization with the assistance of its yearly reports. It assesses the things of money related explanations from every last angle and gives bits of knowledge about the execution and position of the firm to administration and investors (Bragg, 2012). The investigation considers the quantitative information introduced in the yearly reports for the years. Money related proportion investigation of Redrow Plc and Bellway Plc has been finished by utilizing the yearly report of 2017 and 2018.

These measurements help in understanding the money related quality of the organization by estimating its competency in satisfying its current budgetary commitments with its present resources (Bragg, 2012).

• Current ratio: The underneath table demonstrates that the CR of both the organization has expanded throughout the years. For Redrow, the proportion was 3.21 in 2017 which expanded to 3.23 in 2018. Also, if there should be an occurrence of Bellway, the proportion was 3.59 in 2016 that ended up being 3.76 in 2017. Both the organizations have high proportions however relatively; Redrow Plc has bring down proportion than Bellway. It very well may be deciphered that the liabilities of Redrow are less and furthermore it has high measure of CA which improves it proportion. Notwithstanding, both the organizations has proportion more than the standard one which mirrored that they don't use its assets effectively.

	Redrow		Bellway
Current ratio	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Current assets (A)	2140.0	2350.0	3,147.30	2,720.84
Current liabilities (B)	666.0	727.0	837.60	757.61
CR (A/B)	3.21	3.23	3.76	3.59

• Quick Ratio: When assessed, it has been seen that the QR of Redrow and Bellway was not exactly the perfect benchmark of 1:1. Redrow has low proportion of 0.15 in 2017 while on the opposite side Bellway announced a proportion of 0.21 amid that year. This was because of the way that Bellway has nearly more fluid resources utilized for reimbursing the liabilities.

	Redrow		Bellway
Quick ratio	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Quick Assets (A)	97.0	132.0	179.20	172.54
Current Liabilities (B)	666.0	727.0	837.60	757.61
QR (A/B)	0.15	0.18	0.21	0.23

These budgetary measurements are utilized for estimating the general gainfulness of the organization. The proportions are especially helpful for the financial specialists as to settle on reasonable choices with respect to their interest in a specific firm (Gibson, 2011).

• Net profit ratio: it tends to be seen that Bellway has high NPR as contrast with Redrow. Amid 2017, the organization detailed a net edge of 17.74% while its rival Redrow reflected NPR of 15.24%. Reason being, the firm has made high net benefits because of the solid interest of new lodging the nation over.

	Redrow		Bellway
Net profit margin	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Net profit (A)	253.0	308.0	454.00	385.50
Total revenue (B)	1,660.0	1,920.0	2,558.50	2,240.65
NPR (A/B)	15.24%	16.04%	17.74%	17.20%

• Return on Equity: Due to the solid base of benefits, Bellway has given exceptional yields to its investors as contrast with Redrow Plc. It has been seen that the ROE of Bellway was 20.86% in 2017 while amid that year, Redrow detailed the proportion of 19.92%. Nearly, the measure of value of Bellway was likewise more than its rival.

	Redrow		Bellway
Return on equity	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Net income (A)	246.0	326.0	457.1	400.9
Shareholders' equity (B)	1,235.0	1,483.0	2,191.3	1,867.0
ROE (A/B)	19.92%	21.98%	20.86%	21.47%

• Return on capital employed: Due to high working benefit or profit before intrigue and assessment, Bellway has high ROCE as contrast with Redrow in both the years. Be that as it may, as contrast with 2016 the proportion has been decreased because of the upsurge in Bellway's present liabilities. It shows that Bellway is more fit for making adequate usage of its capital utilized in the business.

	Redrow		Bellway
Return on capital employed	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
EBIT (A)	322.0	382.0	571.50	492.00
Capital employed (B)	1,535.0	1,680.0	2,309.7	1,963.2
ROCE (A/B)	20.98%	22.74%	24.74%	25.06%

They measure the long haul dissolvability of the organization by assessing its obligation and value component. The measurements utilized aides in understanding the capital structure of the firm and assessing the degree of monetary hazard taken by it (Godwin and Alderman, 2012).

• Debt to value: Comparatively, Redrow has high D/E proportion of 0.78 a year ago which speaks to that the organization depends more on outside obligation as contrast with its rival. High bank advances and lenders helped up the proportion for the organization. Then again, Bellway has low enthusiasm bearing borrowings which mirrors that the firm is less monetarily hazardous.

	Redrow		Bellway
Debt to equity (gearing)	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Total Liabilities (A)	966.0	924.0	956.00	853.82
Shareholder's equity (B)	1,235.0	1,483.0	2,191.30	1,867.00
D/E (A/B)	0.78	0.62	0.44	0.46

• Debt Ratio: the beneath table mirrors that the obligation proportion of Bellway was 0.30 in 2017 while the equivalent was 0.44 if there should be an occurrence of Redrow Plc. The sole explanation behind such variety was that the Bellway has high measure of advantages which are sufficient to cover every one of its liabilities. This lessened the proportion to some degree.

	Redrow		Bellway
Debt ratio	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Total Liabilities  (A)	966.0	924.0	956.00	853.82
Total Assets (B)	2,201.0	2,407.0	3,147.30	2,720.84
DR (A/B)	0.44	0.38	0.30	0.31

These proportions decide the competency of the firm in making income by using every one of its benefits and assets adequately and effectively. The measurements measure the ability of the administration in overseeing and keeping up its assets (Higgins, 2012).

• Asset turnover ratio: Bellway has the equivalent ATR in both 2017 and 2016 revealed at 0.75 occasions. Likewise, its proportion was more than the ATR of Redrow that was 0.57 occasions. This was because of the huge sum discharged from the offer of organization's property plant and hardware amid that year. It in the end added to the expanded turnover and effective usage of benefits.

	Redrow		Bellway
Asset Turnover	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Sales (A)	1235.0	1483.0	2,191.30	1,867.00
Average Total Assets (B)	2,171.0	2,304.0	2,934.05	2,505.05
ATR (A/B)	0.57	0.64	0.75	0.75

• Inventory turnover ratio: The ITR of Bellway was additionally more than Redrow on the grounds that the adjustment in its stock is route not exactly the expansion in its rival's stock amid the year. Likewise, the proportionate increment in Bellway's COGS and normal stock has lessened the proportion as contrast with 2016.

	Redrow		Bellway
Inventory turnover ratio	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Cost of goods sold (A)	1255.0	1451.0	1,896.90	1,665.89
Average inventory (B)	1,973.0	2,130.5	2,758.20	2,341.75
ITR (A/B)	0.64	0.68	0.69	0.71

• Debtor turnover ratio: The DTR demonstrates the invert incline in the event of Bellway Plc has it was 26.53 occasions in 2017 while Redrow mirrored the proportion of 34.79 occasions amid that year. This was on account of Redrow has low indebted individuals relatively and was centered around gathering its receivables productively.

	Redrow		Bellway
Accounts receivable turnover	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Net sales (A)	1235.0	1483.0	2,191.30	1,867.00
Average accounts receivable (B)	35.5	38.5	82.60	72.25
DTR (A/B)	34.79	38.52	26.53	25.84

These proportions measure the execution of organization's stock throughout the years. These measurements are utilized by the speculators with the end goal to realize that whether the offers of an organization are overrated or underpriced (Jenter and Lewellen, 2015).

• Price earnings ratio: The P/E proportion of Bellway was accounted for at 7.72 that was more than the proportion of Redrow at 7.27. Be that as it may, if there should be an occurrence of Bellway, the proportion has been decreased from 9.13 to 7.72 in 2017. The decrease was because of the reduction in organization's offer value which implies that the loads of the organization are underestimated.

	Redrow		Bellway
Price earnings ratio	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Market price (A)	509.0	516.1	2,856.16	3,004.00
EPS (in cents) (B)	70.00	85.00	370.00	329.00
P/E (A/B)	7.27	6.07	7.72	9.13

• Earnings per share: Bellway has high EPS relatively and furthermore the proportion has been expanded throughout the years. In 2017, Redrow announced EPS of 0.70 while Bellway's EPS was accounted at 3.71. This was because of the high measure of net benefits made by the organization. Likewise, it has issued less number of offers.

	Redrow		Bellway
Earnings per share	2017 (£m)	2018 (£m)	2017 (£m)	2016(£m)
Net income (A)	253.0	308.0	454.00	402.90
Number of shares outstanding (B)	361.0	361.0	122.51	122.55
EPS (A/B)	0.70	0.85	3.71	3.29

From the above investigation, it tends to be said that in contrast with Redrow Plc, Bellway has performed well in 2017 from all the money related angles. The organization has high productivity and dissolvability position. In addition, it is sufficiently productive to make high turnover by using every one of its assets viably and effectively. Taking a gander at the productivity factor, Bellway has offered significant yields to its investors because of the high benefits made by it amid the year. Moreover, the organization has low budgetary hazard as it depends less on obligation. Also, Bellway has made high income by using its non-current advantages for a more prominent degree. In general, the firm has performed well however it needs to concentrate more on its liquidity position and should make more utilization of trade out turn in regard of developing the business. To the extent non monetary components are considered, Bellway has more extensive system than Redrow as it has 19 divisions through which it works. Likewise, it gives an extensive variety of items to its buyers which can end up being gainful for Persimmon Plc in future. Thus, it is suggested and reasoned that the board of directors of Persimmon should acquire Bellway Plc as it has performed well and superior to Redrow Plc.

The report highlights the capital budgeting techniques that are been used for evaluating a proposal and to check the viability of the same. DLM Company wants to make investment in bringing their new product Battsave into production phase and for that purpose, the firm needs to determine the profitability of the project in order to analyse that whether it is better to go forward with the project or not. For this purpose, various investment appraisal methods are used and are explained in the report.

Overview of Bellway plc

The procedure followed in order to determine the feasibility of the investment projects is known as investment appraisal or capital budgeting. The tools and techniques are generally applied for the proposals which are expected to give long term benefits in future. For instance, purchase of any property, plant and equipment, starting a new production line and others (Borgonovo, 2017). Such projects involve huge capital investment and therefore it is very much necessary for the companies to properly evaluate them before taking any sort of investment decisions. The methods used involve payback period, IRR, NPV, average rate of return and others (Baker, Jabbouri and Dyaz, 2017).

It is the simplest technique applied to measure the viability of a project as it determines the amount of time required for recovering the initial investment. Generally, projects having low payback period are more favourable for the companies than the ones having longer PBP (Daunfeldt and Hartwig, 2014).

Calculation of payback period
Years	Cash flows	Cumulative cash flows
0	-£ 308,000.00
1	£   56,250.00	-£              251,750.00
2	£   76,000.00	-£              175,750.00
3	£ 107,500.00	-£                68,250.00
4	£ 160,000.00	£                91,750.00
5	£ 179,000.00	£              270,750.00
Payback period		3.43

It can be interpreted from the above calculation that Battsave will take 3.4 years to recoup the initial cash outflow made on the project. Out of the useful life of 5 years, the project will take 3 years and 4 months to recover the initial investment. This reflected that Battsave will be feasible enough in near future to generate positive and high returns.

This method is used to measure the profitability of the proposal. It considers the present values of the cash flow which are helpful in providing more relevant outcomes. It is said that if NPV of the project is positive and high, then it should be accepted otherwise rejected. Proposals having negative NPV show that they are not able to generate high returns in future and thus can bring loss to the company (BiermanJr and Smidt, 2014).

Calculation of net present value
Years	Cash flows	pvf@8%	Present values
0	-£ 308,000.00	1	-£ 308,000.00
1	£   56,250.00	0.93	£    52,083.33
2	£   76,000.00	0.86	£    65,157.75
3	£ 107,500.00	0.79	£    85,336.97
4	£ 160,000.00	0.74	£  117,604.78
5	£ 179,000.00	0.68	£  121,824.39
Net present value			£  134,007.22

It can be seen that the new product of DLM Company proves to be profitable as it has high and positive NPV. This means it will generate high returns in future as its NPV is accounted at £134,007.22 by discounting the cash flows at the required rate of return of 8%. Also, in third and fourth year high cash inflows will be made by the project will make profits for the company in coming years.

It is where the NPV of the proposition is zero which implies the present value of cash outflow is equivalent to the present value of cash inflow. The choice measure for IRR is that the activities having high internal rate of return are acknowledged (Gotze, Northcott and Schuster, 2016).

Calculation of internal rate of return
Years	Cash flows
0	-£ 308,000.00
1	£   56,250.00
2	£   76,000.00
3	£ 107,500.00
4	£ 160,000.00
5	£ 179,000.00
Internal rate of return	20%

DLM has set the benchmark for IRR at 18% and according to the counts; the IRR of Battsave is 20%. This implies the venture is great for the organization as it has IRR higher than the standard and the cost of capital of the company.

Conclusion

From the above investigation, it has been prescribed to DLM that it ought to acknowledge and go ahead with its product Battsave. It is totally practical and attainable for the organization as it has brought down shorter period, high IRR and high NPV. The item will create benefits in future and interest in it will assist the organization with growing and make progress in the business.

Along with this, it is also concluded that before making any kind of capital speculation, the organizations are required to appropriately check the reasonability of the projects by applying important and dependable capital budgeting techniques. It will help the firm in the long run and assist it to take reasonable and suitable decisions in regard of making capital ventures (Shapiro, 2008).

References 

Baker, H.K., Jabbouri, I. and Dyaz, C. (2017). Corporate finance practices in Morocco. Managerial Finance, 43(8), 865-880.

BiermanJr, H. and Smidt, S. (2014). Advanced capital budgeting: Refinements in the economic analysis of investment projects. Oxon: Routledge.

Borgonovo, E. (2017). Sensitivity Analysis: An Introduction for the Management Scientist (Vol. 251). Switzerland: Springer.

Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New Jersy: John Wiley & Sons.

Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley & Sons.

Daunfeldt, S.O. and Hartwig, F. (2014). What determines the use of capital budgeting methods?: Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4),101-112.

FT.com (2018). Bellway PLC BWY:LSE. [Online]. Available at: https://markets.ft.com/data/equities/tearsheet/profile?s=BWY:LSE  

FT.com (2018). Redrow PLC RDW: LSE. [Online]. Available at: https://markets.ft.com/data/equities/tearsheet/profile?s=RDW:LSE 

Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.

Godwin, N. and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.

Gotze, U., Northcott, D. and Schuster, P. (2016). INVESTMENT APPRAISAL. (2^nded.). New York: Springer.

Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.

IBIS World (2018). Residential Building Construction - UK Market Research Report. [Online]. Available at: https://www.ibisworld.co.uk/industry-trends/market-research-reports/construction/of-buildings/residential-building-construction.html 

Jenter, D. and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.

Shapiro, A. C. (2008). Capital budgeting and investment analysis. India: Pearson Education.