Report Looking at the Financial Performance of Chudley Construction
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Module Title: Business Strategy Module code: EB215003S Date: May 2007 Lecturer's names: Mike Canter Candidate Name: Aaron Wright SID Number: 0478764 Report Looking at the Financial Performance of Chudley Construction May 2007 Contents Page(s) 1.0 INTRODUCTION 3 2.0 MAIN SECTION 4 - 15 2.1 Appraisal 4 - 6 2.1.1 Profit & Loss Account 4 - 5 2.1.2 Balance Sheet 5 - 6 2.2 Ratio Analysis 7 - 2.2.1 Profitability 7 - 8 2.2.2 Efficiency 8 2.2.3 Liquidity 9 2.2.4 Gearing 9 - 10 2.2.5 Investment 10 2.3 Advice on Chudley Construction... 11 - 15 2.3.1 Recommended as a subcontractor? 11 - 12 2.3.2 Recommended as a main contractor to a subcontractor? 12 - 13 2.3.3 Recommended to investors? 13 - 15 2.3.4 Recommended to a supplier supplying goods? 16 2.3.5 Recommended as a well managed company? 16 - 17 3.0 CONCLUSIONS 18 4.0 RECOMMENDATIONS 19 References 10 Appendices 1.0 INTRODUCTION This report looks at Chudley Construction's profit & loss account and balance sheet and attempts to provide advice to potential investors as to whether or not they are a suitable company to conduct business with / invest in. Ratio analysis is undertaken where possible, which helps examine the financial health and performance of the company. This review process has raised a number of questions, primarily in respect of the lack of information provided, one key example being the absence of a cash flow statement. Alongside the profit & loss account and balance sheet, a cash flow statement is considered "one of three essential reporting and measurement tools for assessing a company's strength" (http://www.businessballs.com/finance.htm). Cash flow statements illustrate the cash flow of a company i.e. the money flow in and out of the company's bank account in terms of income and expenditure over a specified period. Accurate forecasting of the cash flow is vitally important for planning and budgetary control. The report may also look at a range of factors which would influence whether or not Chudley Construction may be considered as a company suitable to conduct business with / invest in.
The other ratio for interest cover calculates the amount of profit available to cover interest payments. 2.2.5 Investment A number of ratios exist which can help investors assess the potential return on their investment, three of which I have calculated: * Dividend per Share = £5.00 per share * Dividend Payout Ratio = 4.0% * Earnings per Share = £120 per share Dividend per share gives an indication of how much cash an investor will receive for their shareholdings. Dividend payout ratio illustrates the amount of earnings that a business will pay out in the form of dividends to it shareholders. I was unable to calculate three investment ratios, as I was not provided with 'market value per share' and 'operating cash flow'. These investment ratios were: * Dividend Yield Ratio - This allows potential shareholders to assess the cash return they can expect per share compared to the shares market value. * Operating Cash Flow Per Share - This provides shareholders a good guide as to whether a business can afford to pay dividends, particularly in the in the short run. * Price / Earnings Ratio (P/E) - This compares the market value per share with the earning per share; and is a good measure of future market confidence. 2.3 Advice on Chudley Construction... The next section of the report will offer advice on whether or not I deem Chudley Construction a suitable company to conduct business with, for a number of potential investors. It will also discuss the information you would need to make an informed decision. 2.3.1 Recommended as a subcontractor? I have devised a model (see figure 1) which can be used to help select potential subcontractors or main contractors. The model poses questions in four key areas; financial, technical quality, reliability and workability. Financial Good credit history? Do they have references for payments? Payment dates - stage payment can they cope?
From the information provided, I feel Chudley Construction would be a risky investment to all businesses and investors as a lot of money is currently tied up in stock and WIP. I must state that if I was provided with further information, my interpretation of the information may change, as there may be reasons for the financial performance. There are also a host of ways of reporting accounting information, and Chudley Construction may have adjusted accounting records for income and expenditure to enhance financial reporting. A review of the most recent management accounts i.e. the day-to-day financial accounts might throw more light on the strengths or weaknesses of this company. The acid test indicates this business is struggling for cash whilst trying to grow too quickly. This report should be treated with the utmost caution due to the limitations of information provided, and should therefore not be used to make any final decisions. It is merely an interpretation of what little information has been provided and tends to raise as many questions as answers. 4.0 RECOMMENDATIONS In order to improve this report, I would ensure that I obtain as much information as possible, not just financial, but also how the company was run and operated. I would advise auditors to investigate how the business operates. It would also be beneficial to gain access to historical records, along with forecast business plans etc to see how Chudley Construction plans to grow. The report could have compared the performance with other companies in the construction industry, by making use of the 'Financial Analysis Made Easy' (FAME) database. The FAME database would have allowed me to benchmark Chudley Construction's performance against similar sized construction companies; however I felt that benchmarking the limited information provided would be of little relevance. I was only provided with limited information for one accounting period, and would benefit, if provided with historical results to see how Chudley Construction has performed in the past. At present all we have been provided with is a recent snapshot.
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