Paper Example on UK Construction Industry: Financial Data

Introduction

Park, 2015, pg.12 defines univariate analysis as the purest form of a quantitative technique used for statistical evaluation. The, therefore, employs only one variable; describing each variable in a data set and summarising each variable in data set on its own. Also, the univariate analysis does not deal with relationships unlike multivariate analysis but describe the data by taking data, summarizing and finding patterns in the data (Park, 2015 pg. 14).The study, through data exploitation, describes the single variables using advanced tests and ultimately narrow down the types of multivariate analysis we should carry out. The variable data is then consolidated in a frequency distribution table, bar graph, pie charts, histogram, etc. from where the variables are presented. The study requires the collection of financial data regarding the UK construction industry within the years 2005 and 2014. The years represent two years before the financial crisis, two years of the crisis and six years after the disaster.

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Trend Analysis

Trend analysis is a technique that collects information over time and then plotting the info horizontally for further review (Park 2015, pg. 27). The aim of conducting this analysis is to detect the pattern in the relationship between the variables associated and finally project the future direction of the model. Trends analysis will help us evaluate how stable the financial systems of the UK construction industry is, as well use profitability ratio to assess the profitability of UK construction industry. Using liquidity ratios shows the available working capital that is essential to evaluate UK's construction industry performance.

Ratios

Ratio Class A: Profitability Ratios

Profitability is defined as the capacity of an industry or a company to make a profit. The Therefore a profitability ratio is used to measure the profitability of a company, i.e., the company's performance, and efficiency. It assesses the ability of an industry to make earnings concerning the expenses and other relevant costs that are incurred during this time. The relative difference in the ratios in the subsequent time periods indicate either strong or reduced profitability of the industry or the company. Examples of profitability ratios are the return on capital employed, return on equity (ROE), and return on assets (ROA).

Return on Capital Employed (ROCE)

Grant, 2016 pg. 48, defines ROCE as "the ratio of the net operating profit of the company to its capital employed." Therefore, the equation expresses the Earning as the percentage of the total capital employed. ROCE is a better tool for the longevity of a company because it considers efficient use of assets performance while considering long-term financing. ROCE is calculated by:-

ROCE= Earnings Before Interest and Tax (EBIT)/ Capital Employed

EBIT indicates the earning of a company only from is operations without regarding interests or taxes.

Return on Equity

According to "it is also referred to as return on net worth, and is the ratio that is used to measure how easily the shareholders' investment is used to generate profits for the company." ROE is calculated using the formula:-

ROE= Net income/Shareholders Equity

Return on Assets (ROA)

According to Weygandt et al. 2015 pg.112, "it is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets." It indicates the efficiency of a company when managing the company's assets to produce revenue within a specified period (Weygandt, 2015, pg. 113). Because the profit of a company is measured concerning its total assets, the ratio shows the profit generated from the capital a firm has invested in its fixed assets. The formula used to calculate ROA is:-

ROA= Net Income/ Total Assets

The average total assets are used because the total assets can vary during the time.

Ratio Class B: Liquidity Ratios

The liquidity measures the ease with which a company can convert assets into cash. Grant, 2016, pg.87 states that "liquidity ratio is used to analyze a company's ability to pay off both its current liabilities and long-term liabilities as they become due and current respectively." Liquid assets are used to analyze the current liabilities to evaluate how efficiently a company can cover short-term debts in case of an emergency. Therefore, "the higher the liquidity ratio, the higher the margin of safety that the company possesses to meet its financial obligation, i.e., current liabilities" (Grant, 2016 pg.92). Liquidity ratios employed in analyzing the performance of UK's construction industry include quick ratio, current ratio, and Gearing ratio.

Quick Ratio

According to Grant, 2016 pg. 126, "quick ratio is known as the acid-test ratio, quick ratio measures how a company meets in short-term financial liabilities effectively." He further claims that "it indicates the company's short-term liquidity, hence measuring the company's ability to meet its short-term obligations using its most liquid assets." Quick ratio helps determine the level of exchanging assets to current liabilities quickly. The quick ratio is calculated by:-

Quick ratio= (cash + marketable securities + accounts receivables)/current liabilities

Alternatively;

Quick ratio= (total current assets-inventory-prepaid expenses)/ current liabilities

Current Ratio

"It is the most popular and often used liquidity ratios, that helps evaluate how able a company is, to pay off its short-term debt obligations, including the accounts payable, accrued taxes and wages" (DeFusco et al., 2015 pg. 77). It indicates the short-term liquidity of a firm using with a fiscal year. The ratio is widely used to determine whether an investor should invest in or lend money to an entity.

Current ratio= current assets/ current liabilities

The resulting ratio is usually stated in the numeric format rather in decimal format.

Gearing Ratio

Grant, 2016, pg.63 describes it as "a type of financial ratio that measures a company's borrowed funds relative to its equity." It indicates the company's financial leverage, i.e., the financial risk it is subjected because excessive debt can lead to financial constraints. According to DeFusco et al., 2015, pg.136, "company's financial leverage represents the use of borrowed by a firm to increase its sales hence profit. While high gearing ratio indicates a higher proportion of the debt to equity, low gearing ratio represents a low proportion of debt to equity." The most general equation used to calculate gearing ratio should include all forms of debt including both long and short-term and overdrafts. The formula is:-

Gearing ratio= (long-term debt+ Short-term debt + bank overdrafts)/shareholders' equity

Alternatively,

= EBIT/ interest payable

Ratio Class C: Efficiency Ratios

Omar, et al., 2014 pg. 231 states that "the efficiency with which a company utilizes its assets to generate revenues as well as the ability to manage those assets." Efficiency ratio can, therefore, be defined as a firm's ability to make sales by using its assets and liabilities (Omar et al., 2014 pg. 224). Since a company that is efficient in managing its assets and liabilities become profitable, efficiency ratios and profitability ratios go hand in hand. The efficiency ratios used for this analysis are net asset turnover and interest cover.

Net Asset Turnover

Net asset turnover ratio is used to calculate the value of the revenue a company generates relative to the amount of its asset. Hence, it shows the sales made from each dollar of the company's assets. It indicates how efficiently a company deploys its assets when making income.

Net assets turnover= sales/total assets

Interest Coverage Ratio

It is one of the vital; ratios that help in risk management and risk reduction. According to Weygandt, et al., 2015 pg. 170, "interest coverage ratio is the measure of times a company can pay its debt with its earnings before interest and taxes (EBIT)." The ratio is used by creditors and investors to determine the profitability and risk of a company (Weygandt et al., 2015, pg.170).

Interest coverage Ratio= EBIT/ Interest expense

References

DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Omar, N., Koya, R.K., Sanusi, Z.M. and Shafie, N.A., 2014. Financial statement fraud: A case examination using Beneish Model and ratio analysis. International Journal of Trade, Economics, and Finance, 5(2), p.184.

Park, H.M., 2015. Univariate analysis and normality test using SAS, Stata, and SPSS.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.