1.0 Executive Summary

2.0 Introduction

Travis Perkins plc. is one of the leading companies in UK on building and plumbing

merchants. This company began in year 1797 by Benjamin Ingram Company and carpenters

founded at the City of London. However, Benjamin Ingram next merged with Perkins and

formed Ingram Perkins. In year 1970, Sandell Perkins was formed by merging with Sandell

Smythe & Drayson and Ingram Perkins. Both companies are supplier local goods of building

and home materials. Together with few numbers of acquisitions, Sandell Perkins was finally

a public listed company and was listed on the London Stock Exchange in year 1986. There is

another merger between Travis & Arnold and Sandell Perkins in late 1988 and formed

company name Travis Perkins. Travis Perkins was actively providing product lines such as

building materials, landscaping materials, painting and decorating materials, timbers,

kitchens and bathrooms, and other materials till present 2014.

3.0 Detailed Evaluation

3.1 Profitability

Profitability ratio is used to measure how much does a company generates profit from the

sales. There are two different way to measures of profit which is gross profit, net profit and

return on assets (Thukaram, 2003).

The gross profit margin of Travis Perkins on year 2012 was 30.21% and decreased 0.45%

becomes 29.76% on the year 2013. Gross profit margin is used as an indicator to business’s

financial performance. The higher the percentage, the better business retains of sales and

more money remains for other expenses and net profit. Meanwhile, lower gross profit margin

refers to the business generate low level of profits to pay the expenses. It causes the business

lack of control on production and inventory cost is low. One of the way to solve low grow

profit margin is to increase company’s sales. Travis Perkins should increase their sales

volume without increasing any cost of goods sold per unit (Raul, 2012). This method can be

done because the fixed cost per unit becomes smaller.

The net profit margin of Travis Perkins shows an increase rate of 0.22% from 6.18% on year

2012 and 6.4% on year 2013. Travis Perkins has a high net profit margin because they do

generate enough sales. High net profit margin shows the more effective the company in

converting revenue to actual profit. Supply and demand are one of the reasons in increasing

the profit margin of a company (George, 2012). For instant, your product has higher demand

thus; customers are willing to pay at a higher price. Besides that, by reducing the cost of

goods sold able to increase the profit margin too (M. Y., 2007). For example, getting low-

priced suppliers, and cheap material are few ways to reduce costs of goods sold.

Return on assets (ROA) is the return to all providers’ funds where total assets are equal to the

total liabilities and equity. Besides that, it also used to measures the overall effectiveness of

management in term of generating profits (Gibson, 2004). The return on assets of Travis

Perkins in year 2012 is 6.88% and increased 0.54% to 7.42% in year 2013. This result

concludes that the company is in high profitability. Besides that, Travis Perkins has an

excellence control in expenses by spending less money able to decrease the volume of sales.

3.2 Short-term Liquidity

Liquidity ratio refers to the competence of a firm to figure out the short-term loans and

unpredicted cash. It involves quick ratio and current ratio. Current ratio is to measure the

company’s ability to clear its current liabilities (Roman Weil, Katherine Schipper, 2009). The

current ratio of Travis Perkins for year 2012 is £0.93 and increase to £1.18 on year 2013.

Result shows that an increasing of £0.25 and conclude that Travis Perkins is in a comfortable

financial position. Current ratio that is lower than 1 shows that the firm might face some

difficulties. Besides that, investors should take note on a firm’s cash flow (Kapil, 2011).

Quick ratio is to measure the instant debt-paying ability of a firm. The quick ratio of Travis

Perkins for year 2012 is £0.54 and increase about £0.13 to £0.67 on year 2013. It shows that

Travis Perkins’s quick ratio is less than one means that they’re holding too much of stocks.

Besides that, the result shows that they are highly dependent on their inventory too. On the

opposite side, quick ratio of less than one indicates that firm wouldn’t be able to repay their

debts by using their liquidity assets (Irfanullah, 2012). Travis Perkins must cut down their

stocks which has exceeds over limit of stocks.

3.3 Operating Efficiency

Efficiency ratios used to measure how effectively a firm does to utilize their assets and

liabilities. Efficiency ratios includes assets turnover, inventory turnover, receivables days,

and payables days (Roman Weil, Katherine Schipper, 2009).

Asset turnover refers to the amount of revenue generated per dollar of assets. Travis Perkins’s

asset turnover shows £1.11 on year 2012 and £1.16 on year 2013. It concludes that Travis

Perkins has a higher asset turnover for year 2013. On the other hand, they could able to

generate more sales with fewer assets which may help the company to get higher turnover

ratio on the year 2014.

The inventory turnover of Travis Perkins of year 2013 is lower than 2012 which shows result

of £5.26 on year 2013 and £5.31 on year 2012. It shows that Travis Perkins having a low rate

of inventory turnover. Besides that, the business shows that there were increased in

expectation of sales that did not occur (Henri, 1996). Travis Perkins has lot of unsold goods

and comes out with high inventory rate. Therefore, it shows that Travis Perkins have lot of

inventory on year 2013 compared to 2012.

The receivable day of Travis Perkins on year 2012 was 55 days and 58 days on year 2013. It

is important for a company to collect their money from the debtors. Short period of

receivables refers to the company were actively exercised good credit control and collecting

their debts on time. However, a long period of collection indicates that the firm were facing

difficulties on credit terms and may face problems on paying their suppliers on time

(Norman, 2012).

The payables day of Travis Perkins on year 2012 was 120 days meanwhile on year 2013 was

123 days. When a firm is paying its suppliers in a rapid time might cause cash flow

difficulties. Therefore, Travis Perkins weren’t facing any difficulties on paying its suppliers

on time in 123 days on year 2013. Compared to 2012, it takes faster to pay its suppliers in

120 days. Therefore, it assumes that Travis Perkins was having difficulties on paying its

suppliers and having cash flow on year 2012.

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3.4 Capital Structure and Solvency

Debt ratio used to measures the extent of a company’s power. The higher the ratio, the more

powerful the company are and greater the financial risk. The debt ratio of Travis Perkins on

year 2012 was £0.48 and reduced to £0.43 on year 2013. According to (Henri, 1996), every

company has its own levels for debts and ratio of 0.5 is a reasonable ratio. Therefore, Travis

Perkins debt ratio is considered to be less risky which refers to the company has twice of its

assets to the liabilities. In the other hand, the assets of the company have two times than the

liabilities: 2:1.

Interest cover for Travis Perkins was 10.88 in year 2012 and 13.90 in year 2013. Result

shows that in year 2013 has the highest value of interest cover compared to 2012 only 10.88.

Besides that, Travis Perkins does not have the ability to pay their debts on time on year 2013.

However, the company should find investors or a creditor who willing to borrow.

The gearing ratio is the relationship between equity and debts. It is very important to have a

balance between these two where it can indicate the level of risk of a business. If a company

has a high gearing ratio, it means that it has high long-term debt (Richmond, 2004). The

gearing ratio of Travis Perkins in year 2012 is 20.90% and reduced about 6.38% to 14.52% in

year 2013. High gearing ratio refers to a great deal of leverage where a firm are using debt to

pay their operations. In additional, the firm may facing trouble in debt payment and high risk

of bankruptcy.

3.5 Investors Attractiveness

Earnings per share refer to the market prospect ratio that measures an amount of net income.

Besides that, earnings per share also show that how profitable a company is. Travis Perkins

earnings per share in year 2012 were £104.3 and increased to £109.9 in year 2013. Therefore,

higher earnings per share are better than lower ratio (Bhattacharyya, 2011). This is because

the company is more profitable and more profits will be distributed to their shareholders.

Dividend yield is a financial ratio that used to measure the amount of money distributed to

common shareholders accordingly to the market value per share. Besides that, it is used by

investors to figure out how their investment goes. Investors use this analysis to compute the

dividend or cash flow from the investments. In year 2012, Travis Perkins dividend yield

shows a 1.98% and decreased to 1.44% on year 2013. Results show that, Travis Perkins

having a low dividend yield and pay its investors a small dividend.

Dividend cover uses to measures the percentage of net income that is distributed to

shareholders in terms of dividend. Investors are usually interested on dividend cover because

they are interested if the company are giving out a reasonable percentage of net income to all

the investors. In year 2012, Travis Perkins dividend cover shows a £4.21 in year 2012 and

decreases to £3.84 in year 2013.

4.0 Marginal Costing and Absorption Costing

Marginal cost refers to the cost of an additional unit of output and it is used to determine an

optimal quantity of production for a company.