Beazer Homes USA Inc Business Analysis Essay
Financial statements analysis involves evaluation of an organization’s previous financial performance and determination of future performance based on information that has been obtained. Analyzing a firm’s financial performance does not only require the capability of an analyzer to sense and judge, but also requires application of analytical techniques.
Analyzing Financial Statements: Beazer Homes USA INC
The organization’s financial data and information are used by various stakeholders as well as those individuals who want to invest in the organization in one way or the other. Some of these stakeholders include creditors, investors, suppliers, employees, the government, competitors, and proprietors of the organization. Creditors require firm’s financial information in order to determine if the organization is or is not in a stable financial position to repay credit extended to it. Investors require the firm’s financial information in order to decide whether or not to invest in the organization. The information enables them to determine the firm’s ability to make profit with invested finances. In turn, competitors use the firm’s financial information to compare its performance with the other firm and improve areas in which it has lagged behind. Owners or proprietors of an organization use its financial statements to know how their business is performing compared to previous years as well as determining its financial position, which enables them to make decisions about the company. Lastly, the government has to get firm’s financial statements to calculate how much it is going to charge as tax depending on the firm’s returns.
This paper analyzes Beazer Home USA Inc., a Fortune 500 American homebuilding organization founded in 1985 and based in Atlanta, Georgia. The firm builds and sells single family as well as multiple family homes in over twenty states of the US. It offers homes for entry levels, moving up, as well as retirement-oriented buyers. The company sells its products under its unique brand of Beazer Homes. Moreover, under the application of a commissioned new home, it engages qualified sales counselors as well as individual brokers. Determination of ratios of a company has emerged as one of the most significant ways of analyzing financial information. This paper provides a clear picture of the company’s financial performance and the information obtained will be necessary in comparing the data of the company with its previous data and with other companies in the same industry.
Ratios Calculation and Evaluation
Current ratio is determined by the process of division of current assets of a business by its current liabilities:
Current ratio = current assets/current liabilities
It determines whether or not an organization has sufficient cash in order to meet its current liabilities over the following fiscal year of its operations. The ratio obtained is considered as a test of liquidity for the firm. It determines if the organization has enough cash to meet its short-term liabilities with current assets it has.
On the one hand, short-term creditors would rather go for a high current ratio than a low credit ratio since it draws down their general risk. On the other hand, they may prefer a higher current ratio because they are more concerned about growth of the firm by using its assets. A current ratio has twice the current assets as current liabilities are acceptable by most investors although the ratio may vary from one investor to another.
A high current ratio indicates that the organization is holding high capital in the form of current assets. With Beazer Homes USA Inc., current assets increased from $5.12 million to $10.7 million, which shows that the liquidity state improved in 2016 (U.S. Securities and Exchange Commission, 2017).
Quick ratio = current assets – inventory/ current liabilities
- The high quick ratio proves that the organization has the ability to recover its short-term debts from its liquid assets. Most importantly, there is a huge distinction between current and quick ratios due to the fact that the company has enormous inventory.
- Also, it can be seen in the balance sheet that the company has increased its highly liquid investments that can be easily turned into cash.
- Cash ratio generally looks at the ability to cover liabilities more than other liquidity ratios. This is because it does not include inventories or accounts receivables in the equation. The cash ratio remained constant for the years 2016 and 2017.
Long-Term Solvency /Financial Leverage Ratios
Total debt ratio = total assets-total equity/total assets
Total debt is the amount of long-term interest bearing liabilities, which an organization performs on its balance sheet. It includes bonds that have been sold out to the public, capital leases, or even notes sold to banks. The advantage of debt is that it can assist an organization in increasing its earnings although the burden of interest and principle payments will ultimately prevent the company from excessive borrowing.
Debt equity ratio = total debt/total equity
Debt to equity ratio is calculated by a process of division of the total debt of an organization by its equity. If the debt exceeds equity of an organization, then creditors have a bigger stake in the company than stakeholders. Debt to equity generally offers more insight about the composition of both equity and debt as well as their influence on the valuation of the organization. The debt/ equity for Beazer Inc. was 7.02. Such a small debt to equity ratio shows that the firm is not taking full advantage of its financial leverage. However, a high debt to equity ratio may indicate that a company has been borrowing too much to finance its growth. This may make the firm experience a burden of additional interest expense. The ratio measures how the organization is leveraging borrowing compared to the capital invested by investors.
Equity multiplier = total assets/total equity ($1,986,789 – $240,550/$1,986,789 = 87.9%)
Times interest earned ratio = EBIT/Interest
Cash coverage ratio=EBIT+DEPRECIATION/interest
- Debt Ratios 2017 2018
- Total Debt Ratio 86.8% 87.9%
- Debt/ Equity Ratio 72.9% 65.9%
- Equity Multiplier 7.55 8.26
- Times Interest Earned 50.2 30
- Cash Coverage Ratio 0 0
The above ratios measure the extent to which the firm is financed by debt and whether the firm is in a position to meet its interest payments. Debt to total assets ratio suggests that the firm had more debt financing in 2017 than before, but it is not a considerable amount of change compared to the previous year. Debt/equity ratio has increased from 87.9% to 86.8%. Debt financing is extremely high and will possibly increase the EPS and therefore will reduce the dividend per share, assuming that it will keep on increasing. Equity multiplier is stable by 0.71, which means that the company has 0.71 in assets for every 1$ in shareholder equity. Times interest earned decreased from 50.2 to 30, which suggests more risk for creditors since they fear that they cannot get their interest. Also, it will be very difficult for the firm to borrow additional funds. Cash coverage ratio cannot be determined because the firm does not show depreciation in the balance sheet.
Asset Utilization/Turnover Ratios
These ratios are to show how quickly the firm converts its current assets into cash. A/R turnover and days sales in receivables show that the firm is efficient in collecting its receivables and it gives a very short credit period to customers. It also indicates that the organization is too strict in its credit policy and takes only favorable trends. Total asset turnover faces an increase from 0.51 to 0.65, which could be caused by efficiency of controlling assets or the firm’s proper utilization of its assets to generate sales. Lastly, capacity intensity suggests that there is inefficiency in deployment of its assets although expenses are still very low.
Profit margin measures the overall work of an organization and shows the company’s ability to withstand competition and resist adverse conditions like rising costs, decrease in sales, and decrease in prices, or even management distress. The profit margin shows investors how well the company carries out its entire pricing strategies and how effective the organization is in controlling its costs. Generally, profit margin tells the amount of money the organization makes from total sales or revenue. It can offer a good insight into firms in the same industry and assist in learning trends of an organization from year to year. Beazer Homes USA Inc. shows a profit margin of -1.0%, which is 37.11% lower than the average in the industrial goods sector.
Return on assets, ROA, shows how effective the management of an organization is in creating income by using all available assets. It is an important ratio that assists in evaluating performance of various departments of an organization and comprehending management performance over a period of time.
Return on equity (ROE) = net income/ total equity
Return on equity tells organization’s stockholders how well their investment is being used or invested. It is a vital ratio when analyzing the organization’s profitability or management effectiveness given the capital invested by investors. Return on equity shows how well an organization uses investment to create income. In most industries, ROE between 10 and 30 percent is considered as desirable to offer dividends to its investors and have money for the growth of the organization in future. When using return on equity, investors should be keen because ROE can be high if an organization is heavily leveraged.
From the calculation for Beazer Homes USA Inc., the return on equity is -6.28%, 25.5% lower than that of the industry. Profit margin ratio illustrates the amount of profit realized for every single dollar of the company’s sales. A low ratio may suggest that expenses as a percentage of sales are high or that the firm cannot sell enough to cover them. Net income has drastically dropped from -14.45% to -2.63% due to high expenses of the company. Net loss was $145,326 million and decreased by $33,868 million in 2016 (U.S. Securities and Exchange Commission, 2016).
Return on assets ratio measures the amount of profit generated for every dollar invested in assets. This ratio showed a drastic decrease in 2016. The ratio is made by a combination of profit margin and total asset turnover. It is clear that the drop in the ratio is due to the lower profit margin and total assets turnover. A low ratio is unfavorable and a deeper analysis should be done to increase the profit margin.
Return on Equity shows profit generated by the firm for every dollar invested by shareholders, as well as the management performance. Management is looking for a higher ratio, but unfortunately 46% decrease was seen in 2017.
Return on equity is composed of three major constituents, including:
- Profit margin (operational efficiency), which indicates a huge drop.
- Total assets turnover (utilization of assets), which decreased as well.
- Capital structure, the use of debt financing, i.e. leverage.
It is clear that there was a dramatic drop in profit margin and decrease in the total asset turnover indicates that the management is ineffective. Moreover, it suggests that the company is not effective in using its assets to generate sales.
Most importantly, many organizations are aimed at maintaining their current ratio as 1 in order to ensure that their current assets can cover their current liabilities. On the one hand, current ratio that is greater than 1, as in the case of Beazer Homes USA Inc. at 8, cushions the organization against future contingencies that might arise in the short term. On the other hand, the current ratio of this organization is way too high. This implies that the company is using its resources inefficiently and that the resources are concentrated in the working capital of the company, which could be put in other revenue generating activities. All in all, this company is better than those, which maintain a much lower current ratio since they tend to risk their companies. That is due to the fact that liquidity matters should be accounted for in every company.
Quick ratio, as noted before, is an indicator of the organization’s solvency and should be analyzed over regular periods of time, just like current ratio. Quick ratio of Beazer Homes is still high despite the fact that it has been reduced in the current year compared to the previous year. This implies that this company is investing too much with available working capital of the firm, which could be invested somewhere else and still generate more profit than it is currently generating. This company should consider investing cash in other new ventures or if there are no other available and more profitable ventures, it should then return excess funds to shareholders as profit or use them to cover borrowed finances. In any case, the fact that Beazer Homes USA Inc.’s quick ratio is high makes the company better than others in the industry, which have very low quick ratio, implying that such companies take great risks by not balancing the buffer of liquid resources.
Moreover, the debt to equity ratio of Beazer Homes USA Inc. is 0.65. This implies that the organization uses debt financing equal to 65% of equity. This is a reduction when compared to the previous year when it used 75% of debt financing. In both cases, the debt to equity ratio is relatively high. Such high debt to equity ratio increases chances of the company’s default in repayment, which may result in liquidation. This may be dangerous to all stakeholders of this organization, especially investors and lenders, since it increases the risk associated with their investment. This in turn may force them to demand a higher rate of return to cover additional risks. Such increases in required rate of return by lenders and investors will consequently increase the cost of capital for Beazer Homes USA Inc. However, the high ratio of debt to equity for this company could imply a positive concept as well. This is so since debt is sometimes a cheaper source of finance when compared with equity due to tax savings associated with the latter. Therefore, the company can maintain the ratio at a high level, but not at an extremely high one because very high ratio may cancel the benefit that is associated with this concept. This is because high ratio will be met by investors’ and lenders’ high rate of returns due to the risk associated with such high levels of debt. It is therefore crucial for this company to measure the debt to equity ratio and maintain it at a reasonable level.
Net profit margin ratio: As discussed earlier, profit margin ratio indicates the proportion of revenue that turns into profit. In this case, the Beazer Homes USA Inc. had a profit margin of -2.63% in 2017. This was an improvement compared to 2016 when the margin was -14%. The fact that this figure is negative indicates that the company actually suffered losses. This ratio is a crucial and fundamental key performance indicator of the organization’s profitability. The decrease in the net profit margin ratio from -14% to -2% is a significant change that probably contributed to increased sales coupled with efforts of the company to reduce the rate of expenses involved in buying and constructing homes. The low profit margin of 2016 could be explained by existence of a competitive environment in this industry, which consequently influenced such factors as selling price, cost structure, and cost of factors of production and inflation. The company might have done a research and come up with ways of reducing the cost of production as well as that of sale in 2017, hence explaining improvement in profit margin.
The total revenue increased by 28% from 2016 to 2017, which indicates that the company is making more sales by selling houses, but with more expenses. The company experienced a very high drop in profitability and ended up with high cost and expenses that resulted in losses in previous years. Home construction and sales expenses increased by 20%, which raised expenses. The cost of revenue increased from $1,005,677 to $1,287,577 (U.S. Securities and Exchange Commission, 2017).
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From the analysis it is evident that Beazer Homes USA Inc. is still performing well compared to previous years because there is a significant reduction in losses in 2017 compared to 2016. The loss amounted to $145,326 to $33,868 in 2016 and 2017 respectively (U.S. Securities and Exchange Commission, 2014). In case the company can decrease the cost of building homes and get cheaper land, it will eventually stop making losses, which will significantly boost its profits. Beazer experienced a large amount of expenses although the revenue shows further growth compared to the previous year, which is a good sign. However, the main sources of loss included home and land sale expenses, depreciation, and amortization. Furthermore, it is evident that it is hard to predict whether these expenses could result in profit because the cost of expenses was increasing faster than the revenue that the company should have maintained or increased steadily.
This company needs a clear plan in order to reduce its expenses. As it can be seen from the analysis, main causes of these losses were related to operational costs. Fixed costs did not contribute immensely to high expenses. With a proper and well-controlled business plan, the company will be in a position to make profits and increase earnings for its investors since the market for its products, homes, is in demand and the company is competing relatively well in this market.
This paper has discussed financial analysis of Beazer Homes USA Inc. The financial statements have shown a consistent increase in total revenue over three years. However, the firm is still in a phase of low or no profits, which is explained by high expenses, especially the cost of home construction and cost of buying land. The paper has explored liquidity ratios for this company. It has looked at the current ratio, which measures whether or not an organization has enough cash to meet its current liabilities over the next fiscal year. The ratio obtained for this company is very high, 8 times, and this is a positive indication although it also shows that the company is not efficient in using its available working capital. The quick ratio at 2.54 proves that the organization has the ability to meet its short-term liabilities from its liquid assets. The same concerns its cash ratio, which generally looks at the ability to cover liabilities in more depth than other liquidity ratios, although it remained constant for two years.
The paper has also analyzed profitability ratios of the company. Profit margin has been among them and it indicates that there is a great improvement from -14% to -2% despite the fact that the company is still making losses. Return on assets showed a significant drop to 1% from 7% and the return on equity had a 46% decrease in 2016. Asset utilization or turnover ratio shows how quickly the firm converts its current assets into cash. The total asset utilization is low at 0.5 times although it is an improvement from the previous year’s 0.65%. Lastly, the paper has discussed the financial leverage ratio, which measures the extent to which the firm is financed by debt and whether the firm is in a position to meet its interest payments. This company was financed at the level of 86% and 87% in 2016 and 2017 respectively.