MJ Gleeson Plc Financial Analysis

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Introduction

The stiff competition which has engulfed the contemporary business arena has forced many companies to maintain proper books of accounts. Proper maintenance of financial records is imperative for every successful business. Maintaining proper financial records enables a company to identify the various areas of finance where it is failing. For instance, during the recent economic recession firms which do not value proper book keeping were more affected as compared to companies with efficient book keeping department. By keeping proper financial accounts low sales and excess expenditure are effectively addressed and an appropriate cause of action is implemented in case a deviation from the budget is detected. Due to these factors, companies have resulted in hiring and motivating experienced auditors who are supposed to be independent. These auditors are trained to follow accounting ethics and must report the real financial situation of the company to the shareholders. Some companies have adopted the services of external auditors in order to ensure that the work done by the Accountants reflect true financial position of the company at the end of a financial year. In addition, most of the organizations have adopted a period of 12 months as their financial year. At the end of the financial year, it is imperative that every company hold an annual general meeting in order to give reveals the financial position of the company to the shareholders and other interested parties. This paper seeks to analyze the financial position of MJ Gleeson Plc by using its financial statement.

MJ Gleeson Plc is a company which is based in the United Kingdom. The firm deals with general building and construction services. MJ Gleeson Plc also deals with process engineering including electrical installations and maintenance. Financial analysis is a vital accounting procedure which entails preparation of annual reports of a company. The reports include the balance sheet, the income statement and cash flow statements. This analysis involves critically examining the accounting principles used by the company in relation to other companies in the industry.

MJ Gleeson Plc bases its assets and liabilities using the historical cost principle which ensures that consistence in accounting is maintained. Revenue recognition on construction contracts is calculated and referenced in relation to the completion level of those contracts as at the end of the financial year. Financial assets on the other hand, are not recognized when they are purchased but an investigation is done to determine whether a profit or a loss was incurred after the initial purchase. The company also includes exceptional items on its financial statements. These are items which are infrequent but sometimes occur during the day to day operations of MJ Gleeson Plc. Even though some of the expenses incurred by the company may seem to be negligible, it is imperative to take into consideration their short term and long term implications on the company. Some of the minor expenses incurred by the MJ Gleeson Plc include renovation of acquired premises. It is the culture of the company to treat such expenditure under the exceptional items in the profit and loss account. The company recognizes interest income as accrued and dividend is recorded on the income statement once the payment date has been determined.

Sources of financial funds for MJ Gleeson Plc

The achievement of the objectives of a budget highly depends with the availability of financial resources and well maintenance of books of accounts. Due to intensive competition for the available resources, companies have adopted various techniques to maximize their production. In this regard, it is vital for companies to diversify their sources of income. The MJ Gleeson Plc sources of finance include borrowed loans and discount on deferred payments which are recorded in the income statement. Effective interest method is used to recognize the interest to be paid on borrowed income. This type of interest rate is suitable because it doesn’t incorporate one-time charge.Plants, equipments and stationary are depreciated using the straight line method. This is a method whereby, the amount of depreciation charged is constant through out the expected life time of the asset. This method is also easy to calculate and all non-current assets are depreciated except land which instead of depreciating in value it appreciates. MJ Gleeson Plc uses equity method of accounting to recognize joint ventures. This technique is mainly used when a company holds more than 20% of another company’s holding/equity. The company values inventory by estimating the selling price of the stock during normal working situation.

MJ Gleeson Plc Strengths

Proper analyses of the strengths and weaknesses of a company is a fundamental issue which cannot be overlooked if firms aim at increasing their production of goods and services. In this regard, one of the notable strengths of MJ Gleeson Plc is that the company has acquired a large market share in the construction industry. This is based on the fact that the company operations are highly concentrated in the Northern part of England. MJ Gleeson Plc has adequate assets to meet both the short-term and long-term business obligations. The company is also well diversified in that; it deals with construction and restructuring of houses as well as electrical installation. Secondly MJ Gleeson Plc Company highly values the health and safety procedures for its employees. For instance, MJ Gleeson Plc employees are well protected from bodily harm when performing their jobs. Employees are accidently injured are well compensated.

The company has a strong social responsibility program which gives the company a chance to serve the society. This initiative has a positive implication in that it enhances the publicity of the company. In addition, MJ Gleeson Plc has been able to improve its image as compared to its competitors through CSR programs. When a company practices social responsibility, its reputation is increased and customers have faith and goodwill towards the company. MJ Gleeson Plc has an effective risk checks put in place. For instance, the company’s top managers meet regularly to address any pressing business issue. During these meetings, managers from different departments submit their weekly reports which must be analyzed and appropriate adjustments are done. The company uses standard protocol in establishing the communication channel to be followed during times of crisis. Different levels of authority are respected and power of authority is maintained hence making the management efficient and maintain control. MJ Gleeson Plc has effective training methods and procedures put in place to train its employees. New employees are thoroughly trained according to their job descriptions hence increasing their job performance and help in meeting the company’s overall goals and objectives. By establishing different policies for each and every department ensures overall management control. When departments have independent policies, control becomes easier. This is because every department has unique operational characteristics which are different from other departments. MJ Gleeson Plc has insured its main business undertakings. Business risks can not be avoided in this unpredictable business environment and by insuring these risks, promises business continuity when calamity strikes. This is major strength in that many companies in this industry are uninsured against these risks.

MJ Gleeson Plc Weaknesses

Over the last three years, MJ Gleeson Plc has experienced phenomenal losses resulting from declining sales. This decline had been caused by the un-stabilizing selling prices as well as the exceptional renovations of houses. MJ Gleeson Plc has a high employee turnover as many employees have been laid-off. For instance, the company at present has 311 employees, which is great reduction compared to the previous years. Although the company used unique policies and procedures for each department, it is difficulty to compare the performance level of these different departments. Another weakness of MJ Gleeson Plc is that, instead of devising new methods and procedures in dealing with low sales, the company retrenches and reduces the number of employees. This gives the company a bad reputation which further affects the company negatively.

Financial ratios

By using financial ratios, a company’s financial situation can be critically examined. Ratios have to be compared and the figures interpreted and analyzed. This is because independent figures are of no use to the company and so, they have to be compared with others in the industry, (Elliot et al, 2004).This part of the paper indicates some of the most important financial ratios applied by the MJ Gleeson Plc

Liquidity ratios

These ratios examine MJ Gleeson Plc ability to meet short-term obligations. A high liquidity ratio shows that a company can meet its financial obligation without compromising its daily operations.

Acid-Test Ratio

This ratio determines whether a company can meet its short-term obligations without including its inventory.

= 10.93+57.91
33.54
= 2.05

According to the above ratio, MJ Gleeson Plc has the ability to pay its short-term liabilities without selling any inventory employed. In normal circumstances, when a company has an Acid-Test Ratio of less than one, many creditors consider that company’s credibility status as unhealthy (Elliot et al, 1994).

Profitability ratios

Profits have always been considered a main indicator of company’s performance. This can be done by comparing the company’s profit capacity in relation to its capital. These are ratios which determine the overall profitability of the company during a specified period of time.

Profit margin

This ratio indicates the profitability position of the company after the taxes payable by the company have been deducted from the total sales.

Recommendations

MJ Gleeson plc is constantly underperforming in the construction industry as seen from its financial statements. This is witnessed from the declining turnover in the last three years. That is from ₤ 194.5 million in 2007, to ₤ 55 million in 2009.This low turnover resulted to the greatest losses within those three years. This company has to improve its turnover and decrease the exceptional charges. The company is highly liquid which gives an assurance to its creditors.

Conclusion

Based on the above analysis of MJ Gleeson Plc, it is important to note that accounting department is an important section of an organization which should be properly managed. Bearing in mind the importance of this department, well trained auditors and accountants have an important role of ensuring that true and reliable information is depicted by the books of accounts.

References

Elliot, Barry, Jamie, Financial accounting and reporting: London: Prentice Hall, 2004.

Weygandt J, Kieso, Accounting Principles: London: McGraw-Hill, 1996.

Information on MJ Gleeson Plc financial statements: 2010.

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