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Over the two year period Persimmon was able to maintain an ROCE (Return on Capital Employed) higher than that of the industry average, and also increase it slightly from 23. 3% in 2003 to 26. 1% in 2004. This is because they benefited from increased sales, and decreased long term loans from i?? 351 million to i?? 330. 4 million over the two years. Westbury, however, had a decrease in ROCE over the two years, although it remained comparable to the industry average in 2004.

The reason for the decrease in Westbury’s ROCE is because of the sizeable increase in long term loans that they accrued which increased from 69. 4 million to  216. 2 million. This money was raised through a ‘US private placement’, but unfortunately there is no explanation in the accounts for the purpose of this large loan. Both Persimmon and Westbury have managed to increase their operating profit margin over the 2 years. This indicates that they are keeping tight control over their expenses, and also indicates the higher mark-ups on their sales.

The companies are making much higher returns than the industry average of 9. 3% in 2004. This ratio should remain similar from year to year. Both Persimmon and Westbury were able to increase their gross profit margin over the two years by about 2% each. From examining the cost of sales figure, it can be seen that it did not drop proportionately to sales; therefore they have made this increase by making more of a mark-up on sales, and increasing profit. This could be indicative of the supply-demand imbalance, that they are able to charge more for their properties.

A ratio of 2:1 of assets to liabilities is considered prudent, but it does depend on the type of business as to what level is considered acceptable. Therefore, both of the companies could easily afford to pay their short term debts as they fall due as in both years. In 2004, the ratio is above 3:1 for both companies, which compares favourably to industry average of 1. 9:1 Persimmon had a small increase in the current ratio, which is due to the increase in stocks and work in progress being larger than the increase in current liabilities.

This is mainly due to more land being held as stock. Westbury had a significant increase in the current ratio, which was caused by the firm paying off a large sum of money in their short term bank loans and overdraft as the figure dropped by 81% (228,393 to  43,086). It is not mentioned in the notes to the accounts why they decided to reduce their current liabilities, although it could be that some of the increase in long term loans went to paying off the debt at a better rate of interest. A ratio of 1:1 is usually considered desirable.

Both companies’ ratios are well below the 1:1 ratio at 0. 15:1 for Westbury, and 0. 22:1 for Persimmon in 2004. However, this is not necessarily a sign that they are unable to pay the debts they incur, as it seems a ratio below 1:1 is normal in the house building industry. However, both companies do have a very low ratio compared to the industry average of 0. 62:1 in 2004, and this could be something of a concern, as although they are profitable companies, if they have all of their cash invested in stock, they run the risk of not being able to pay their short term debts as they fall due.

The longer a company can take to pay its creditors, the longer they can invest it elsewhere for higher returns for shareholders. Therefore the longest credit agreement is favourable. From the reports it is not possible to ascertain the credit agreements, but it is possible to see from earlier ratios that they are able to pay their debts as they fall due. Persimmon’s creditor payment period increased over the 2 years, from 47 days to 52 days, and this may be due to a sizeable increase of 13% to i?? 199.

6 million in the trade creditors’ amount owed. This allows Persimmon to invest their money elsewhere in the company for longer periods of time before paying their creditors. Westbury’s creditor payment period decreased significantly from 98 days to 71 days in 2004. A possible reason for this is the decrease in the amount of money owed to its trade creditors. This is shown by the stock holding period (see figure 7) which decreased, as they are able to assess more efficiently how much stock they need to meet demand.

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