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Historical Financial Analysis of a Listed Company

Home Free essays Analysis Historical Financial Analysis of a Listed Company

First of all, an overall financial analysis of the Pulte Homes should be provided. According to Pulte Homes 2012 annual report, the companys net operating revenues decreased from $7.47 billion in 2002 to $6.28 billion in 2008, and $4.13 billion in 2011. Additionally, the companys net income decreased from $453.67 million in 2002 to -$1473.11 million in 2008. However, it should be noted that during the last three years the companys net income increased from -$1096.7 million in 2010 to -$210.3 million in 2011, and $206.1 million in 2012. That is why the company received net income $206.1 million in 2012. It means that the company is recovering after the difficult times.

It should be mentioned that financial analysis is an interesting subject, as it requires the knowledge of how to use financial statements, for example, income statements and balance sheets. Financial analysts perform an analysis of financial statements of an enterprise and provide recommendations for improving the current situation. However, there is no single approach to determine such category as financial analysis. Some economists support an opinion that financial analysis is an analysis of companys financial state; however, other economists emphasize a dynamic approach to determining this category. They consider financial analysis to be an analysis of financial processes, in which an enterprise takes part.

However, in our opinion, it would be reasonable to provide a clear definition from economic dictionary. Thus according to Business definition for financial analysis,

Financial analysis use and transformation of financial data into a form that can be used to monitor and evaluate the firm’s financial position, to plan future financing, and to designate the size of the firm and its rate of growth. Financial analysis includes the use of financial statement analysis and funds-flow-adequacy ratio. (Business definition for financial analysis, n.d.)

However, according to the most definitions, financial analysis is the analysis of the financial statement of a company (Business definition for financial analysis, n.d.).

The first group of ratios is the ratio of profitability. This group includes rate of return on net sales, rate of return on total assets, and rate of return on common stockholder’s equity. According to the data provided in Table 1, the Pulte Homes ratios of profitability were higher in 2002 as compared with 2012 and especially 2008. The Pulte Homes return on total assets dropped from 6.5% in 2002 to -19.1% in 2008. However, the companys return on total sales increased from -0.27 in 2010 to -0.07 in 2011, and 0.03 in 2012. For this reason, the companys effectiveness and profitability are slowly recovering after the consequences of global financial crisis. However, it is premature to state that the companys effectiveness is good since profitability ratios are still low. Generally, the companys profitability was higher in 2002 and it was deteriorating till 2008. The companys effectiveness increased during the last few years, but it has not reached its 2002 level yet.

The current ratio describes the companys ability to repay its own debts. This ratio shows the level of coating total current liabilities by total current assets. According to data provided in Table 1, the Pulte Homes current ratio increased from 1.26 in 2002 to 1.87 in 2008, and 2.79 in 2012. It is noteworthy that this ratio decreased to 2.79 in 2012 as compared to the previous year; however, it does not matter since the value of this ratio exceeds the normative values. It means that companys liquidity is quite high.

The next indicator is the acid-test ratio, and it is better for the measurement of the companys liquidity than previous indicator, because money is always money. It is well-known that cash is an absolutely liquid asset, and the company does not need to sell accounts receivable or merchandise inventories for repaying debts. This indicator is calculated by dividing such high-liquid assets as cash, short-term investments, and accounts receivable over total current liabilities.

As it can be seen from the data provided in Table 1, the Pulte Homes acid-test ratio increased from 0.65 in 2002 to 0.97 in 2008 and then it decreased to 0.69 in 2012. As a result, the companys absolute liquidity is quite high. However, it is not an excessively optimistic indicator since the company has a redundant liquidity. Generally, the companys liquidity was high during the last 10 years and its high values during the global financial crisis can be explained by the companys low effectiveness.

Table 1

The Pulte Homes Indicators of Financial Analysis





Profitability ratios


Return on total assets




Return on stockholders’ equity




Return on sales




Net return on sales




Return on Invested Capital %




Liquidity ratios


Current ratio




Acid-test ratio




Inventory to net working capital




Leverage ratios










Coverage ratio




Activity ratios


Inventory turnover




Fixed-assets turnover




Total assets turnover




Shareholders’ return ratios


Earnings Per Share




Book Value Per Share




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According to the data provided in Table 1, it becomes obvious that the Pulte Homes profitability and liquidity ratios are increasing. However, if the companys liquidity ratios can be considered as high, profitability ratios have not reached its 2002 level. That is why the company should improve its effectiveness and profitability.

As it is known, such popular indicator as an inventory turnover ratio shows a period, over which firms inventory is sold and replaced. The main rule is that all indicators of turnover must increase. According to the data provided in Table 1, the companys inventory turnover decreased from 8.96 in 2002 and 9.02 in 2008 to 0.92 in 2012. It means that the current situation is much worse than it was in 2002. Generally, the companys activity ratios were deteriorating during the last 10 years.

Additionally, it should be noted that the companys solvency can be estimated by the use of the leverage ratios. Therefore, the next very important indicator of financial stability of any company is the debt ratio. This indicator is determined by dividing total liabilities over total assets, and it shows the percentage of total liabilities in the structure of liabilities.

Therefore, the Pulte Homes financial stability dropped since debt ratio increased from 0.59 in 2002 to 0.63 in 2008 and 0.67 in 2012. It means that the companys debts are 67% of total assets. That is why the companys financial stability and solvency cannot be considered as safe.

In addition, such toll as Altmans Z model should be used in order to estimate the companys probability of becoming a bankrupt and its solvency during the last 10 years. As it is known, Altman in his researches used financial data of stable companies which become bankrupts during the next five years. Altman included 22 financial ratios, which were shortened to 5 most important ones. Using his analytical method, Altman offered the following reliability equation:

Z = 1.2 1 + 1.4 2 + 3.3 3 + 0.6 4 + 0.99 5, where

X1 – working capital / total assets

X2 – retained earnings / total assets

X3 – earnings before interest and tax / total assets

X4 – market value of equity / total liabilities

X5 – sales / total assets. (Altman Z-Score, n.d.)

A score below 1.8 means the company is probably headed for bankruptcy, while companies with scores above 3.0 are not likely to go bankrupt. The lower / higher the score, the lower / higher the likelihood of bankruptcy is (Altman Z-Score, n.d.).

Table 2

Altman Z-score for the Pulte Homes






X1 – Working Capital / Total Assets





X2 – Retained Earnings / Total Assets





X3 – Earnings Before Interest & Tax / Total Assets





X4 – Market Value of Equity / Total Liabilities





X5 – Sales / Total Assets.





Altman’s Z-score





Therefore, according to the Altmans Z-score model, the companys probability of heading for bankruptcy had been decreasing till the beginning of the global financial crisis and then it was slowly improving. That is why, as it has been previously assumed, the companys financial stability is recovering, but the companys Z score was below 1.8 during the past three years. It means that the probability to head for bankruptcy is quite high. It should be sated that the companys financial stability was the best during the first five years of the 2000s, while the global financial crisis affected the company a lot.

To conclude, it should be noted that the Pulte Homes financial state is not stable, but the companys financial ratios increased during the last three years. However, these ratios have not reached their level of 2000 yet. Generally, the Pulte Homes had the better financial state before the financial crisis, and it is improving now.

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