Financial Analysis of a Corporate Annual Report

Company Overview and Leadership 

The Standard Pacific Corporation has over 100 years of combined homebuilding experience. In the middle of the 20 th century, the company began building attached and detached homes for single family homes in a bid to diversify its market segment especially for low to middle-income consumers ( Abraham & Shrives, 2014) . The company has been an active trader in the NYSE, where it trades under its ticker symbol of SPF. Its operations of homebuilding stretched across all states including Texas, California, Nevada and Colorado. It has currently focused on the development of the move-up market ( Crowther, 2018) . The management within the company has realized that well-built and designs that are innovative are attractive to those seeking to own state of the art houses. Its product mix can confirm this, where it is evident that it consists of more than 73% of inventory in the move-up sector and the luxury homes, while its inventory in the entry-level homes is 27%. The company has realized that by applying such a product mix, its products will be competitive in the homebuilding industry.

The company faces high levels of competition from the numerous residential construction companies in the United States. The company is ranked as the fifth largest home builder in the US, where its 2011 financial report showed that the company had over $893 million in terms of the annual revenue ( Crowther, 2018) . The biggest competitors for Standard Pacific Corporation are the Pulte Group, Inc. and the Lennar Corporation. The Pulte Group has been the leading in terms of performance, where the company prides in more than $3242 million revenues higher than the Standard Pacific, while those for Lennar Corporation are $2200 million higher. This implies that the Standard Pacific Home has a smaller market share compared to its close competitors even though the management has strived towards attaining the competitive advantage.

The company is made up of a board of directors meant to ensure that the members set the direction to which the company is headed ( Crowther, 2018) . Among these members is the founder, Ronald R. Foell. The company has sought the need of splitting the duties of the chairman and the chief executive, which is a strategy that is meant to benefit the company on the onset of an economic downturn. The founder has acted as the chairman of the board of directors, while Scott was the CEO from 2012 ( Abraham & Shrives, 2014) . The directors have adopted the whistleblower program, where employees are allowed to access the information of activities within the company as a model of increasing the levels of accountability. The company has also used the program to manage its financial information accurately.

The major setback to the levels of performance at the homebuilding company is that the encroachment of the recession such as that which happened in 2008, where the business company faced lower levels of demand for its products despite having invested heavily in research and development. Investors have also been proactive in ensuring that they make wise decisions considering that the current market conditions for the housing industry are poor and marked with low levels of performance ( Abraham & Shrives, 2014) . Even though the market has deteriorated, the levels of demand in the housing industry have been on a consistent rise bearing in mind that the population and the economy in the United States are on the rise as the country heals from the economic downturn of 2008 ( Crowther, 2018) . A system of comparison of the liquidity ratios, asset management, profitability ratios and the market analysis can be helpful in creating knowledge about the specific levels of performance of Standard Pacific Corporation, Pulte Group, Inc., and Lennar Corporation.

Ratio Analysis 

Liquidity Ratios 

The current ratio and the quick ratio can help in the analysis of the liquidity of the Standard Pacific Corporation and two of its rivalry companies ( Chen et al., 2015) . The two liquidity ratios are viable for investors as it allows them to make wise decisions regarding the investments into the company. From the analysis of the current ratio for the three corporations, Standard Pacific Corporation has the lowest compared to its competitors like Pulte Group, Inc. and Lennar Corporation that have 10.31 times and 12.86 times of the current ratio respectively ( Crowther, 2018) . This implies that among the three companies, Standard Pacific may find itself in trouble paying off the current liabilities if it does not seek for additional sources of financing ( Abraham & Shrives, 2014) . The analysis also shows that Pulte Group and Lanner Corporations are in a better liquidity position and can affordably finance their current liabilities from their equity. It is also evident that the Standard Pacific Corporation is currently striving towards closing the gap existing in the current ratio.

Company	Times (Current Ratio)
Standard Pacific	9.15
Lennar Corp.	10.31
Pulte Group	12.86

Graph 1.1: Current Ratio

The quick ratio is the next liquidity ratio that can guide investors in making the right decisions for investment in any particular industry. The quick ratio determines the ability of a company in meeting the short-term financial liabilities ( Chen et al., 2015) . The quick ratio is found out by finding the ratio between the liquid current assets and the total current liabilities. In the housing development industry, Lennar Corporation is found to surpass the Pulte Group, while Standard Pacific Corporation is found to have the lowest results ( Abraham & Shrives, 2014) . Despite having had the lowest results, Standard Pacific has been consistently striving towards sealing the gap existing ( Damodaran, 2016) . An analysis of the liquidity ratio in the industry shows that Standard Pacific Corporation is currently having the highest level of trouble as compared to the other two corporations. Pulte Group is seen to be financially healthier compared to the two, while it is closely followed by the Lennar Corporation ( Crowther, 2018) . The Standard Pacific has the ability to pay off its debts even though the other companies are more capable compared to the former. In this case, the asset management should be conducted to critically evaluate the modes in which the company can shield itself from liquidity. 

Company	Times (Quick Ratio)
Standard Pacific	2.41
Lennar Corp.	3.08
Pulte Group, Inc.	2.56

Asset Management Ratios 

The Inventory turnover, the day’s sales outstanding, fixed asset turnover and the total assets turnover are applicable in the corporation of the performance of the companies in the housing development industry ( Abraham & Shrives, 2014) . The resultant factors are useful when presented to investors as the can make wise decisions regarding the need for investment in different companies ( Warren & Jones, 2018) . The ratios will respond to the consideration that the total amount of each type of asset as reported on the balance sheet may either be reasonable, too high, or too low in view of the currently projected levels of sales. 

The graph below shows that the Standard Pacific Corporation has the lowest inventory turnover ratio compared to its competitors. The company has an inventory turnover ratio of 0.2 times, where it is taking more than five years to sell off its inventory ( Abraham & Shrives, 2014) . On the other hand, Lennar Corporation is taking one year and three months to sell of its inventory of houses, while Pulte Group, Inc. has doubled Lennar Corporation inventory turnover ratio with results showing that it is 1.4 times and seven times faster than the Standard Pacific Corporation ( Chen et al., 2015) . It is evident that even though the Standard Pacific Corporation is extremely unfavorable, the company had almost ten times the amount of inventory as compared to the closest competitors before the housing market collapsed.

Company	Times (Inventory Turnover Ratio
Standard Pacific	0.2
Lennar Corp.	0.8
Pulte Group Inc.	1.4

 The other measure that was used analyze performance was the outstanding ratio, which reveals the average collection period. This ratio illustrates the ways in which the accounts receivables are being managed ( Abraham & Shrives, 2014) . The graph of analysis of these accounts receivables for the housing development corporations reveals that Standard Pacific Corporation has the lowest average with results of 10.2 times as compared to its two biggest competitors. The results show that Standard Pacific has surpassed its competitors, where it can collect quicker on the sales credit ( Crowther, 2018) . The analysis reveals that the corporation is more selective in terms of choosing the person who is supposed to purchase a home ( Chen et al., 2015) . On the other, hand, the Lennar Corporation depicts a sales outstanding ratio of 19 times, where the company has the highest trouble in terms of collecting from its sales, which is an indication that it has to re-evaluate the lending policies ( Crowther, 2018) . On its part, Pulte Group, Inc. is at the median level among the three selected corporations, where it has its day’s sales outstanding results showing that they are 10.5 times as shown in the table and graph below. 

Company	Times (Days Sales Outstanding Ratio)
Standard Pacific	10.2
Lennar Corp.	19.0
Pulte Group Inc.	10.5

 The other performance measure was the fixed assets turnover ratio, which is the ratio of sales on the profit and loss account to the value of the fixed assets found on the balance sheet ( Chen et al., 2015) . The ratio is used to indicate how well a business company is using its fixed assets to generate the sales. In this case, when the ratio is on a declining trend, it implies that the business is over-invested in the plant, equipment, and other fixed assets. An analysis of the fixed assets turnover ratio in the housing development sector shows that Standard Pacific results are an extreme outlier and cannot be applied in the financial analysis ( Abraham & Shrives, 2014) . This implies that the Standard Pacific Corporation has a system of reporting the fixed assets on the balance sheet. Pulte Group, Inc. and Lennar Corporation are closer in terms of performance regarding the fixed assets turnover ratio as shown in the graph below. 

Company	Times (Fixed Asset Turnover Ratio)
Standard Pacific	24.7
Lennar Corp	5.9
Pulte Group, Inc.	1.0

 The asset turnover ratio is another model that can help in the determination of the performance of a business company relative to the industry. The asset turnover ratio is an efficiency ratio that measures the ability of a company to generate sales from its assets through making comparisons between the net sales and the average total assets. This ratio depicts how efficiently a company uses its assets in the generation of the sales. ( Abraham & Shrives, 2014) Comparing the three companies chosen for this analysis, Standard Pacific is found in the middle when comparing the total assets turnover ratio ( Warren & Jones, 2018) . This indicates that the Standard Pacific Corporation has total assets turnover ratio results of .4 times, where it is generating slightly more business volumes in its investments in the total assets as compared to Lennar Corporation ( Chen et al., 2015) . On the other hand, Pulte Group, Inc. has been depicted to outperform its competitors where it has doubled its total assets turnover ratio compared to that of Lennar as shown in the graph below. 

Company	Times (Total Asset Turnover Ratio)
Standard Pacific	0.4
Lennar Corp	0.3
Pulte Group, Inc.	0.6

A close examination of the asset management ratio within the industry shows that the Standard Pacific Corporation is not as unfavorable in terms of liquidity as previously thought. In the wake of the collapse of the housing market, Standard Pacific Corporation began experiencing financial hitches ( Abraham & Shrives, 2014) . The company has problems related to the conversion of its inventory into cash. Over the past several years, the company started recovering with the consequent improvement in performance especially in terms of the fixed asset turnover ratio, and the day’s sales outstanding ratio ( Chen et al., 2015) . The company developed a system of restructuring that has helped it to stabilize its financial position. To confirm the viability of its improvement, it calls for a system of analysis of the debt management. 

Debt Management Ratios 

The three debt ratios are the debt to total assets, the time's interest earned and the fixed charge coverage, which will be critically analyzed to find out the position at which Standard Pacific Corporation is placed relative to its competitors ( Crowther, 2018) . It should be noted that a company with high debt ratio is expected to have a higher return on investment when it is in a proper economic condition. However, when there is an economic downturn, such companies are exposed to defaults in terms of repayment of loans ( Chen et al., 2015) . In the current economic conditions, the housing market seeks low debt management ratios ( Abraham & Shrives, 2014) . The debt to total assets ratio is an indicator of the financial leverage of a business company. The ratio gives the percentage of the total assets that can be financed by the creditors, liabilities, and debt. The ratio is found out by dividing the corporation's total liabilities and the total assets. An analysis of the housing market shows that the Standard Pacific Corporation and Pulte have the same debt to asset ratio of 72%. The companies have a higher ratio compared to that of Lennar Corporation, which has a ratio of 49%. Lennar Corporation is currently handling an economic downturn by 23% better than the Standard Pacific and Pulte Group ( Crowther, 2018) . This allows Lennar Corporation to be more flexible in paying back its creditors. The analysis of the three corporations in terms of the debt to assets ratio is as shown in the diagram below. 

On the other hand, the time's interest earned or interest coverage ratio gives the measure of the company's ability to honor its debt payment. The ratio is calculated as the EBIT or EBITDA and its quotient with the total interest payable ( Chen et al., 2015) . The interest charges for this ratio are the interest expenses to be covered in the income statement. An analysis of the time's interest earned ratio shows that Pulte Group Inc. has the highest interest earned ratio with results of 26.3 times. This indicates that the company can pay its creditors more efficiently ( Abraham & Shrives, 2014) . This is a vital aspect of the housing market since the market is currently facing a downturn. Standard Pacific Corporation and Lennar Corporation can pay their creditors, despite the fact that they have variations in their results as compared to the Pulte Group Inc. 

Company	Percentage (Times Interest Earned)
Standard Pacific	0.72
Lennar Corp.	1.8
Pulte Group, Inc.	23.6

The fixed charge coverage ratio is similar to the time's interest earned ratio, even though it is more inclusive since it is recognized by the companies lease rather than the assets. The ratio is used to measure the ability of a business company to meet the fixed-charge obligations ( Crowther, 2018) . The ratio is found out by taking the ratio of earnings before interest, depreciation, and amortization less the unfunded capital expenditures and distributions and dividing the result by the debt service. All the three companies have the same fixed coverage ratio results as times interest ratio as they do not disclose the information for leases ( Chen et al., 2015) . After analysis of the debt management ratio, it is evident that the Standard Pacific Corporation is in a decent financial position corresponding to the biggest competitors. These three companies have been able to manage their finances in such a way that it allows them to survive in the wake of the economic downturn ( Crowther, 2018) . The profitability of the three companies in the housing industry is highly dependent on their ability to manage profits and debts in the current economic conditions. 

Profitability Ratios 

Profitability ratios depict the combined effects of liquidity management, assets management, and the debt management at the levels of operations ( Abraham & Shrives, 2014) . The other measures of performance include the net profit margin, the returns on assets, and the return on common equity, where they depict the levels to which a business company has managed resources in the course of generation of profitability. 

The net profit margin, which is sometimes called the gross profit margin, shows the relationships between the sales and costs ( Crowther, 2018) . The homebuilding market is currently in a downturn direction in terms of the overall performance of the industry. Standard Corporation, Pulte Group, Inc., and Lennar Corporation are some of the adversely affected companies in the industry. These business companies experienced a loss during the 2012 fiscal year in the wake of the economic downturn in the housing industry ( Abraham & Shrives, 2014) . The loss highly contributed to other related measures of performance such as the net profit margin, and the return on equity. Pulte Group, Inc. had a better economic trend compared to the other two as it had a higher return on assets, net profit margin and the return on equity. The company experienced the ratios of -.1% in terms of the net profit margin, -.1% in terms of the return on assets and -.2% in terms of the rate of return on equity as shown in the graph below: 

Analysis of the profitability ratios for the companies in the housing industry shows that the Standard Pacific’s operating results have suffered because of the poor housing market. The operating results in the company are close to the leaders in the industry ( Abraham & Shrives, 2014) . If the Standard Pacific Corporation can continue managing its assets and debt in a proper manner, it will experience drastic levels of improvement in the net profit margins once the housing markets recover. 

Market Value Ratios 

The market value ratios are used in the evaluation of the current share price of a publicly-held company’s stock. These ratios are employed by the current and potential investors for determination of whether the company shares are overpriced or underpriced. The most common market value ratios include the book value per share ( Chen et al., 2015) . The ratios can help a company such as the Standard Pacific to know the perceptions of investors and the future sustainability of the housing. 

The price and earnings ratio indicates the number of dollars an investor can expect to invest in the business company to receive one dollar equivalent of that company's earnings. The P/E ratio is also referred to as the price multiple since it shows how much an investor is willing to pay per single dollar of the earnings in the stock market. Comparing the companies chosen for this analysis, it is evident that Lennar Corporation has a ratio of 40.1 times, where it is the only company that has a positive result ( Abraham & Shrives, 2014) . Pulte Group, Inc. is the second-best performer in terms of the P/E ratio, where it has 11.5 times. Consequently, the P/E ratio for Standard Pacific stands at -63.6, which depicts a poor system of performance. The variations in the P/E ratio are attributable to instability in the market, the restructuring decisions that the companies make and the costs. In this case, the market/book ratio is the best indicator of the market value of the three companies, where it shows the perceptions of the value that investors hold for each company. 

Investors have found out that Standard Corporation is in the middle among its close competitors with a market/book ratio of 1.3 times ( Crowther, 2018) . The Lennar Corporation and the Pulte Group, Inc. have the market/book value of 1.2 and 1.8 times respectively, where it is evident that the Pulte is the better performer in terms of the market/book ratio, which shows that investors are more interested in the business company ( Abraham & Shrives, 2014) . Currently, investors are of the view that the housing market has acquired stability and when the other sectors of the economy start improving, the housing market will also outperform the current expectations. 

Although ratio analysis has become a strong indicator of the financial position of any business company, investors are constantly becoming aware of the potential problems with the figures presented in the financial statement ( Chen et al., 2015) . The asset turnover ratios for the chosen companies are highly varied because the companies use totally different accounting methods for their inventory. An analysis of the financial statements for the three companies depicts variations in the accounting methods ( Abraham & Shrives, 2014) . For instance, Standard Pacific Corporation and Pulte Inc. reveal the financing subsidiaries on their financial records, while the financial statements at Lennar do not disclose the financing subsidiaries. The other consideration when analyzing the financial performance of the business companies within the same industry is the economic environment in which the company operates. 

Economic Environment in Which the Businesses Operate 

The current economic environment involves understanding the variations between inflation and recession ( Crowther, 2018) . The increase in prices in any business environment is marked by indicators such as the expansion in demand or supply in money. On the other hand, a recession is marked by a period of economic contraction, which is limited in terms of the scope and the duration. As of now, most of the global countries are not facing any form of recession or inflation ( Abraham & Shrives, 2014) . On the other hand, when a country stays out of an economic recession and has shown the potentiality of attaining a stable economic growth, the Federal Reserve may find the need to raise the interest rates. The current situation is that the Federal Reserve has kept the interest rates at a low rate as a way of increasing the supply of money to banks to increase the levels of lending and the consequent stimulation of economic growth. The current status also shows that there are expected high-interest rates, high healthcare costs and the consequent increase in the taxes, where the banks are not eager to lend the money at hand to the businesses or to investors since the banks cannot adequately access the risks. 

The future of the Standard Pacific Corporation depends heavily on the global economic conditions and the economic conditions of the country in which the business operates ( Chen et al., 2015) . The strict lending rules that have been imposed by the banks have made it difficult for consumers of the housing industry to meet their demands from the low supply of cash reserves. With the realization of the increase in the foreclosures in early 2013 meant that there would be a system of stimulation of economic growth ( Abraham & Shrives, 2014) . On the contrast, the poor job market and economic conditions prevented buyers from affording new homes, which greatly affected the levels of performance at the business company. Consequently, the costs of purchasing a new home are expected to increase as the inflation rates increase. 

The other notable market condition that determines performance at the Standard Pacific Corporation is that there has been an oversupply of the used homes on the market has prevented the rise in the prices of new homes ( Chen et al., 2015) . Since the used homes act as a cheaper substitute in the housing industry, most of the consumers prefer the cheaper substitutes as they are easily affordable. This preference has affected the Standard Pacific in terms of the profit margins. 

Investor Analysis 

Analysis of the investors involves seeking the ways in which the investors perceive the industry as a broader perspective and the prospects within the Standard Pacific Corporation. In as much as some of the research findings show that it is recommended to invest in the stocks at the Standard Pacific, other research findings have shown that it is safe to sell the existing stocks of the company ( Abraham & Shrives, 2014) . Over the first five quarters of its performance, Standard Pacific has produced a positive trend in the total earnings per share, which has made it possible to recommend that it is worth purchasing the shares of the company. 

The financial analysis of the company depicts some strength along with some amount of weaknesses. The Standard Pacific Corporation has the greatest strength in terms of growth in revenue, a good system of cash flow from the operations and an impressive trend in terms of the growth in the earnings per share ( Chen et al., 2015) . The major setback that investors are wary of is that the company faces a high debt management risk and poor profit margins, which are holding them back from making the right investment choices. 

Annual Report Analysis 

The homebuilding revenues for the Standard Pacific Corporation have been increasing, where they decreased by 3% in 2011 because of a 4% reduction in the home deliveries to the clients. The decline was highly attributed to the decrease in the number of homes inventories at the start of the year compared to the previous years ( Damodaran, 2016) . The total amount of costs for the company was $3 million in terms of the loss that the company made on the land sale revenues. The loss was partially offset by a 2% increase in the consolidated average home price. The company had to consolidate the average home price with the consequent increase by $16,000 in 2011 ( Abraham & Shrives, 2014) . Within the same period, the company incurred a loss of $16.4 million on the homebuilding sector, which was $4 million more than the loss experienced the previous year. This net loss that was incurred in 2011 comprised of the loss on asset impairment charges and deposit write-offs, which constituted the highest percentage of the total, loses. On the other hand, the company had to incur the restructuring charges and the management change charges, which in total were about $4 million. The highest percentage of the loses made on the homebuilding operations was highly attributed to the positioning for the future as the company hoped that the future of the housing market would recover. 

The operations at the Standard Pacific Corporation are highly dependent on the demand, which is also inclined on the system of restructuring ( Abraham & Shrives, 2014) . The company had to respond to the 2008 economic downturn by in initiating a restructuring plan that saw it reduce the ongoing overhead costs with the consequent improvements on the operating efficiencies. In this regard, the company had to consolidate its divisional offices, dispose its related property and reduce the volume of the workforce. This meant that the company would not evade the severance charges, which was a loss on its part. 

Stock Analysis 

The company has improved in terms of the financial condition over the recent past, which is marked by the change in the common stock price ( Chen et al., 2015) . The company had earlier on experienced a steady system of financial growth before it decreased its market share in the wake of the collapse of the housing industry in 2007. For instance, before the collapse, the stock of the company was trading at $27.44 per share. However, the company faced a drastic economic downturn after the collapse of the housing market, where its share dropped by over 800% to as low as $3.35 per share. In the beginning of 2012 after the company had begun restructuring, there was an evident increase in the stock price with the share of the stock reaching $6.90 in 2012 ( Abraham & Shrives, 2014) . As of now, the company is working towards retaining all it’s earning to continue in the development of land acquisition. The future of the dividends of stockholders of the firm is dependent on the financial condition of the company. 

Long-Term Perspective 

It is imperative to note that the housing market has continued to suffer an enormous economic downturn especially after the 2008 global economic recession ( Crowther, 2018) . The players in the industry suffered from low market shares, low levels of the stock price per share and a decrease in the revenue. In response to the economic downturn in the housing market, players such as the Standard Pacific have altered the business practices to compensate for the downturn ( Abraham & Shrives, 2014) . The company has invested in restructuring while ensuring that it retains its earnings to purchase land in preparation for a brighter future as it has prospected that the housing market will heal from the collapse. The company is expected to improve in the near future bearing in mind that its restructuring efforts have started bearing positive outcomes. 

References 

Abraham, S., & Shrives, P. J. (2014). Improving the relevance of risk factor disclosure in corporate annual reports.  The British accounting review ,  46 (1), 91-107. 

Chen, L., Feldmann, A., & Tang, O. (2015). The relationship between disclosures of corporate social performance and financial performance: Evidence from GRI reports in the manufacturing industry. International Journal of Production Economics ,  170 , 445-456. 

Crowther, D. (2018). A Social Critique of Corporate Reporting: A Semiotic Analysis of Corporate Financial and Environmental Reporting: A Semiotic Analysis of Corporate Financial and Environmental Reporting. 

Damodaran, A. (2016).  Damodaran on valuation: security analysis for investment and corporate finance  (Vol. 324). John Wiley & Sons. 

Warren, C. S., & Jones, J. (2018).  Corporate financial accounting . Cengage Learning.