A Financial Ratio Analysis Of Balfour Beatty Plc
According to the database on www.balfourbeatty.com (2009), Balfour Beatty is an engineering and construction corporation,it is also one of the largest and most diverse company in the United Kingdom. The company serves rail, road and power systems, buildings and complex structures in different areas around the world. This report will look into the details of Balfour Beatty's current finational position in the chosen fields in the UK market. Globally speaking, through the ratio analysis, the report will provide evidence to give financial insight into the company of the company and how its bussiness has progressed over the last two years. Furthermore, according to the director’s report and account 2008, the ratios can be calculated from the data in 2007 and 2008. More explanations will be provided as to what the companys key performance indicators are likely to be.
Findings & Discussions
According to the Balfour Beatty Group report 2008, the table was calculated and shown below
Gross Profit Ratio
Net Profit Ratio
Acid Test Ratio
The process of calculation (See given numbers from Balance Sheets on Appendix 1 & 2, page 7 & 8 (Balfour Beatty plc.2008)), followed by the instruction on the textbook and the internet recourses, is listed in details as shown below:
Gross Profit Ratio =
Gross Profit Ratio=
Net Profit Ratio =
Net Profit Ratio=
Acid Test Ratio=
Acid Test Ratio=
First of all, the analysis shows that profits have remained stable over the two years. This suggests that the business was going to be managed in a stable way except the return on ordinary shareholders’ funds ratio. The company kept adapting and growing better to make sure the great deals on its business.
Secondly, glancing at the gross profit rate, 7.3% in 2007 and 7.7% in 2008, it was estimated that the company earned more benefits in 2008. The gross profit margin went up due to increase the selling prices in construction over the same time period of the two years. From the beginning of 2008, the trading prospects in the Balfour Beatty company remained positive and, furthermore, some good settlements have been finished on the projects. The group’s wealth position continued to make good progress and kept it strong. (Tim. S, 2008)
Simultaneously, the table shows the net profit margin in 2008 (2.2%) is higher than 2007(1.0%). Therefore, it is able to show that the net profit was earned in the company in 2008 is better than it in 2007. However, the difference between the gross profit rate and the net profit margin in 2007 (net profit margin: 1.0%, gross profit rate: 7.3%) is higher than it is in 2008 (net profit margin: 2.2%, gross profit rate: 7.7%). It can be concluded that the additional expenses of the business, such as the administration and similar expenses, increased from 2007 to 2008. At the same time, its cost of sales was also lower than 2008. As the result, we can know that the company improved its performance in the control of the expenses. By looking at gross profit margin and net profit margin in two years, this can mean that the operating expenses were higher compared with sales revenue in 2007 than they had been in 2008.
However, the return on capital employed ratio in 2008, 31.4%, was smaller than in 2007, which is 32.5%. This can be intuitively interpreted that, for the shareholders, they made less money in 2008 than the year before. Fortunately, there was no significant difference between 2007 and 2008. The number of capital employed increased from £483 million to £861 million (a two-fold increase). At the same time, however, the report shows the profit for the year before taxation increased from £157 million to only £270 million. As shown in the table, the return on capital employed resulted from the data relating to the Balfour Beatty company's results for the year ended 31 December 2008, 31.4%. This is not a good result as it shows that the business is effectively losing around 1.1% on the (investment) funds. In other words, the shareholders did not invest the company as much as the year before.
Predictably, return on ordinary shareholders’ funds of 31.3% in 2007 declined to 22.7% in 2008. The news released on 2nd Aug 2007 on the Balfour Beatty company official website said that the company has successfully “completed three niche acquisitions which strengthen its position in the European rail, professional and technical services and road management and maintenance markets at an aggregated cost of approximately £9 million”(Tim.S, 2007). In the same year in Sweden, Balfour Beatty Rail has acquired Carillion’s Swedish rail contracting company (Tim.S, 2007). The fact suggests that the shareholders had pulled out the money in the bank and invested lots of money in the company and finally made good efforts. Although Balfour Beatty acquired a few companies (such as Dean & Dyball, Blackpool Airport etc.) during the year 2008 (Tim.S, 2008), the group’s average net cash position has reduced as a result of acquisition expenditure.
The table also shows that the liquidity ratio between 2007 and 2008 in the company is much the same; this tells that the financial situation in the company was stable in the two years. Although the difference between the current liabilities in 2007 and 2008 is about £644 million, which is more than the net current assets in 2008, £480 million, it is not astonishing that the liquidity of the current assets is constantly smooth due to the stable current ratio of 0.8% during the period. Current ratio and acid test ratio in the two years are almost the same (current ratio 0.8 times, acid test ratio 0.7 times), so the inventories of the company are not very large. The amount of inventories in 2007 is around £72 million. However, compared to the current assets are as many as £1686 million, it does not has significant effect as was expected. The same conclusion is observed in 2008. Cash flow statement (Appendix 3, Page 9) shows that the company had enough capital to pay for the debt during the two years. Moreover, the cash and cash equivalents at end of 2008(£453 million) was more than 2007(£379 million).
Nevertheless, the share price (See chart below) at the beginning of 2007 to the first half year in 2008 was stable. Since September 2008, the world has been in a prolonged recession, and four majors sectors have been concerned in the crisis --- construction, financial services, manufacturing, and travel-related services (Philip.M, 2009). During this time period, the share price of the Balfour Beatty company in October 2008 suddenly declined to nearly 217.1 pence (See percentage change and share price chart below), which was the lowest price during the last two years. On the other hand, it is obviously that we can see the net cash used in investing activities from the cash flow statement (page 9) in 2008 was more than in 2007 in the company, both in negative numbers (£434 million and £164 million, respectively).
Percentage change Share price
(source: http://www.balfourbeatty.com/bby/investors/price/chart/, 2007-2008)
According to the above discussion, the company has improved its financial position shows good performance during these two years. Although some of the ratios are lower than in 2007. Overall the company’s advantages were greater than disadvantages during the business years. The ratio analysis provides the evidences to support the conclusion. However, the global economic inflation starting from September 2008 still affects the profits of the company afterwards. Therefore, it is essential to seek a solution to solve such problem as soon as possible.
Nowadays, the good news is that Balfour Beatty is financially getting stronger and stronger. The company began to contact various business projects in different places. According to the news released on www.balfourbeatty.com (Duncan, M. 2009), “Balfour Beatty wins new contracts of $449 million (£274 million) in the U.S. as the company covers many different businesses in construction area”. Looking at the official website, Balfour Beatty Company is extending its business and seeking more people who want to join in the big group by improving its market competitiveness. In the future, the corporation should take some more actions to regain more profits back and reduce the financial risks by running the business.
Philip,M., 2009.The Recession and Migration: Alternative Scenarios. Working Papers.p6
Duncan,M (2009). Balfour Beatty wins new contracts of $449 million (£274 million) in the U.S. as the company covers many different businesses in construction area [online]. Balfour Beatty plc. Avaliable at <http://www.balfourbeatty.com/bby/media/press/2009/2009-10-20/ > [12/11/09]
Tim.S ( 2007). Balfour Beatty strengthens business mix with three niche acquisitions. [online]. Balfour Beatty plc. Avaliable at <http://www.balfourbeatty.com/bby/media/press/2007/2007-08-02/ > [12/11/09]
Balfour Beatty plc. (2008). “Directors’ report and accounts 2008”. pp27-30
Tim.S ( 2008). AGM Trading Statement and Interim Management Statement. [online]. Balfour Beatty plc. Avaliable at <http://www.balfourbeatty.com/bby/media/press/2008/2008-05-15/ > [12/11/09]