Balfour Beatty provides world class services in infrastructure industry. They operate the lifecycle of infrastructure and have a strong position infrastructure markets. They have four brands in leading market-leading these are Professional services Construction services Support services Infrastructure services They provide main services in creation and care of infrastructure that includes investment, project designing, finance, management services, engineering, and construction services. Their main customers are in United Kingdom, Europe, United States, South East Asia, Australia, and Middle East. They deliver the highest level of safety, quality and technical expertise. Question No. 1 The company’s gearing decision. You should also evaluate the gearing decision of the firm and comparing it with the theoretical and empirical evidences. Answer:
Gearing tells us about the relationship between the company’s debt and equity shareholders funds. It expressed as a percentage and calculated by dividing the company’s debt by its equity. Highly geared company means higher risk and means company unable to pay its large debts. There are several reasons of shareholders interest in gearing for example high gearing risk means that there is a risk on liquidation or insolvency, it increases the instability on dividends. If gearing is high then there is a low chance of receiving dividends is company liquidate. Credit agencies analyse very carefully in company’s ratio before offering any loan because if company is highly geared they might not pay the interest.
Calculation of gearing ratio:
It compares the total borrowing of the company with amount of finance invested into the business. It shows the ratio of the capital raised through the borrowing. Following is the formula to calculate the gearing ratio: Capital employed financed means the total debt financed and share holder’s funds. Using this formula 25% gearing ratio means 25% of finance comes from debt finance and 75% from equity financed. Company is highly geared if 50% + of total capital comes from long term loan.
Gearing Ratio of Balfour Beatty:
Gearing Ratio Calculation
years Non-Current Assets Current Assets Total Current Liabilities Non-Current Liabilities Total Equity Gearing ratio 2007 1673 1686 3359 2165 711 2876 483 147.205 2008 2378 2166 4544 2809 870 3679 788 110.4061 2009 2818 2576 5394 3044 1344 4388 1238 108.5622
Question no 2
The company’s dividend decision. You should report on the company’s current dividend policy. If the firm announced a dividend between 05/10/2010 and 09/02/2011. How did the market react to the dividend announcement? Compare and contrast yours selected company’s policy to the theoretical and empirical evidences.
What is Dividend policy?
A firm have different choices regarding dividend policy whether they pay to shareholders as cash dividends, how should be it distributed, and much the cash should be. In broader sense dividend policy also means to take the decision whether to distribute cash to investors via share repurchase rather than regular dividends.
How dividend policy effect firms value?
There are different views on how dividend policy affects company’s value: Dividend increase shareholders wealth (Gordon 1959) Dividends are irrelevant (Miller and Scholes 1978) Dividend decrease shareholders wealth (litzenberger and ramaswamy 1979) Recent research from 1983 to 1987 done by cornell, Shapiro, prezas, ravid, says that there is a relationship between investment and financial decision investor stakeholders (suppliers, customers, banks, employees, distributers) influence the financial decision.
Dividend policy of Balfour Beatty and reinvestment plan:
“Balfour Beatty aims over time to grow the dividend broadly in line with the growth in earnings, taking into account the investment needs of the business. The Board has recommended a final dividend of 7.2p in respect of 2009, giving a full-year dividend of 12.0p (2008: 11.1p adjusted), up 8% on last year. Underlying dividend cover for 2009 is 2.9, slightly lower than the cover of 3.1 last year but the Board believes that this is reasonable given the strength of the Group’s cash reserves and future prospects.” Balfour Beatty has a dividend reinvested plan which allows their ordinary shareholders to reinvest their cash dividends in company’s share from through specially arranged share dealing services.
Dividends paid over the years
Financial Calendar of Balfour Beatty of 2010
1 January Preference dividend payable 4 March 2009 Prelim announcement 21 April Ordinary: ex-dividend date 23 April Ordinary: record date 12 May AGM and provisional date for trading update 26 May Preference: ex-dividend date 28 May Preference: record date 1 June Ordinary: last date for form of election (DRIP) 1 July Preference dividend payable July Interim Management Statement 5 July Ordinary: payment date 11 August Half-year results announcement 6 October Interim ordinary: ex-dividend date 8 October Interim ordinary: record date 3 November Final date for DRIP mandate forms in respect of interim ordinary dividend 11 November Interim Management Statement 24 November Preference: ex-dividend date 26 November Preference: record date 3 December Interim ordinary: dividend payment date
1 January Preference dividend payable 13 January Update on trading for year ended 31 December 2010 3 March 2010 full-year results announcement 12 May Annual General Meeting 17 August 2011 half-year results announcement
Question no 3
The company’s working capital management. By using appropriate ratio analysis evaluate your selected company’s management of working capital. Where are its strengths and weaknesses? Compare and contrast with relevant theoretical and empirical literature. Answer
Working Capital Management
Working capital is a financial tool which helps to understand the operating liquidity available to the organization including government entity. Working capital measure’s the organization health and efficiency. If working capital of the organization is positive it means that company is able to pay its short term liabilities. But if working capital is negative its means that company is not able to pay its short term liabilities this could be dangerous for company and also affect its market value and share price.
A financial ratio is a key to understand the financial situation of the company. Most of the ratios are calculated from the information given in the financial statements. Financial ratio can be used by the managers to help in decision making that will help shareholders, creditors, and financial markets. It helps them to understand the strength and weakness of the company. If shares of the company traded in financial market the share price is also used. There are different types of financial ratios Profitability ratio Liquidity ratio Assets turnover ratio Financial leverage ratio Dividend policy ratio
It used to measure the company’s used of assets and control over the expenses and generate a good rate of return. It measures the success of the firm on profit generating. Profitability ratios calculated as follows: 31/12/2009 GBP 31/12/2008 GBP 31/12/2007 GBP 31/12/2006 GBP 31/12/2005 GBP
Return on Shareholders Funds (%) 26.65 31.36 32.51 32.30 48.29 Return on Capital Employed (%) 11.36 15.56 13.15 12.78 16.32 Return on Total Assets (%) 4.95 5.94 4.67 4.85 6.29 Profit margin (%) 2.98 3.27 2.43 2.79 3.67 Gross margin (%) 8.72 7.66 7.33 8.16 7.69 Berry ratio (x) 1.38 1.39 1.20 2.04 1.80 EBIT margin (%) 2.39 2.17 1.21 2.76 3.41 EBITDA margin (%) 3.72 3.28 2.12 4.10 4.59
It shows the firm’s ability to meet its short term liabilities and availability of cash to pay its debts. There are two types of liquidity ratio
A 2009 2008A 2007A 2006A 2005A Current ratio (x) 0.85 0.77 0.78 0.80 0.90 Liquidity ratio (x) 0.81 0.73 0.75 0.75 0.86
Assets turnover ratio
It shows that how efficiently a company uses its assets and generate revenue or sales for the company. Following is the formula to calculate it
Financial leverage ratio:
Dividend policy ratio:
Dividend policy ratio tells about the dividend policy of the company and future growth. There are two different ratio method used to calculate this:
Balfour Beatty Trading Update
Results for 2010
Balfour Beatty plc will announce their trading results for the year ended 31st December 2010 on 3rd of March 2011.
Their overall performance is regular with their plans. They book high quality book order of £15 billion which shows the strength of their expertise in technical and integrated solutions.
In professional services, performance is more then there