Financial Analysis of Global Construction Companies - Research Proposal Example

1.  Title

Financial analysis of global construction companies

2. Background or introduction

It is of vital importance to analyze the financial performance of construction companies because they are agents of development and transformation. They play an important role in the national economy because they use the gas and oil wealth in constructing economic and social facilities (Ross et al. 2010: 234). This is results in the growth of GDP by an average of 5% to 9% of the developing countries. Therefore, construction industry is a good indicator of the economic condition of a nation. However, many of such companies face the challenge of bankruptcy and business failure each year and this results in uncompleted public and private construction projects (Hodge et al. 2010: 134). This is because the social and economic damages that result from the business failure of such companies are beyond the quantifiable costs to the owners of the company as well as shareholders, employees and creditors. In order to reduce such damages, it is crucial that business failure is recognized as the earliest stage (Acerete, 2011: 534). The successful completion of projects requires periodic evaluation of the company’s financial records. Therefore, it is critical to evaluate the financial performance of construction companies in order to identify necessary and appropriate strategies so as to maintain their survival (Melicher & Norton, 2002: 165).

The project will concentrate on Interserve PLC. Interserve PLC refers to a UK multinational support service as well as construction company. As of 2014, it had revenue of £3.2 billion and a workforce of over 75,000 people worldwide. The project aims at understanding through carrying out detailed financial and organizational analysis how the global construction companies are organized and how their involvement in PPPs delivers value to their shareholders.

• Statement of purpose or aims

Failures or challenges have been experienced in the construction industry in developing nations as well as in the entire world due to financial crisis or economic downturn. The failures of the construction industry are both extremely disruptive to the industry and also pose threats to the economy of the nation. This is because construction companies are often highly vulnerable to bankruptcy because of fluctuation in the construction volume, inflation, fragmented nature of the industry, high competition, the uncertainty as well as the risks involved (Walton & Aerts, 2006: 237). It is anticipated from the literature that I have checked on that I will learn much regarding the performance trends of construction companies in the wake of finishing the project. Analysis and comparison of the financial performance of the construction company with the industry average will help in rearranging and breaking down financial statements, financial planning and forecasting, judging the efficiency of the companies and locating weaknesses

Financial analyses of construction companies will help in identify and understanding the organization of the global construction companies as well as how their involvement in PPPs helps in delivering value to their shareholders. In addition, it will help in identifying differences and similarities in the items which enables such companies in identifying the trends in the company’s financial position and financial performance. This will help the prospective investors them in deciding to buy or sell stocks of the company. In this project, I am going to take Interserve PLC for the comparison as well as the analysis. In will specifically, focus more on how the performance of the company are with regards to different financial parameters, for example, capital structure, working capital management, use of leveraging, their long-term financing patterns, dividend policies, and mergers and acquisitions in case there are. The project has realistic goals because it is helpful to the investors in giving insights into the financial performance of the construction companies.

• Review of the relevant literature

The UK has been experiencing transformation because of high volume of construction activities. This has resulted to an escalating of construction firms in the kingdom. This transformation is because of the wealth created by the economic growth. Complex structures have been developed, these, cause an attraction contractors as well as construction firms from within the country as well as from everywhere throughout the world (Peterson, 2009: 123). Along these lines, construction organizations are the backbone of real estate development. This industry’s booming is due to the wealth generated by the good performance of the company, which is reinvested in infrastructure. Currently, the use of public private partnerships (PPPs) between private and public sector has empowered much new infrastructure despite the constraints on the accessibility of public capital (Acerete et al. 2010: 56). They have provided an opportunity to develop the concession for around 25 years. However, failures have been experienced in the construction industry due to financial crisis or economic downturn (Brealey et al. 2006: 124).

In predicting business failure, routine evaluation needs to be adopted by the construction companies in the UK. The main reason for this is that it will help them in adopting timely and appropriate strategies in sustaining the business. Several models that are helpful in predicting business failure include ratio analysis, subjective assessment, conditional probability models and multiple discriminant analysis. For instance, based on the multiple discriminant analysis, Z-score model has been developed and it has been used by corporate bodies in identifying potential bankrupt companies. On the other hand, conditional probability models utilize non-linear maximum likelihood method in estimating the probability of failure on the basis of some characteristics of a company. Ratio analysis will be used in assessing the financial performance of the UK construction firm. The elements of income statement and balance sheet of a company are the common tools that will be used to track and measure the financial health status of the company.

Yin (2006) postulates that business failure often depends on many factors and not just a single factor especially in the construction industry. For instance, a construction company is in distress if it shows the following warning indications: bank line of credit that is constantly borrowed to the limit; lack of comprehensive business plan, communication problem; ineffective financial management system, poor estimating or job cost reporting and poor project management.

According to Davidson & Maguire (2003), the main factor affecting the performance of construction companies is insufficient capital to finance the undertakings of such firms by the contractors. This is because contractors lack fixed assets like many manufacturers. They do not have lands or buildings but have construction equipment and such moving assets cannot be accepted by banks as adequate collateral for loans (Lethbridge, 2011: 16). According to Arditi et al. (2000: 125), the most common causes of the failures of construction firms are high employee turnover, faster growing, working in new geographical regions, poor cash flow, inadequate capital, poor accounting system and purchasing useless stuff. However, Schaufelberger (2003: 145) postulates that many business failures in the construction industry are due to lack of capital, unrealistic project margin and poor financial management. On the other hand, Enhassi et al. (2006: 14) states that the main reasons for business failure in the construction industry are budgetary and macroeconomic issues. This therefore implies that the business failure of construction companies is attributed to bad judgments, excessive debt, low profit margins, poor billing process, poor utilization of accounting system and lack of managerial experience. In assessing the performance of construction companies the project will use company balance sheet and the income statement to track and measure the company’s financial health status.

According to Kivrak & Arslan (2008: 300), analysts and investors should be able to utilize financial ratio analysis in examining the operational performance of the construction firm in term of whether it is using its assets, whether it has excessive investment in fixed assets; whether its profit margins align with its assets; whether it is adequately financed; whether it has liquidity constraints; and whether it has efficient collection of receivables.

5. Methods

This project uses financial ratio in analyzing the financial record of the UK’s constriction company in predicting its financial health status. Each of the profitability, liquidity, asset management, and leverage ratios are compared with the standard average of the industry over a long time period in identifying the trend in their financial performance. The financial records of the UK’ construction company was obtained from London Stock Exchange market as well as from its annual reports in its website which is analyzed and compared for five consecutive years.

The project adopts proposed seventeen financial ratios such as quick ratio, current ratio, current liabilities to net worth ratio, debt to equity ratio, fixed asset to net worth ratio, current assets to total assets ratio, collection period, average age of accounts payable, return on equity, assets to revenue ratio, return on assets ratio, working capital turns, degree of fixed assets newness, accounts payable to revenue ratio, after tax profit margins, gross profit margins, and gross overhead ratio (Fridson et al. 2011: 346).

Such ratios were used as standard performance tools for the company and the respective data for their calculation were obtained from balance sheet, income statement and cash flow statement. Each and every ratio was computed and then compared with industry’s average ratios. For accurate and effective analysis and comparison, the literature review was conducted on the given financial parameters by consulting various websites, books and annual reports of the company. In the project, I will mostly use secondary sources of information. It will be based on the examination of the secondary data because they are readily available. In addition, they are less costly. Since secondary data will be used, sample and sample size will not be necessary because I will deal with only a single firm. I will compare the results with the standard industry average to check the plausibility, reliability and robustness of my conclusions.

• Ethical issues

I will adhere to any ethical guidelines by applying the following ethical principles. First, I will strive for honesty in all the communications or writings. Honestly reporting data, methods, results and procedures as well as the publication status. I will not fabricate, misrepresent or falsify data. Secondly, I will strive to avoid bias in the data analysis, data interpretation and writing as well as other research aspects where objectivity is highly required. Thirdly, I will strive for consistency of action and thought throughout. In addition, I will protect all confidential communications. Finally, I will write so as to advance scholarship and research not my own career. On the other hand, I will respect intellectual property through honouring patents, copyrights. I will not use unpublished data, results or methods without permission. I will give proper and required credit or acknowledgement for all contributions to the research by not plagiarizing. I will also avoid careless negligence and errors by carefully and critically examining my own work as well as the work of my peers. I will keep good records of my research activities like research design, data collection, and correspondence with journals.

• Timetable/project plan

2016

2006

13-Apr

5-Apr

20-Apr

23-Apr

29-Apr

30-Apr

2-May

15-May

1

Identification of the company

1.1

Identification of company and topic

2

Plan the Project

2.1

Approval of the company and the topic

2.2

Develop the outline

2.3

Finalize on the outline

3

Carrying out the reaserch

3.1

Carrying out background analysis

3.2

Selection of methodology

3.3

Taking notes on main pints

3.4

Written analysis of the proposal

4

Finalizing the project