Financial Analysis of Balfour Beatty and Kier Group: Capital Budgeting and Valuation

This study evaluates Balfour Beatty's finance linked performance and positioning that is listed on the FTSE 350. The study focuses on capital budgeting and valuation of the two companies. The study includes efficiency ratios, shareholder’s investment ratio, liquidity ratio, and gearing ratios.

Financial analysis
capital budgeting and
valuation

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART 1........................................................................................................................................3
Efficiency ratios.................................................................................................................7
Shareholder’s investment ratio..........................................................................................9
Liquidity ratio....................................................................................................................1
PART 2.....................................................................................................................................2
Part 3..........................................................................................................................................2
CONCLUSION............................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Profitability statements assess a corporation's monetary data that are used to assess its
activities (Akan and Tevfik, 2020). Accounting measures are used by customers, banks, investors,
the authorities, workers, and its different rivals to evaluate economic strength to that of everyone
else. This study would look at 2 businesses. The Balfour Beatty company, established in 1909, is a
UK construction company. Balfour Beatty is definitely among of the biggest constructions, with
over 26000 employees in the United Kingdom and Ireland, as well as nearly 50 locations in other
countries. Kier Group, which was founded in 1928, is a major British construction and a rival of
Balfour Beatty. It is one of Britain's finest businesses, focusing on various building and civil
engineering, support services, and the Private Finance Initiative. KIER GROUP operates with a
work force of around more than 20064 so as to give an upper hand to the firm in the market
wherein it operates.
MAIN BODY
PART 1
Study Objective- A company's investing and fiscal selections are critical for
executives to operate operations and attain a certain goal of running a business. With the
purpose of emphasising and comprehending financial management. This study evaluates
Balfour Beatty's finance linked performance and positioning that is listed on the FTSE
350. Monetary administration is important to company since it enables executives to take
smarter choices and assess a company's present and prospective success through monetary
instruments. As a result, it's critical to comprehend the fiscal methods used to illustrate
Balfour Beatty's efficiency in comparison to Kier Group (Anderson, Chandy and Zia, 2018) .
Finance statistics are a set of instruments employed by executives to aid in
decision-making while reviewing a firm's productivity and establishing market
assessments. Administrators could utilise such ratios to emphasize the firm's advantages
and shortcomings, and so build goals which would be employed to make plans to lead the
business smoothly and profitably, once they've been computed. To better comprehend
Balfour Beatty's operations, fiscal ratios for the years 2019 and 2020 have been computed.
Such ratios are calculated between those two years to evaluate if the business was ready to
expand its productivity from the prior season, 2019. Likewise, Kier Group is picked as
Balfour Beatty's rival, and the firm's ratios for the identical two years that are 2019 and
2020, were calculated. By evaluating such statistics, the most important component is to
evaluate which business thrived well. It is crucial to assess the organisation's worth;

evaluation plays a vital role in determining if the business is profitable or not that is an
essential component of a market’s overall yield. Gordon's Payout Expansion Assessment
Methodology was adopted for the assessment of Balfour Beatty for this objective. We use
the payout for the coming year, the payout increase ratio, and the costs of ownership to
generate such payout growing assessment estimate. To compute the payout expansion
method, we'll use the income retaining system to estimate the dividend increase
percentage, and the CAPM to get the costs of equities (Besley and Brigham, 2013) .
Evaluation and observation-
Profitability ratios BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
2020
KIER GROUP
2019
Gross profit
margin
24% 38% 15% 13%
Net profit margin 19% 13% 9% 11%
Operating profit
margin
22% 17% 14% 12%
In the year 2020, the gross profit percentage for KIER GROUP was higher than that of
Balfour Beatty, as seen in the figure ahead. This suggests that, in comparison to Balfour Beatty,
KIER GROUP has already been obtaining products at lower costs via vendors or selling at
premium rates. Balfour Beatty's operating earnings in 2020 is greater than that of KIER GROUP's;
it appears that Balfour Beatty reduced its expenditures, resulting in a greater income. KIER
GROUP's operating income pattern reveals that they spent greater money in 2020 than they did in
2019. The similar can be said for net revenue; Balfour Beatty does have a marginally higher net
income in 2020, whereas KIER GROUP appears to be falling below. In terms of total income,
Balfour Beatty's ROA percentage is greater than KIER GROUP's, indicating that Balfour Beatty's
administration is successfully operating most of its resources in the most optimal way feasible in
2020, as opposed to KIER GROUP. Likewise, Balfour Beatty's ROE in 2020 is higher than KIER
GROUP's, implying that Balfour Beatty investors put a lot of money through into company and are
earning a better yield and putting the money to good usage. Excluding the gross profit percentage,
KIER GROUP has lagged below in all performance measures (Frieden, 2015).
Efficiency ratios BALFOUR
BEATTY
2020
BALFOUR
BEATTY
2019
KIER
GROUP
PLC
2020
KIER
GROUP
2019
Working capital turnover 7 times 6 times 9 times 8 times
Average inventories turnover period 65 days 54 days 39 days 42 days
Average settlement period for
payables
19 days 25 days 62 days 65 days

Average trade receivables 90 days 80 days 104 days 109 days
Effectiveness metrics are used to determine a company's capacity to govern its holdings and
debts in order to increase revenue. It is critical to get a strong operating capacity turnover, as this
indicates that administration is very effective with its brief run structural resources and obligations.
In 2020, Balfour Beatty outperformed KIER GROUP, with KIER GROUP failing to enhance its
operating capacity turnover. KIER GROUP being likely to trade their shares quicker swiftly in
2019 than in 2020, according to the mean turnover period. In addition, in 2020, Balfour Beatty
lagged below KIER GROUP in terms of share sales. Therefore it implies that Balfour Beatty would
need to cover the expense of maintaining the amount of inventory, which would entail an impact
on the company's earnings. The mean settlements timeframe demonstrates that both businesses
significantly increased their ability to repay funds over the course of the year (Grashuis and Su,
2019). Balfour Beatty, on the other hand, is performing higher than that of KIER GROUP, since it
would repay back most of its debtors in just 27 days. According to the mean accounts receivables,
Balfour Beatty had supplied numerous products along with its borrowing clients, who would repay
these again in 81 days, whereas KIER GROUP is performing well since its borrowing consumers
would repay these again in 4 days.
Shareholder’s
investment ratio
BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER
GROUP
2019
Dividend payout ratio 39% 68.4% 76% 56.6%
Dividend cover ratio 2.5 1.46 1.31 1.76
Dividend yield ratio 2.5 3.9 4.6 3.17
Price earnings ratio 15.6 times 17.2 times 16.28 times 17.83 times
The investing proportions of investors are given in the figure above to indicate how much
cash individuals previously put in the company has returned to them. In 2020, Balfour Beatty's
payouts will be lower than KIER GROUP's, which has an optimal dividend payout proportion. Yet,
it implies that KIER GROUP will have fewer residual profits to work with. Balfour Beatty does
have a better payout coverage percentage than KIER GROUP, indicating that they have been
utilising company earnings to satisfy company fiscal obligations, but KIER GROUP appears to be
struggling (Knorr Cetina and Preda, 2012). The payout yielding proportion aids shareholders in
forecasting the financial returns individuals would receive from a transaction; KIER GROUP is
outperforming Balfour Beatty, indicating that KIER GROUP would be paying out further monthly
revenue to its shareholders. The P/E relationship demonstrates that both businesses' price-earnings
ratios have decreased, owing to a dip in the industry's share value in 2020. In 2020, KIER GROUP
appears to have had a stronger P/E proportion than Balfour Beatty. KIER GROUP appears to
perform effectively in terms of repaying capital to investors, according to analysts.

Liquidity ratio BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER GROUP
2019
Current ratio 1.4 1.82 1.91 1.84
Acid test ratio 0.98 1.35 1.53 1.46
KIER GROUP has a higher current proportion than the prior season, while Balfour Beatty
does have a lesser current proportion, implying that it would require longer to repay its brief
run loans. Likewise, when comparing Balfour Beatty to KIER GROUP, the quick proportions
indicate that Balfour Beatty seems to have a lesser quick ratio, which it requires to increase in order
to boost its flexibility.
Gearing ratios BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER GROUP
2019
Gearing ratio 27.4% 26.4% 48.6% 51.1%
The gearing ratio considers the corporate framework and concentrates on how longer
run obligations have been utilized to fund the cash contributed by investors. A reduced gearing
ratio is preferable because it reveals a smaller percentage of the firm's borrowing to ownership. In
2020, Balfour Beatty boosted its gearing ratio somewhat, whereas KIER GROUP enhanced its
capacity to repay long-term debts; yet, it appears to be quite hazardous in comparison to its
competition (Phuoc, Kim and Su, 2018).
Profitability ratios
Gross profit margin = Gross profit ×100
Revenue
BALFOUR
BEATTY 2020
(£m)
BALFOUR
BEATTY 2019
(£m)
KIER GROUP
PLC 2020
(£m)
KIER GROUP
2019 (£m)
Gross profit 854.3 761.9 254.8 162.4
Revenue 4266.2 4167.4 10,181.90 10,377.30
Gross Profit
margin 20.02 18.28 2.502 1.565
Net profit margin = Net profit profit × 100
Revenue
BALFOUR
BEATTY 2020
(£m)
BALFOUR
BEATTY 2019
(£m)
KIER GROUP PLC
2020 (£m)
KIER GROUP 2019
(£m)
Net profit 610.2 590.4 27.4 37.3
Revenue 4266.2 4167.4 10,181.90 10,377.30
Net profit margin 14.30 14.17 0.2691 0.3594

Operating profit margin = Operating profit ×100
Revenue
BALFOUR
BEATTY 2020
(£m)
BALFOUR BEATTY
2019 (£m)
KIER GROUP PLC
2020
(£m)
KIER GROUP 2019
(£m)
Operating profit 748.9 761.9 254.8 162.4
Revenue 4266.2 4167.4 10,181.90 10,377.30
Operating profit
margin 17.55 18.28 2.502 1.565
Working capital turn over
=
Efficiency ratios
Revenue Working capital
BALFOUR
BEATTY
2020 (£m)
BALFOUR
BEATTY
2019 (£m)
KIER GROUP
PLC 2020
(£m)
KIER GROUP
2019 (£m)
Working Capital 471600 729400 1922800 1772900
Revenue 4176900 3999800 10555400 10311400
Working capital turn over 9 times 5 times 6 times 6 times
Average inventory turnover period = Averageinventory ×365
Cost of sales
BALFOUR
BEATTY
2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER GROUP
2019
Average inventory 451650 401200 798850 821650
Cost of sales 2724200 2656400 6427000 6325900
Average inventory
turnover period
61 days 55 days 45 days 47 days
Average settlement period for receivables =Receivables ×365
Revenue
BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER GROUP
2019
Receivables 931600 712500 123200 125250
Revenue 4176900 3999800 10555400 10311400
Average
settlement period
for
receivables
81 days 65 days 4 days 5 days
Payables

Average settlement period for payables = Purchases ×365

BALFOUR
BEATTY 2020
(£)
BALFOUR
BEATTY 2019 (£)
KIER GROUP
PLC 2020 (£)
KIER GROUP
2019 (£)
Payables 219000 224900 994750 1055800
Purchases 2793900 2687600 6429000 6278200
Average settlement period
for payables
27 days 31 days 56 days 61 days
Shareholder’s investment ratio
Dividend pay-out ratio= Dividend per share ×100
Earning per share
BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER GROUP
2019
Dividend per
share
1.73 2.84 0.19 0.17
EPS 4.43 4.15 0.25 0.30
Dividend payout
ratio
39% 68.4% 76% 56.6%
Dividend cover ratio
=
Earning per share Dividend per share
BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER GROUP
2019
Dividend per
share
1.73 2.84 0.19 0.17
Earnings per share 4.43 4.15 0.25 0.30
Dividend cover
ratio
2.5 1.46 1.31 1.76
Dividend yield ratio = Dividend per share × 100
current market price per share
BALFOUR
BEATTY 2020
BALFOUR
BEATTY 2019
KIER GROUP
PLC 2020
KIER GROUP
2019
Dividend per share 1.73 2.84 0.19 0.17
Current market price
per share
69.25 71.50 4.07 5.35
Dividend yield
ratio
2.5 3.9 4.6 3.17
Price-earnings ratio =

Market per share
Earning per share

BALFOUR
BEATTY 2020 (£)
BALFOUR BEATTY
2019 (£)
KIER GROUP
PLC 2020 (£)
KIER
GROUP
2019 (£)
Market price per
share
69.25 71.50 4.07 5.35
Earnings per share 4.43 4.15 0.25 0.30
Price earnings ratio 15.6 times 17.2 times 16.28 times 17.83
times
Liquidity ratio
Current ratio = Current Assets
Current liablities
BALFOUR
BEATTY 2020
(£)
BALFOUR
BEATTY 2019
(£)
KIER GROUP
PLC 2020
(£)
KIER GROUP
2019 (£)
Current Assets 1642200 1616000 4027600 3884500
Current
liabilities
1170600 886600 2104800 2111600
Current ratio 1.4 1.82 1.91 1.84
Acid test ratio =Current Assets−inventory
Current liablities
BALFOUR
BEATTY 2020
(£)
BALFOUR
BEATTY 2019
(£)
KIER GROUP
PLC 2020
(£)
KIER GROUP
2019 (£)
Current Assets 1642200 1616000 4027600 3884500
Inventory 486500 416800 799900 797800
Current
liabilities
1170600 886600 2104800 2111600
Acid test ratio 0.98 1.35 1.53 1.46
Gearing ratio = Longtermliablities ×100Total shareholders funds
BALFOUR
BEATTY 2020
(£)
BALFOUR
BEATTY 2019
(£)
KIER GROUP
PLC 2020
(£)
KIER GROUP
2019 (£)
Long term
liabilities
801700 1035800 2927800 2884900
Total
shareholders’
funds
311800 322000 6021100 5649800

Gearing ratio 27.4% 26.4% 48.6% 51.1 %
PART 2
The theories of Net Present Value and Internal Rate of Return are being employed to
analyse prospective venture funding (Prasad, 2015). In some conditions, the NPV and IRR
become exactly equivalent. While evaluating a conventional venture, it is important to
differentiate among the statistics produced by the NPV and IRR. While multiple attributes are
employed to assess 2 distinct initiatives, the findings are usually inconsistent. The net present
value (NPV) is the sum of expected earnings and taxed earnings. Whenever the entire cost of the
venture is 0, the IRR is the discounting percentage. For commercial undertakings, both NPV and
IRR employ DCP approaches to assess capital feasibility. If the program's net present value
(NPV) is equivalent to or higher than 0 at the discounting factor chosen, it is deemed fundable.
When calculating possible capital gains, the IRR employs a proportion ratio rather than a cash
number, as the NPV does. In the situation of a solitary operation, the effectiveness of approaches
is usually the identical. The NPV and IRR concepts applied in asset evaluation are the emphasis
of this section. NPV Calculation Occasionally program assessment entails only single activity,
whereas another occasions it entails multiple. Depending on the outcomes of the investigation,
an organisation can decide to offer safety equipment or shields. Technique for calculating NPV
and activating it. To calculate prospective cash flows and amortization, the company utilises a
discounting factor which represents the program's volatility and significant expenditures. To
calculate the present worth of an expenditure, you must reduce all potential positive
contributions to a singular existing worth and deduct that amount from the original outlay. The
plan is accepted if the NPV is 0 or above (Richards, 2012).
Part 3
The Gordon Expansion Theory, commonly referred as the payout growth paradigm, allows
shareholders to assess the profitability of a stocks by eliminating current industry variables. The
P/E relationship approach likely to be less throughout instances of strong hyperinflation, so it
will never provide a good image of stocks pricing. One must apply a couple of hypotheses in
order to perform the computations. The final goal of calculating the payout growth strategy is to
figure out how much a company's stock is worth (Sheedy, Griffin and Barbour, 2017).
Hypotheses-
 Thus, the payout growth strategy stays consistent.

 The costs of investment and the rate of returns are both fixed.
 The retention proportion has remained constant.
 The company's operational span is endless.
 The proportion of company expansion remains unchanged.
To illustrate, the payout growth strategy for Balfour Beatty in the coming year is estimated
(Wang, Dou and Jia, 2016).
Dividend growth valuation for 2021
CAPM
β = 0.70
Krf = 1.25
Km = 6.5%
Ko = Rf + β (Km-Krf)
Ko = 1.25+ 0.7 (6.5%) = 1.2955
Dividend growth rate 5 years = 8.52%
Dividend per share = 25
D0(1+ g)
V 0= k −g
154 (1+0.0852)
= 1.3464−0.0852
167.1208
= 1.2612
= 155.25
Interserve Plc’s marketplace pricing in 2021 was 3830 pounds, whereas the estimated
valuation per unit is 155.25 pounds. This demonstrates a considerable upward pattern in the
industry cost, which is far greater than the computed figure. The stock's marketplace value could
be greater for a variety of factors.
 The need for the securities could be excessively strong, with an increasing number of
individuals engaged in purchasing these; the primary rationale for this is the large
marketplace for securities which has overstated the industry pricing.
 Owing to socioeconomic fluctuations, there may be a surge in the industry, causing
marketplace rates to move beyond their true worth each unit (Wilson, 2012).
This approach is used to evaluate the underlying worth of the stock since it is simple to
compute and comprehend. Furthermore, because this method doesn't really taking this into

consideration industry circumstances, it is simpler to establish industry evaluations. Yet, such
approach does have a flaw: whenever we compute K, we expect that now the expansion percent
will stay fixed, as will the risk-free interest and beta, but the valuation of the payout each unit
will change annually. It must be remembered that most of such industry factors are subject to
change as the industry varies on a regular grounds, which will have an impact on the pricing
outcomes.
CONCLUSION
Apart for the gross profit ratio, Balfour Beatty performs well than Kier Group in terms of
efficiency ratios. This is due to the firm's higher price of procuring products. Likewise, Balfour
Beatty's productivity statistics for stock administration are far superior to those of its
competition. As a result, from a managerial standpoint, Balfour Beatty will be more successful
in the long run. According to investor viewpoint metrics, Kier Group is performing well than
Balfour Beatty since they are paying out more beneficial payouts. In contrast to flexibility,
metrics suggest that Balfour Beatty can readily afford to repay its brief run obligations,
indicating that it is a preferable time to engage in the business because its fiscal condition is
secure. Furthermore, Interserve Plc has an inherent worth of 456.22 pounds for 2020, which is
less than the firm's selling price. Balfour Beatty significantly outscored Kier Group PLC in 2020
when comparing to 2019.

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