Portfolio Restructuring and Investment Analysis

This assignment provides an investment analysis of Bolvis plc and Carillion plc, along with portfolio restructuring based on financial analysis. It also discusses the reasons behind the collapse of Carillion plc.

Running head: PORTFOLIO RESTRUCTURING AND INVESTMENT ANALYSIS
Portfolio restructuring and Investment analysis.
Name of the student:
Name of the university:
Author Note:

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Executive Summary:
The assignment is prepared to show the investment analysis of the Bolvis plc and Carillion
plc through use of major key performance indicators. In this report, deep analysis is
performed for the investment decision that the investor should take into consideration for
securing expected return from investment. This assignment also explains the concept of
portfolio restructuring and the factors based on which portfolio restructuring is made. The
portfolio restructuring has been done based on the finding of financial analysis of both the
company. The assignment is also explained the reasons behind the collapse of the Carillion
plc, which was one of the major liquidation in UK in the year 2018.
The finding of the collapse is explained and interpreted in such a manner that the result can
be termed as a lesson for investment purpose. The collapse and financial distress of the
carillion plc has resulted into some warning signs for those who only upon the financial
statement of the company. It also questioned the reliability of the financial statement of the
company.

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Table of Contents
1. Introduction:...........................................................................................................................3
2. Analysis of financial statement for portfolio restructuring:...................................................4
2.1 Current ratio:....................................................................................................................4
2.2 Operating cash flow:........................................................................................................5
2.3 Net profit margin:.............................................................................................................6
2.4 Gross profit margin:.........................................................................................................6
2.5 Return on equity:..............................................................................................................7
3. Justification:...........................................................................................................................9
4. Reasons and findings from liquidation of Carillion plc:......................................................11
5. Conclusion:..........................................................................................................................14
7. References:...........................................................................................................................15
7. Appendix:.............................................................................................................................18

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1. Introduction:
The whole assignment is prepared to show the portfolio management consisting of
shares of two companies namely Bolvis plc and Carillion plc with the calculation of ratios
from the data derived from the financial statements of both the company. Portfolio
restructuring plays a vital role in mitigating risk and assuring optimal rate of return to the
portfolio. The portfolio restructuring involves continuous analysis of performance of the
company whether from financial point of view or market perception point of view. Both the
company namely Bolvis plc and Carillion plc is engaged in the business of construction and
the person has acquired shares of both the company. The Bolvis plc is the one of the largest
company of the united kingdom whereas the Carillion plc is ranked 2nd in terms of market
share holding. Since, the investor has made investment in both the companies. Now the
investor is considering to divestment from one of the company. The divestment process can
be done with the deep analysis of key financial ratios such as Gross profit margin, Net profit
margin and Return on equity.

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2. Analysis of financial statement for portfolio restructuring:
The investment or divestment strategy under portfolio management is mainly
dependent upon the financial statement of the company. The financial statement helps in the
portfolio restructuring to reduce overall risk up to acceptable level insuring optimum return
from the portfolio. Financial statement of any company is the information based on which
financial health of the company can be determined and it can be analyzed to predict the status
going concern concept of the company. The investment strategy is mostly dependent upon the
major financial ratios and the financial health of the company. It also predicts the expected
growth rate of the company.
The reliability of investment decision is mainly dependent upon the analysis of the financial
statement using different accounting techniques such as ratio analysis, growth factors and
dividend policy of the company. The more accurate the analysis is the more efficient decision
can be made based on it.
The process divestment is generally dependent upon no. of factors such as investor’s
perception regarding expected return, and growth of investment made. These all factors are
related to an analysis of such factors, which is done based on the company performance and it
will be influenced by the relevant market forces, which leads investor to reallocate their
investment in the portfolio as to maximize return and diversification of risk associated with it.
Financial ratios are the major indicator of financial performance of the company and it can be
analyzed to evaluate the major portfolio restructuring decision such as investment and
divestment. The following ratio can be used in investment decision purpose:

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2.1 Current ratio:
It shows debt paying capacity of the company in short period of notice i.e. within an
accounting period. This financial ratio is the comparison between current liabilities as well as
the current assets of the organization. It is the signal of the health of the company in terms of
fulfilling its capacity debt repayment. Investors generally uses this ratio to ascertain whether
the company has a healthy operating cash cycle or not. A low current ratio indicates that
company is not able to pay its short-term debt and it requires additional working capital to
pay its debt obligations. A high ratio is the indicator of high working capital holding of the
company. It indicates that the company has generated more cash & cash equivalent through
its operational activities. A high ratio sometimes perceived as a failure of company to
reinvest excess working capital holding by the company.
Through calculation of current ratio, the Bovis plc has current ratio of 3.54 whereas
carillion plc has 0.82, which indicates that the Bovis plc is financial healthy in terms of
fulfilling their short term requirements of cash & cash equivalents to pay its debts. Based on
the analysis of current ratio, divestment through selling the shares of Carillion Plc is
advisable. (See Appendix)
2.2 Operating cash flow:
It is analyzed to show the company’s performance in terms of generating cash from its
operating. The financial experts generally uses operating cash flow data to get the idea
whether the company is able to pay its expenses through cash flows from operating activities
or whether it needs external source of funding to finance its expenses. The operating cash
flow of Carillion plc is £ 73.30 million whereas Bolvis Plc. has operating cash flow of £
61.80 million, which indicate that the Bolvis plc has generated less operating cash flow in
comparison with later. Therefore, based on above analysis the shares of the Carillion plc may

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be purchased and the shares of Bolvis plc can be sold but decision cannot be based on above
only.
2.3 Net profit margin:
It shows that how much revenue is being converted into the profit. It can be used to
determine the profitability of the company. A higher percentage is the indicator of higher
profitability of the company and vice-versa. It also indicates the growth prospective of the
company in terms of profitability. The Bovis plc has Net profit margin of is 14.67% whereas
the Carillion plc has 3.34%. so, Carillion plc is seems to be less profitable in comparison with
the Bovis plc. Based on above, the shares of Carillion plc can be sold.
2.4 Gross profit margin:
It indicates the amount of profit that company had met from sales before expenses. It
does not indicate true & accurate profitability of the company. Gross profit margin is
calculated by dividing gross profit by net sales of the company. It is the result of deducting
cost of goods sold from the sales revenue. It is used to analyze the reasons for the gap
between sales and gross profit based on which necessary cost reduction policies and decisions
can be taken. The higher gross profit margin indicates financial soundness of the company
and it discloses that the company has enough amount to pay its overhead expenses.
By calculating Gross profit margin of both the companies, the carillion plc has
92.02% and Bolvis plc has77.66% of Gross profit margin. Therefore, based on above ratio
the carillion plc is seemed to be more profitable but the discussion is not yet over because the
net margin of Bolvis Plc tells another story. The reason behind this might be increased
employee cost, increase in overall production cost, depreciation and higher interest burden on
the company. Decision based on only on this will not provide expected outcome or will
provide outcome that is not expected to have. (See appendix)

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2.5 Return on equity:
Return on equity is the widely accepted profitability indicator that generally shows
how much profit company has generated for its shareholders. Many expert uses this ratio to
examine the overall performance of the company as well as operational efficiency in terms of
profit earning capacity for the shareholders of the company. It shows how effectively the
management is engaged to earn returns to the shareholders. A higher ratio is the indicator of
company’s act in managing its affairs to secure trust of investor and affecting overall
expected growth of the company. Return on equity directly contributes towards the price of
the shares, the higher ROE, the higher intrinsic value of the stock will be. This explains why
the companies having higher ROE generally have higher intrinsic value in comparison to
other companies having lower return on equity.
From the calculation, the carillion plc has Return on equity of 60.20% whereas the
Bolvis plc has Return on equity of 179.67%. Therefore, from above data it can be concluded
that the carillion plc is less profitable and not suitable for further investment purpose but
Bolvis plc. is more profitable. The Bolvis plc. is having comparatively higher Return on
equity which means that it is generating sufficient profit to the shareholders and will be
preferred for long term investment purpose. (See appendix)
It is the most important and widely accepted tool for analysis required for making
decision for investment purpose such as portfolio restructuring. The carillion plc has
performed well but as compared to Bolvis plc it seems to be less worthy and it is not feasible
to invest further funds in the Carillion plc. The Bolvis plc. has strong key performance
indicators and its Key performance indicator signals that the investment in Bolvis plc is more
worthy and will provide more sustainable return to the shareholders. Therefore, the Carillion
plc’s share should be considered for divestment purpose.

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Based on above analysis, it can be observed that the Bolvis plc has more growth
opportunity and it is financial sound to provide optimum returns to its shareholders.

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3. Justification:
The overall decision-making process related to portfolio restructuring is mainly
dependent on ratio analysis of the company. The ratios are calculated based on the numbers
and data provided in the financial statement of the company relying wholly on which will not
feasible and will not give the desired result. The main drawback of the financial statement of
the company is that the company may be able to hide some facts or will manipulate figures to
the extent it is feasible for them. The expected return and the expectations of the potential
investors should be main concern for the board as they are the persons who are actually
financing the projects of the company and company should focus more on creating values for
their investors through which they will be able to attract more investment proposals in the
company. The Bolvis plc is financially strong as compared to the Carillion plc whether it is
gross profit margin ratio or any other financial ratios. Based on the ratio analysis, the decision
regarding dilution of funds from shares of one company to another company can be made.
The strong financial ratios is not only criteria to judge any company for investment purpose,
other factors should also be taken into analysis such as growth factors, dividend policy,
composition of the board of directors, market belief regarding shares of the company and
micro economic conditions covering overall activities of the company. As both the company
whether it is Bolvis or Carillion plc has engaged in the business of construction, major
projects, which they have completed during their life of tenure should be studied. If any of
the company have failed to complete any project then it will have serious impact on the
company’s performance as well as the revenue of the company. The investor will take this
failure as signal that may hamper their investment decision in that company. The financial
statement analysis has some assumptions and limitations, which may be studied and disclosed
properly in the notes to the financial statement so that the investor will take these

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assumptions and limitations while making investment decisions. Relying only on investment
will affect the overall investment and expected return from the investment.

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4. Reasons and findings from liquidation of Carillion plc:
The liquidation of carillion plc was the one of the shocking liquidation and well
known news in the year 2018. The Carillion plc was one of the most renowned and it was
first choice for investment purpose. Although the financial statement has not revealed certain
facts and figure about the performance of the company which should be taken into
consideration for rational investment decision purpose. The financial statements had not
disclosed certain facts and findings about the company resulting into liquidation of the
company. Bellow mentioned are reasons or signals that have to be disclosed in the financial
statement of the company:
a) The Carillion plc had several contracts whose value has considered being less as
compared to the previously assessed values. These decline in the value is the
generally was the result of increase in the cost associated with it and the expected
benefit to be achieved from it. Thus, this resulted into writing down the values of the
previously accessed contracts resulting into incorrect profit disclosed in its initial year
of contracts. It was misleading to the shareholders they were more or less dependent
upon the financial statement and ratios calculated from the financial statement.
Somewhere over valuation of contracts helped the company stating higher gross profit
margin and lower operating loss of the company.
b) Cash crunch: The Company was suffering from the problem of cash crunch. As the
company has incurred huge losses in its previous financial year. Therefore, it had lost
the confidence of potential creditors due to failure of not paying their dues on timely
basis. Therefore, company mostly used to utilize its working capital and sometimes it
needed additional source of funding to finance its working capital requirements.
When there was urgent need of cash to pay its debts, it has requested government for

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providing significant amount of cash to repay its debt, which was later rejected by the
parliament resulting into liquidation of the company.
c) One of the main reason behind the liquidation of Carillion plc was their debt burden,
which was increased and has termed as main charge against the profit of the company.
It had the debt nearly £ 900 million and it has been marked as defaulter by the banks
barring the company for further sources of funding. The main lenders of the company
has rejected company’s request to add some additional funds into the company. It was
necessary for the company to overcome from urgent cash requirements and sources of
funding. Later on, this resulted into the liquidation of the company.
d) Pension deficit: The Company had in its financial statements showed £ 600 million of
pension deficit, which has serious implications on the financial performance of the
company and the liability, was increasing each year. The failure of which has resulted
into statutory penalties on the company. Although it was mentioned in, the financial
statement of the company but the data regarding of the deficit and the period of deficit
has not provided in the financial statement. This has questioned the reliability of the
financial statements whether it was showing true & fair view of the company. this has
created bad picture of the company among its shareholders and employees of the
company resulting into loss in potential and valuable work force. Thus, the matter of
liquidation has been raised by potential lenders of the company.

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5. Conclusion:
From the above discussion, it can be concluded that the decisions based only on the
financial ratios may have serious implications on the long-term sustainability of the company
and other factors should be taken into consideration. It can destroy values for the investment
of the investors. However, most of time financial statement has been used to calculate ratios
by which the performance of the company is accessed. More dependence upon the financial
statements for investment will result into unexpected outcome. For better reliability of
investment made, other factors should also take into analysis as it was in the case of carillion
plc. Other factors are increased debt burden and written down value of the contracts. The
investors’ belief mainly depends upon the financial statements that have been published
publically, but it does not disclose those data that are more important in investment decision
purpose.

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7. Appendix:

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