10 October, 2016
This has been a good year for the P&L of the construction industry as a whole: turnover is up and so are profits - all without a significant increase in the size of the balance sheet, suggesting that the sector is working its capital more effectively. But as ever, some individual companies are better prepared than others.
The difference between those companies in this sector with high H-Scores and low H-Scores is largely down to three things: profitability, funding, and net worth.
The average profit for the top 10 by H-Score is over £20m while the average profit for the bottom 10 only £5m, and all bar four are loss-making.
In terms of funding, the bottom 10 companies are much more dependent on debt and this is reflected in the net worth. Three of the bottom companies – Morrison, Sisk and City Building – have negative net worth. This number increases to six when 'tangible' net worth is considered. (This being simply the net worth of the company when non-physical assets such as patents, brand names and crucially, valuations of acquisitions are omitted).
Our results seem to suggest that there is no real sign of improvement for Balfour Beatty yet; in fact the year-on-year H-Score reflects the continuing downward trajectory of profitability.
The stand-out performer is Skanska, which continues its good performance of the past five years. It has a well-structured balance sheet and steady profit.
Company Watch calculates a health rating (H-Score), based on published financial information which is processed through a mathematical model to produce an H-Score out of a maximum of 100.
Scores between 76 and 100 indicate robust financial health. A score below 50 indicates financial weakness and those with a score of 25 or less are in the Company Watch Warning Area.
Not every company in the Warning Area fails but, in the past 15 years, almost 90% of all UK businesses that went into insolvency or underwent a financial restructuring were in the Company Watch Warning Area at the time.