Introduction

Capital is the sum of the funds that the company uses to establish the business or attaining the objectives and goals. It is essential for every company to raise the capital in order to operate the business. The important factor in the capital is the capital structure. Capital structure defines the way that the company uses to finances its assets or operational activities through different source of finance. Capital structure plays the essential role in financial management of the company. There are many sources of finance that the company can use to finance its operation activities such as debt, equity, debentures, euro issue, letter of credit, venture funding and the others. But the main sources of finance that the company commonly used to finance its operations are debt and equity( Baran, Pastýr, and Baranová, 2016). In this paper, the discussion is made on the concept of “financial structure”. In order to understand the concept, the London Stock Exchange company “Balfour Beatty” has been selected to evaluate the company financial structure.

Balfour Beatty Plc is a multinational company that provides the construction services to customers. The company is based in the United Kingdom that supports services and infrastructure investment. It operates the business in Canada, Ireland, the United Kingdom, the United States and South East Asia (Balfour Beatty, 2019).

Sources of Finance

Debt and Equity are the two main sources of finance that the company can use to finance its operational activities. There are different type of debt and equity that the company can use to raise the capital such as preference share, common share, hybrids, and convertible bonds and so on. The company can mix of debt and equity in different ways in order to raise the capital (Grennan, and Michaely, 2019). According to Balfour Beatty Plc., it is determined that the company uses the debt and equity both to finance its operating activities. It has been seen that it is beneficial for the company to use the debt as the source of finance for raising capital. Debt as the source of finance has the main advantage of retains control. It is beneficial for the company to use the debt for financing the operational activities. It has been found that ownership stays with the firm by using the debt which is beneficial for it while operating the business for long time without any conflict as the owners can operate the busing without sharing it (Efinance Management, 2019).  As per this advantage, the company owners or current management retains full control over the firm.

The other advantage of debt is interest payments are tax deductible. The companies always want to reduce their income tax payment and by borrowing the money on debt help the firm to reduce the income tax amount as the amount of debt are deducted from the income of the firm. The amount of taxes is reduces due to which the amount of interest is also deducted that directly helps the firm.

It is observed that the company can easily build or improve its credit score by using the debt as the source of finance to raise the capital. Borrowing the money on debt from bank helps the company to improve its credit score that helps the firm to operate the business for long time. It also makes the easy process for owner in order to expand the business for long time. The owners gets the enough money on debt by improving the credit score due to which it is easy for the firm to expand the business at any size. It has been seen that alternate methods to raise finance may not really be accessible to small businesses by debt is good for financing.

At the end, it can be said that the debt as the source of finance is a good selection for raising the funds. However, be sure that the company should have the ability to repay the amount of borrowing money on debt so that its chances of insolvency is reduces. Once the company ability is measures, the company can go ahead with its borrowing plans. As per the above discussion, debt as the best source to finance as compare to the equity.

Financial Structure

As discussed above, the company uses the debt and equity both to raise the capital. The company mixes the debt and equity to funding the company. In order to evaluate the company debt to equity, debt to equity ratio is evaluated. The debt to equity ratio of the company has been evaluated over the five year in order to determine the firm financial structure. The evaluations of debt to equity ratio are shown below:

As per the above evaluation of debt to equity ratio, it is determined that the company has the high amount of debt in 2015, 2016, 2017 and 2018 as compare to the amount of equity. The amount of debt of the company in the last four years is 1407, 1447, 1244 and 1202 in the year 2015, 2016, 2017 and 2018 respectively (Balfour Beatty, 2016). The amount of equity of the company is 830, 762, 1066 and 1241in 2015, 2016, 2017 and 2018 respective manner (Balfour Beatty, 2015). The high amount of debt in the last four years represents that the company uses more debt to finance its operating activities. The debt to equity ratio of the company is 1.70, 1.90, 1.17 and 0.97 in the respective years 2015, 2016, 2017 and 2018 (Balfour Beatty, 2018). The debt to equity ratio of the company in the last four is decreasing continuously due to decreasing the debt amount in the comparison of equity amount. But in 2019, the amount of debt of the company is less as compare to the amount of equity which indicates that the firm uses the more equity to raise the capital instead of debt. The amount of debt of the company is 1111 and the amount of equity is 1377 which shows that the amount of equity of the firm is high in 2019 as it uses more equity to raise the capital (Balfour Beatty, 2017). The debt to equity ratio of the company is 0.81 in 2019 which is less from the previous year of debt to equity ratio (Balfour Beatty, 2019). The debt to equity ratio is decreasing in 2019 from the previous 4 years due to decreasing the debt amount as compare to equity amount.  

Recommendation 

From the above analysis, it is recommended that the company has to use the equity more to finance the operational activities instead of debt. However, the company improves its capital structure by increasing the amount of equity as compare to the amount of debt (Kim, Lin, and Chen, 2016).

Conclusion 

At the end of the paper, it is concluded that the financial structure of Balfour Beatty Plc. is good as it uses debt and equity to finance the firm for operation activities. In this paper, the company financial structure has been analyzed. According to the analysis, it is suggested that the company has to improve its financial structure more by using the more equity rather than the debt as the source of finance.

References 

Balfour Beatty. (2015)  Annual Report and Accounts 2015. Available From: https://www.balfourbeatty.com/media/149360/ar_2015.pdf  [Accessed 30/8/2020].

Balfour Beatty. (2016)  Annual Report and Accounts 2016. Available From: https://www.annualreports.com/HostedData/AnnualReportArchive/b/LSE_BBY_2016.pdf [Accessed 30/8/2020].

Balfour Beatty. (2017) Annual Report and Accounts 2017. Available From: https://www.annualreports.com/HostedData/AnnualReportArchive/b/LSE_BBY_2017.pdf [Accessed 30/8/2020].

Balfour Beatty. (2019)  Annual Report and Accounts 2019. Available From: https://www.balfourbeatty.com/media/318461/balfour-beatty-annual-report-and-accounts-2019.pdf  [Accessed 30/8/2020].

Baran, D., Pastýr, A. and Baranová, D. (2016) Financial analysis of a selected company. Research Papers Faculty of Materials Science and Technology Slovak University of Technology, 24(37), pp.73-92.

Efinance Management. (2019) Financial Structure – Meaning, Importance and More. https://efinancemanagement.com/financial-leverage/financial-structure

Grennan, J. and Michaely, R. (2019) Fintechs and the market for financial analysis. Michael J. Brennan Irish Finance Working Paper Series Research Paper, (18-11), pp.19-10.

Kim, D.H., Lin, S.C. and Chen, T.C. (2016) Financial structure, firm size and industry growth. International Review of Economics & Finance, 41, pp.23-39.

Yahoo Finance. (2019) Balfour Beatty plc (BBY.L). Available From: https://finance.yahoo.com/quote/BBY.L/balance-sheet?p=BBY.L [Accessed 30/8/2020].

Appendix

Financial Position of 2019 and 2018

Financial Position of 2017 and 2016