Snc-Lavalin Group Inc.

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Current Ratio

The current ratio measures a company’s liquidity by comparing current assets to current liabilities and determining the ability of the company to meet its short term debt requirements. A current ratio of greater than 1 is preferred as it shows a company is liquid and able to cover its short term debt with its current assets. In this case SNC is lower for both years than the other two companies, and a noticeable number is the .96 in 2012 (see table 3.1), which shows that SNC was not able to cover its short term debt that year. However, this it is not a critical situation as the company can borrow against long-term debts to meet their current obligations, as long as long-term debts are good. Another number to notice is IBI’s 3.44 (see table 3.1), generally a current ratio above 3 is not preferred since that can indicate the company is not using its current assets efficiently, and may be losing out on earning interest.

Asset Turnover Ratio

Asset turnover ratios are important because they indicate the efficiency of the company’s management team. This ratio compares total revenue and assets to assess the sales generated by the assets a company owns. In this case, as you can see in table 3.2, Stantec has the highest ratios of 1.31 in 2011 and 1.28 in 2012, which is preferable, as that means management is using the assets well. SNC and IBI are both above one, which is a good sign but in this case the larger the number the better.

Return on Invested Capital

ROIC indicates how efficient the company was in investing capital into profitable investments such as buildings, land, etc. In this case, SNC has a consistent percentage which is relatively high (11.89% in 2011 and 9.28% in 2012 as seen in table 3.3), showing that they are more efficiently generating cash flows from invested capital. IBI has very low ROIC (.55% in 2011 and 5.01% in 2012 as seen in table 3.3), and Stantec’s fluctuates quite a bit between 1.75% in 2011 and 13.39% in 2012 (as seen in table 3.3), bringing uncertainty into the company which makes it riskier to invest in.

Return on Equity

Return on equity measures the net income earned from equity contributed by shareholders. This is an ideal ratio to compare companies’ profitability and their ability to generate profit from shareholders. Generally, an ROE of 15-20% is ideal. Both IBI’s (-9.78% to 72.25%) and Stantec’s (2.04%-17.86%) numbers fluctuate a fair amount between the two years (as seen in table 3.4). This fluctuation leads to uncertainty which means these companies appear riskier. SNC has ideal numbers for both years of 20.48% and 15.62% (as seen in table 3.4), showing that they are efficiently using shareholders’ contributions to build the company and bring in profits. Another notice for IBI is that their ROE for 2012 is a negative number. This is because IBI experienced a net loss in that year.

Gross Profit Margin

Gross profit margin assesses financial health by comparing the gross profit (revenue less cost of goods sold) to revenue. This number should be preferably higher as that means there is more money left over after the cost of goods sold to spend on other expenses or go to retained earnings or to pay out dividends. In this case, Stantec clearly has a low cost of goods sold, because they have a very high gross profit margin of 42.60% in 2011 and 45.01% in 2012 (as seen in table 3.5), this seems to be because Stantec mainly has subcontractors who they pay to do the work and SNC and IBI have high operating expenses as well as salaries. SNC and IBI have very similar numbers that range from 15-23% (as seen in table 3.5) which are still very good numbers, although not as high as Stantec.

In conclusion, SNC and Stantec have preferable ratios to IBI for liquidity, efficiency, and returns. Stantec shows better gross margin and return on equity, but SNC is more consistent with its numbers. When looking to invest in a company, consistency can be very important as that would be a less risky investment.

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IV. INDUSTRY ANALYSIS[a]

The construction and engineering industry in Canada has seen strong growth during the 2007-2011 period to reach a value of $134.6 billion, largely due to governments putting money towards developing new infrastructure plans (marketline p.7,17).

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However, according to an industry profile by Marketline, an independent research company, the industry is forecasted to decelerate to moderate growth at 3.3 percent during 2011 to 2016 due to a global economic slowdown (Marketline p.11). The overall decline in economic growth is also said to strongly affect rivalry in the construction and engineering industry since buyers are large and few, and influenced by quality, price, and performance (Marketline p.15).

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According to GlobalData, an industry research and consulting firm, the global economic slowdown is also likely to create challenges for SNC during 2013-2016 due to government requirements for least price quotes and minimum profit margins in order to acquire government infrastructure projects (GlobalData, p.25). With the reduction of profit margins and increase in costs, the Canadian construction and engineering industry is expected to experience decreased liquidity overall and increased uncertainty about long-term survival.

In a first quarter 2013 financial statistic report for enterprises conducted by Statistics Canada, the construction industry operating revenue, profit, reliance on borrowed funds, and profit margin have shown improvement compared to the first quarter of 2012, however overall profitability has declined (Stats can, p.16-19).

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SNC in comparison to the industry during the 2012-2013 first quarters is somewhat consistent, as operating revenue and gross margin improved, and overall profitability declined due to higher direct costs and overhead. Thus, SNC’s lower net income for the first quarter of 2013 is comparable to the rest of the industry. Although SNC’s net income has dropped significantly by 19.3 percent from $66,549 million to $53,700 million in 2013, GlobalData has noted that SNC would be able to generate higher profits if SNC reduces its expenses (GlobalData, p.23).

In terms of liquidity, the construction industry’s 2013 cash position has also significantly