Construction and Engineeing Firms

[Packer16]

I have been looking at Japanese C&E firms and have found quite a few cheap ones that have decent RoEs and some are net-nets, however, I have some reservations on subtracting out the cash as some or all of it may be deposits from customers.  Has any one see or developed a rule of thumb for C&E firms and required cash?  Alternatively, a way to divide the cash between deposits and actual cash?  TIA.

 

Packer

[LC]

At the firm I used to work for, (NYC architecture/permit firm) we took deposits for permitting fees for large projects up front. We did a large Nomura project where permit fees were 75%+ of the total job. But large deals usually have special pricing. For us, deposits were usually ~15-25% of the total cost of the project. Also in general cash earned by us was not remitted until milestones were completed, although once the deposit cash was in our acct we could theoretically do anything with it (pay salaries, owner withdrawals, etc.).

 

In terms of sniffing it out, I would look for large imbalances in the cash account over time. This is probably indicative of deposits. Also maybe how revenues are earned vs. the cash account, to see if they hit a certain milestone and then can recognize revenue, assuming they play fair. By Play fair I mean, we had huge receivable problems. Small firms like this are usually on the short end of the stick vs. large guys, and other small firms usually just don't have the cash flow. But we kept things on the books to avoid write-downs for years. Cash flow is definitely king in figuring out these things, I think.

[KCLarkin]

I am working through the CB&I annual report right now. I think you are right to be skeptical about the cash balance. CBI, for example, has a very large negative working capital balance. Depending on the nature of the projects, the revenue, earnings, and ROE are all rough estimates at best. How long are the projects? What are the revenue recognition policies?

 

One of the reasons why they might have decent ROE is that they have very large upfront payments, which would reduce capital needs. I would expect to see this as deferred revenue on the balance sheet.

 

 

[MrB]

I am working through the CB&I annual report right now. I think you are right to be skeptical about the cash balance. CBI, for example, has a very large negative working capital balance. Depending on the nature of the projects, the revenue, earnings, and ROE are all rough estimates at best. How long are the projects? What are the revenue recognition policies?

 

One of the reasons why they might have decent ROE is that they have very large upfront payments, which would reduce capital needs. I would expect to see this as deferred revenue on the balance sheet.

I would add that cash - deferred revenue would be my starting point to figure out whether there is excess cash.

[Packer16]

That was my initial thought but on the Japanese balance sheets I am looking at there is no deferred revenues.

 

Packer

[peterareed]

Another item to consider when thinking about whether or not to include balance sheet cash is the amount that is needed for bonding capacity. Many of the jobs require a bond(s), and many of the insurance companies who provide the bond effectively need some amount of cash on the balance sheet. In this circumstance, I would argue that the amount required by the bonding company is not "excess cash" and therefore should not be deducted from the calculation of Enterprise Value.

[matjone]

My accounting knowledge is at the 101 level so this is probably a dumb question, but why shouldn't there be a corresponding liability against a deposit if the work good/service  hasn't been delivered?  Isn't that a pretty basic rule?

[kevin4u2]

Yes it's called unearned revenue.

 

My accounting knowledge is at the 101 level so this is probably a dumb question, but why shouldn't there be a corresponding liability against a deposit if the work good/service  hasn't been delivered?  Isn't that a pretty basic rule?

[Otsog]

Could we get an example so we can check out the FS? What does their note on revenue recognition say?

[Patmo]

My accounting knowledge is at the 101 level so this is probably a dumb question, but why shouldn't there be a corresponding liability against a deposit if the work good/service  hasn't been delivered?  Isn't that a pretty basic rule?

 

Japan fiancial reporting is weird as hell, apparently they can choose from USGAAP, JPGAAP, IFRS or J-IFRS (not even kidding, J-IFRS..... What's the point of IFRS if every country modifies it to their own taste???).  Their rules are really ambiguous, basic rule is revenue s/b recognized based on the realization principle which is the accrual basis we're used to but I bet there's a clause somewhere in the JP methods where they can use cash basis accounting in some situations and recognized this cash as revenue earned instead of deferred until services were rendered. So essentially you'd have to back out whatever your estimate of cash balance is deposits from revenues in whatever year and dump it into a deferred liability. Hopefully someone else can confirm as I am talking out my ass a bit here...

 

 

https://inform.pwc.com/inform2/content?action=resource&id=0000000776625338.pdf and https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0CDEQFjAE&url=http%3A%2F%2Fwww.shinnihon.or.jp%2Fservices%2Fifrs%2Fissue%2Fifrs-others%2Fother%2Fpdf%2Fifrs-jgaap-comparison-v30-E.pdf&ei=M438VJ-9D9PUoATy3oHgCw&usg=AFQjCNGnN3LeLPgxT3jCAdMYi8oe3BR-RA&bvm=bv.87611401,d.cGU are the only two sources of info I could find from a quick googling...

 

 

On another note there's a new revenue recognition rule that was put out in mid 2014, effective 2017, which if I understand correctly will be used by both US GAAP and IFRS, and features a 5 step guide for companies to follow. http://www.iasplus.com/en/standards/ifrs/ifrs15 and http://www.mnp.ca/media/documents/Financial-Reporting-Library/IFRS/01_Hot-topics/MNP_A-Summary-of-IFRS-15-Revenue-from-Contracts-with-Customers.pdf for some info.