ACS is one of the largest construction companies in Spain, but to call it simply a construction company is an understatement. ACS divides its business into 3 legs: construction of civil works, industrial services and other services such as comprehensive maintenance of communities and buildings, as well as cleaning and assistance to dependent groups. Precisely, civil works construction is not its main source of profit

• Infrastructures: Construction of civil works, 20% of net profit.
• Industrial Services: Construction and maintenance of energy, industrial and mobility infrastructures. It constitutes the 62% of net profit.
• Services: Comprehensive maintenance, cleaning and assistance to dependent groups. 4% of net profit.

For more information, please consult its web which, although a little brief, gives a general picture of the company. The objective of this analysis is to understand what ACS' business is like, how it is managed and whether it is an option to incorporate it into a Buy&Hold focused portfolio. We usually divide the analysis into 3 sections to better organize ourselves: the balance sheet, the income statement and the final valuation.

1 Balance Sheet Analysis

To begin with, let's take a look at the capital structure of ACS (ACTIVIDADES DE CONSTRUCCION Y SERVICIOS, S.A.), that is, what it spends the money on (and how much) and to whom it is owed (and how much). We will calculate some ratios and see their progression over time. We are going to organize it in the following points:

• 1.1 Asset analysis
• 1.2 Analysis of liabilities and equity
• 1.3 Indebtedness
• 1.4 Safety margin
• 1.5 Liquidity/Treasury
• 1.6 Working capital

1.1 Asset analysis

The structure of the assets will indicate the degree of immobilization of ACS resources. That is, how much of its total assets are fixed assets (real estate, investments, goodwill, etc). In this case:



This ratio has been fairly stable at ACS since 2012, when it finished restructuring its assets to adapt to the new situation following the crisis in Spain. What they normally call "sale of non-strategic assets", in other words, a "sale of what I can to save the accounts".


If we represent the breakdown of the asset by time, we make visible which part is current and which part is fixed. Its variation over time can give us information on profound changes in the company. In this case, total assets have been decreasing from 2012 to 2018, when they have started to increase again. As we will see later on, this decrease in the amount of assets has helped ACS to lower its debt with credit institutions and has made it more stable:



The fixed asset has not had great variations in its composition that give us any information that something is wrong:



In the period 2012-2018, the item that has fallen most from Fixed Assets is "Non-current financial assets", which we include in the item "Other", but in general, all items have been reduced. On the other hand, from 2018 onwards, there has been a strong upturn in investments in investee companies. In particular due to the purchase of Abertis and the partial sale to Atlantia that took place at the beginning of 2018. Following this, the proportion of each item is currently as follows:

• Investments in investee companies (30,74%)
• Goodwill (21,76%)
• Tangible fixed assets (18,91%)
• Deferred tax assets (14,68%)
• Other intangible assets (7,30%)
• Non-current financial assets (6,43%)
• Real estate investments (0,18%)

As for what matters to us, there are no major changes in the fixed assets that make us think of problems for the company.


As with the fixed asset, we are going to break down the items of the current asset according to time:



In this chart there is more dancing, however, there is nothing important either. On the one hand you can see the disinvestments in the post-crisis period in the item "Non-current assets held for sale". On the other hand, cash has increased in the last year and a half, which at first glance provides security. However, we will see later that the liquidity ratio does not increase. This is because current liabilities also increase and are offset. This is the breakdown of current assets at 31 December 2019:

• Customers by sales (40,15%)
• Cash (33,37%)
• Non-current assets held for sale (8,71%)
• Other debtors (6,88%)
• Other current financial assets (5,57%)
• Stock (3,76%)
• Other current assets (0,94%)
• Current tax assets (0,62%)

1.2 Liability Analysis

In this section we will see the structure of ACS' liabilities, which gives us information about the origin of the resources available to the company. It tells us where the money comes from and to whom it is owed if it is owed to anyone. To find out the proportion of the capital that belongs to the company compared to that of others, we have the following formula:



There have been no major changes in the proportion of equity except for the exceptional moment of the purchase/sale of Abertis. As with the assets, we will break down the liabilities. We'll start with a grouped chart:



Nor has there been much variation in the proportion of liabilities. We will break down each of them to see if they tell us anything that might be of interest to us in terms of an assessment of the state of the company. We start with the net worth:



Reserves have gradually increased to become the most important item in net worth. The largest items that make it up are:

• Reserves (57,56%)
• Minority Interest (19,65%)
• Profit attributable to the parent company (17,50%)
• Share premium (16,33%)
• Issued Capital (2,86%)

We continue with the current liabilities:



The slight increase in current liabilities is due to an increase in supplier and other creditor items. This is completely normal when a company engaged in construction to order is carrying out work and paying its suppliers within X days. The increase in these items indicates that it has more turnover. Another aspect that is visible in the graph is that the debts with short-term credit institutions have decreased in recent years, in general this is good news, as it helps to reduce financial expenses and therefore increase net profit. However, this fall has its perils, this last year the item "other current liabilities" appears again, which are basically debt obligations and which probably have interest. The most important items that currently make up this item are:

• Suppliers (41,54%)
• Other creditors (27,45%)
• Short term debts to credit institutions (12,00%)
• Other current liabilities (7,60%)
• Current provisions (5,13%)
• Liabilities linked to non-current assets held for sale (4,93%)
• Other short term financial liabilities (0,67%)
• Current tax liabilities (0,66%)

Finally, to finish with the analysis of the liabilities, we break down the fixed liabilities:



This image shows how long-term debts to credit institutions have also been reduced in recent years, but there has been a slight upturn in the last six months. In addition, the item "other non-current liabilities" also appears. The most important items are:

• Long-term debt with credit institutions (69,39%)
• Provisions Non-current (15,06%)
• Other non-current liabilities (9,50%)
• Deferred tax liabilities (4,24%)
• Other long-term financial liabilities (1,78%)
• Grants (0,03%)

1.3 Debt Analysis

Once we have seen the composition of the balance sheet in general terms, we are going to review some key figures. A very important concept in the valuation of a company is the debt, since a company that does not have debts cannot go bankrupt. The progression of the debt ratio tells us how big a company's debts are in relation to its equity:



There are no significant variations in the debt graph, but if we represent debt over EBIT we see something interesting:



We like to represent debt over EBIT because it gives us information on how assumable the debts are. Throughout the time series it has varied between 20 and 35 times EBIT. It is somewhat high, but the important thing is that it can be paid and we will see that a little later. There has been a strong upturn in the last six months, which indicates that EBIT has fallen, and we will see this again in the section on the income statement.

1.4 Safety Margin

Companies for their proper functioning normally need their fixed assets to be covered by equity plus long-term debts. This sounds like a tongue twister, but this is known as the safety margin. If the fixed assets were not covered it would mean that part of the company's fixed assets (offices, land, machinery, financial assets...) have to be paid/financed by short-term debt, which can be quite dangerous depending on the nature of the company. A 100% safety margin is not something that must be complied with yes or no, but it is a sign of good health.



It stays around 100%, nothing to worry about.

1.5 Liquidity/Treasury

Liquidity must always be close to 100%, otherwise there may be problems in paying debt maturities or short term payments. In the case of ACS, it has the right liquidity, nothing to celebrate, but indicates that it can cope with short-term debts.

1.6 Working Capital

The working capital indicates the amount of current assets that are financed with permanent resources. In other words, it is the permanent resources that are left over after covering the fixed asset. To evaluate it we can relate it to two magnitudes, the current assets and the sales:



In the case of ACS, the working capital is quite low, if not non-existent. The DHW sector usually needs a higher working capital to undertake expenses working on demand. This is what ACS is trying to do with acceptable liquidity, but if it did not have it at some point it would have room to get into debt, which would be a debacle today.

2 Analysis of the Income Statement

When studying the income statement, we will calculate the following ratios and their progression over time:

• 2.1 Analysis of income, expenses and profit.
• 2.2 Return on Equity (ROE) y Return on assets (ROA)
• 2.3 Margin on sales

2.1 Analysis of income, expenses and profit

We start with the net profit FGO (funds generated by operations):



In Fundamental Analysis we also like to show the FGO, which is the money that the company has managed to earn. Depreciation is added to net profit to avoid possible adjustments by decreasing this concept. Some companies may be forced to make up the profit in this way if they have not done particularly well.


ACS' FGO has grown in the last few semesters, a good figure.


Inevitably, for a company to make money it needs revenue, so let's see how it looks:



Sales are growing smoothly in this last semester and continue with the trend of the last 3 years.


Another piece of information that is usually interesting is the breakdown of expenses. In this case, most of them are made up of supplies, as is normal for ACS business:



This is all very well, sales are growing, expenses don't seem to be skyrocketing...so where does this drop in EBIT come from? It comes from the heading "other expenses", which includes the provision related to the cessation of operations of CIMIC in the Middle East. So it's nothing we need to worry about.


As we see in the following graph, financial expenses remain below EBIT even in an exceptional situation like this:

2.2 Return on equity (ROE) y Return on assets (ROA)

The ROE, or Return on equity, measures ACS's profits compared to its equity. It is a way of measuring the profitability and quality of the business management. But it only makes sense to see it that way when it is a sustained ROE over time. A high ROE in an isolated year can be caused by an increase in debt, which gives a greater capacity to buy assets and therefore an increase in the final profit. The problem comes later, when that debt has to be paid. The ROE is calculated as follows:



The ROE remains stable at over 20%, which is a fairly decent ROE that is above the sector in Spain.

2.3 Margin on Sales

ACS's margin on sales tells us what proportion of sales ends up being a steady profit:


The margin on sales is somewhat low, but very stable over time. Margins like this mean that a setback in some expense item will jeopardize the final profit.



We can also see how ACS's margins behave. On the one hand we have the operating margin, which tells us what proportion of sales ends up being EBIT. On the other hand, the operating margin tells us what proportion of sales ends up being profit before tax.



Margins have been reduced in the last six months due to the aforementioned cessation of CIMIC's operations in the Middle East.

3 Dividend and general valuation

At present, ACS (BUILDING AND SERVICES ACTIVITIES) has 314,664,594 shares in circulation, with treasury stock of 5.39%. It has a 3.13€ EPS and is currently paying a dividend of 1.90€ per share per year in the form of an 17.48€) it gives a dividend yield of 10.86%. The book value is 17.46€ and the PER is 5.58. As a conclusion, despite working with low margins, we can say without much mistake that ACS is at a fairly clear purchase price. In this conclusion we are not taking into account the effect of the coronavirus on ACS's accounts, it is something we do not want to do. This is a very diversified company both by business and geographically and the effect of the virus will not be permanent. It is clear that the next quarters will be affected, but in exchange we have the option to buy a good company at a discount.

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