Financial Performance Analysis for Construction Industry

Abstract

Business failure in the construction industry is an important research issue for forecasting the financial status of a company. The construction industry in the United States has several unique characteristics that sharply distinguish it from other sectors of the economy. These characteristics contribute in many ways to the high rate of business failure in the industry. Analysis of major financial ratios to predict performance of a company is one method of failure analysis. Models developed for the manufacturing industry are not appropriate for the construction industry. This paper presents a quantitative model based on financial ratios to assess the financial performance and grade of a construction company, and its chances of business survival. The following financial ratios are used for developing the model: Current ratio, total liabilities to net worth, total assets to revenues, revenues to net working capital, return on total assets, and return on net worth. The model also considers characteristics of various trades in the construction industry and the impact of the company size. The model is developed for the following six groups: general contractors, operative builders, heavy construction, plumbing, heating and air‐conditioning, electrical works, and other specialty trades.