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Typical Quick Ratios INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
Typical Current Ratios INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
MEDIAN 88 112 65 71
Typical D/E Ratios INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
During downturn in the industry, companies with a large investment in construction equipment usually suffer the most. Typical FA/NW Ratios (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
MEDIAN 38 24 68 36
RANGE 14 90 8 64 36 117 17 75
0.55 0.65
Notable exceptions from the specialties trade are concrete work (61%), wrecking and demolition (55%), excavation (46%)
Retention -- recorded as an AR when the work is completed but will not be able to release until the project is completed. This has an effect in lengthening the collection period. The greater the %R being held and the longer the project, the greater this effect is. For an accurate measure of how long capital is being used to finance clients construction projects it is necessary to include the AR-retention because R is a source of capital to the projects owner.. However, including the AR-R in the calculation of CP distorts the collection period as a measure of how well the company is collecting the AR that are due to it. This is because no matter how aggressive a company collects its AR it cannot collect the retention until the project is complete. A better measure of how well a company is its AR is to exclude the AR-R from the calculations. When a company has met the requirement for receipt of retention, the retention should be moved to the AR-trade account, thus reflecting that the retention is now collectable.
CP should be less than 45 days. CP > 45 days means the company has poor collection policies or has extended generous payment terms to clients. CP shall be 30 days for companies whose clients do not hold retention Reducing the CP reduces a companys need for cash and may reduce the companys need for debt and the interest changes in the companys debt. Generous payment terms and slow collections often increase companys reliance on debt, which increases its interest expenses and thereby reduces its profitability.
Receivable Turns = 365/ Collection Period RTs represent the number of times the receivables are turned over during a year Typical CP (days) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
MEDIAN 23 48 51 50
RANGE 8 45 22 75 31 73 31 72
Heavy and Highway have higher median because of its extensive investment in construction equipment. Typical A/R (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
MEDIAN 29 29 46 32
RANGE 17 49 19 55 34 62 24 44
WCT (or Rev to Net WC Ratio or Sales to Net WC Ratio) = Revenues/ Working Capital Typical WCT INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
When a company passes payments on from the owners to subcontractors, a better measurement of WCT is obtained by: WCT = (Revenues Subcontractor) / Working Capital
A firm with high WCT undercapitalized and needs to reduce its level of sales or increase the availability of CA.
Typical AP/R (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
MEDIAN 24 17 25 32
Pretax PM After-tax PM
INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
Pretax ROE = Net Profit Before Taxes / Equity After-tax ROE = Net Profit After Taxes / Equity Typical ROE (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades
FAN > 60% : a lot of new, shiny equipment, which is often accompanied by large loan payments and represents a large investment capital in equipment. FAN < 40% : a lot of older equipment, often indicating that the company would need to invest heavily in fixed assets to maintain its operations
CONCLUSION
Withholding of retention is common in the construction industry. When retention is withheld, the AR is separated into 2 categories, retention and AR Accounts payable is similarly split into two accounts The standard financial ratios must be modified to take retention into account Retention of AR is ignored when calculating quick ratio and collection period Subcontractors are used as a source of capital for construction companies