Vous êtes sur la page 1sur 8

ANALYSIS OF FINANCIAL STATEMENTS

1. QUICK RATIO (QR)


Quick Ratio = (Cash + Accounts Receivable or AR) / Current Liabilities or CL Measurement of a companys ability to pay current (short tem) liabilities with cash or other near cash assets (assets that can quickly be turned into cash). Also called Acid Test Ratio Should not include AR in the form of retention because often retention cannot be converted to cash quickly. Similarly, ARs that are unlikely to be collected, often recorded as allowance for bad debt, should not be included in the AR. A company with QR 1.0 is considered liquid. But it does not guarantee that the company can pay its CL on time because it CLs may be due before its AR is received. A company with QR < 1.0 need to convert inventory, notes receivable, other current or longterm assets to cash or raise cash to debts or equity financing to pay its current liabilities. QR > 1.5 may be an indication that the company has too much cash and should be investing its capital elsewhere or should be disbursing it to its shareholders.

Typical Quick Ratios INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 0.9 1.2 1.2 1.4

RANGE 2.1 0.3 2.1 0.6 2.1 0.8 2.5 0.9

2. CURRENT RATIO (CR)


Current Ratio = Current Assets or CA / Current Liabilities or CL Measurement of a companys ability to use current assets to pay for current liabilities CR of 2.0 is considered a strong indication that the company is able to pay CL. A company with CR < 1.0 is an indication that the company does not expect to receive enough revenue over the next year to pay its CL. To pay these CLs the company needs to sell long term assets or raise cash through debt or equity financing. QR < 1.5 means a company is undercapitalized and may run into financial problems during the next year CR >2.5 too much of its assets tied up into CA and should be investing its assets in otherlongterm ventures or distributing them to shareholders.

Typical Current Ratios INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 1.6 1.5 1.7 1.8

RANGE 3.2 1.1 3.1 1.2 2.8 1.2 3.3 1.3

3. CURRENT LIABILITES TO NET WORTH RATIO (CL/NW)


Current Liabilities to Net Worth = Current Liabilities / Net Worth Measurement of the risk that short-term creditors are taking by extending credit to the company compared to the risk the companys owners are taking in the company. Short term creditors are suppliers and subcontractors who provide materials, labor, and equipment on credit. For most industries 67%. The construction industry consistently exceeds this recommended level because of the construction industrys heavy reliance on trade financing from suppliers and subcontractors. Typical CL/NW Ratios (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 88 112 65 71

RANGE 29 241 32 240 29 132 29 153

4. DEBT TO NET EQUITY RATIO (D/E)


Debt to Equity Ratio = Total Liabilities / Net Worth Measurement of the risk in the company all creditors are taking compared to the risk the companys owners are taking. The desired range of D/E is 2.0 to 1, one begins to question whether the company can service its debt, particularly during the downturn in the industry. D/E < 1.0 means a company is averse to financing and is not using debt to expand the companys business.

Typical D/E Ratios INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 1.2 1.3 1.0 0.9

RANGE 0.4 3.0 0.5 2.7 0.4 1.9 0.4 1.9

5. FIXED ASSETS TO NET WORTH RATIO (FA/NW)


Fixed Assets to Net Worth = Net Fixed Assets / Net Worth Measurement of amount of the owners equity that is tied up in fixed assets, such as construction equipment, building and vehicles A high number means a company has heavy investment on fixed assts. Fixed assets require a constant stream of income to offset their loss in the value. Construction companies, especially those in the heavy and highway sectors , that have significant investment in construction equipment are more dependent on maintaining a constant flow of work than those companies that have little invested in construction equipment.

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

6. CURRENT ASSETS TO TOTAL ASSETS RATIO (CA/TA)


Current Assets to Total Assets Ratio = Current Assets / Total Assets Measurement of how liquid a construction companys assets are. Typical FA/NW Ratios INDUSTRY SECTOR Single-Family Residential Commercial Specialty Trades Heavy and Highway (due heavy investment in excavation equipment )

RANGE 0.70 0.80

0.55 0.65

Notable exceptions from the specialties trade are concrete work (61%), wrecking and demolition (55%), excavation (46%)

7. COLLECTION PERIOD (CP)


Collection Period = Accounts Receivable (365) / Revenues Measurement of the average time it takes a company to collect its AR or the average number of days that capital is tied up in AR. Measure of how long the companys capital is being used to finance clients construction projects. For the construction industry, the CP is affected by retention.

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

8. AVERAGE AGE OF ACCOUNTS PAYABLE (AAAP)


AAAP = Accounts Payable (365) / (Materials + Subcontract) Represents average time it takes a company to pay bills Measure of how extensively a company is using trade financing. AAAP > 45 days means the company is slow to pay its bills and may receive less favorable credit terms and pricing from its suppliers and subcontractors. When AAAP is shorter than 20 days, unless a company is taking advantage of trade discounts, it may be an indication that the company is using its suppliers and subcontractors to fund the construction work. If AAAP < CP, the company is in the habit of using its working capital to pay bills before it has received payment from the owner. It is desirable for AAAP = or slightly greater than CP.

Payable Turns = 365/ AAAP

9. ASSETS TO REVENUES RATIO (A/R)


Assets to Revenues Ratio = Total Assets / Revenues Measurement of how efficiently the company is using its assets. Also knows as assets to sales ratio Very high A/R may be performing too much work for their assets, which may be a sign of pending financial difficulties if left uncorrected. Very low A/R area underutilizing their assets and should consider taking on more work.

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

10. WORKING CAPITAL TURNS (WCT)


Working Capital = Current Assets Current Liabilities Measurement of how efficiently the company is using its working capital. WC represents those funds available for future operations or for the reduction of long-term liabilities.

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

MEDIAN 11.7 12.1 8.8 8.8

RANGE 26 5.8 23 6.1 17 4.9 16 5.3

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.

11. ACCOUNTS PAYABLE TO REVENUE RATIO (AP/R)


AP/R = Accounts Payable/ Revenue Measurement of how much a company is using its suppliers and subcontractors as a source of funds. Also knows as accounts payable to sales. AP-retention should be included because retention held from a supplier or subcontractor is a form of funding to the contractor. The higher the % the greater the funding the company is receiving from its suppliers and subcontractors.

Typical AP/R (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 4.1 7.9 5.6 4.8

RANGE 1.9 7.4 2.9 13.0 2.8 9.6 2.6 8.1

12. GROSS PROFIT MARGIN (GPM)


GPM = Gross Profit / Revenue Percentage left of the revenues left after paying construction costs and equipment costs and is a measure of what percentage of revenue is available to cover general overhead expenses and provide the company with a profit. Also known as gross profit ratio Typical GPM (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 24 17 25 32

13. GENERAL OVERHEAD RATIO (OHR)


OHR = General Overhead / Revenue Percentage revenues used to pay the general overhead expense. Also known as general and administrative cost ratio As rule of thumb, OHR for commercial construction companies should be less than 10%. Single family RC companies ratios would be higher when sales commissions are included in the general OH.

14. PROFIT MARGIN (PM)


Percentage of revenues that becomes profit, and may be measured before or after income taxes. Also known as return on revenues or return on sales. Measurement of how well a company can withstand changes in the construction market, such as reduced prices, higher costs, and less demand. = = Net Profit Before Taxes / Revenues Net Profit After Taxes / Revenues (A good target for a Pretax PM is 5%)

Pretax PM After-tax PM

Typical After-Tax PM (%)

INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 3.3 2.2 3.2 2.8

RANGE 8.1 0.9 8.7 0.6 7.3 1.0 6.7 0.8

15. RETURN ON ASSETS (ROA)


ROA = Net Profit After Taxes / Total Assets How efficient a construction company is using its assets. Efficiently run assets will have a higher return on assets, whereas poorly run will have a low ROA. Typical ROA (%) INDUSTRY SECTOR Single-Family Residential Commercial Heavy and Highway Specialty Trades

MEDIAN 8.7 6.5 6.5 7.9

RANGE 24.1 2.3 21.7 2.0 14.7 2.0 19.0 2.4

16. RETURN ON EQUITY (ROE)


The return the companys shareholders received in their invested capital. Pretax and after-tax returns of a construction company should be greater than returns of investing the capital in the stock market or other savings instruments.

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

MEDIAN 25.9 16.7 14.6 17.4

RANGE 62 8.1 53 5.4 31 4.7 42 5.6

17. DEGREE OF FIXED ASSET NEWNESS (FAN)


FAN = Net Fixed Assets/ Total Fixed Assets Measurement of how new a companys assets are. FAN represents the % of assets original value that has not depreciated. The depreciation method used for the financial statement will have a great effect in this ratio The faster the depreciation, the lower the ratio A good range for a construction company is 40% to 60% or near the middle.

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