Four Ratios that Guide the Performance of your Construction Business

Financial indicators such as the liquidity ratios, leverage ratios, efficiency ratios and profitability ratios can be used to gauge the performance of your business. With the analysis of these ratios, you will be able to make the informed and right decisions for your business. The following are the top four types;

Liquidity Ratios

These are used to determine a company’s ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

Examples;

Current, Quick, Days of Cash, Working Capital Turnover, Under-billings to Equity, Cash to Over-billings.

Leverage Ratios

Companies rely on a mixture of owners’ equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.

Examples;

Debt to Equity, Revenue to Equity, Asset Turnover, Fixed Assets to Equity, Overhead, Backlog to Equity, Net Fixed Assets to Equity.

Efficiency Ratios

Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.

Examples;

Backlog to Working Capital, Months in Backlog, Days in Accounts Receivable, Days in Inventory, Days in Accounts Payable, Operating Cycle.

Profitability Ratios

These ratios are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well.

Examples;

Return on Assets, Return on Equity, Gross Profit to Revenue, Overhead to Revenue, Overhead to Net Worth, Net Profit Before Taxes to Revenue, Backlog Gross Profit to Overhead, Backlog to Current Year Revenue.

Having a full understanding of the above ratios and looking at them monthly will ensure that the company stays healthy. Staying within the lenders or bonding companies comfort levels will build a strong relationship and reduce the risks when growing your company.

If you would like a Microsoft Excel ratios template that has all of these ratios automatically calculated. You may email me at info@paycrew.com for a FREE copy. Once you receive it, just enter your balance sheet and income statement totals into the first worksheet and each of the above ratios will be calculated from your input.

ABOUT THE AUTHOR

Lee Clark is co-founder and CEO of PayCrew. Clark is passionate about the people in the field, because he understands the importance of trust between a company and its people. And as an owner, he saw first-hand how attracting and retaining skilled people form the foundation of a company’s success. He has a passion for measuring daily performance in the construction industry.