Construction financial business Mangment

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FACULTY OF ENGINEERING

Department of Civil Engineering

Master of Structural Engineering and

Construction

CONSTRUCTION BUSINESS MANAGEMENT

(ECV 5703)

Prepared By:

MAGED MOHAMMED AHMMED GS38690

Prepared For:

PROF. MADYA .IR. SALIHUDIN BIN HJ HASSIN

CHAPTER 6

ANALYSIS OF FINANCIAL STATEMENT

Assignment Number (2 )

Submission Date: 22 March 2016


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Faculty of Engineering



Construction

Construction Business Management(ECV5703) Page 1

Figure 6-1 shows the financial details in the balance sheet for the west mountain construction

company for the pervious and the current year.

WEST MOUNTAIN CONSTRUCTION

BALANCE SHEET

CurrentYear

LastYear

ASSETSCURRENT ASSETS

Cash 32,387 34,826Account Receivable-Trade 74,526 38,212Account Receivable-Retention 6,888 4,235

Inventory 0 0Cost and Profits in Excess Billings 9,177 4,549 Notes Receivable 3,139 0Prepaid Expenses 735 1,061Other Current Assets 3,114 1,119

Total Current Assets 129,966 84,002

FIXED AND OTHER ASSETSConstruction Equipment 32,229 39,229Trucks and Autos 8,981 8,981Office Equipment 8,057 8,057

Total Fixed Assets 56,267 56,267Less Acc. Depreciation 46,562 39,889

Net Fixed Assets 9,705 16,378

Other Assets 45,996 50,462

Total Asset 185,667 150,842

LIABILITIESCurrent Liabilities 38,682 35,772

Account Payable-Trade 3,768 3,536

Account Payable -Retention 1,424 2,022Billings in Excess of Cost and Profits 4,022 5,791

Notes Payable 4,574 2,254

Accrued Payables 2,718 2,405Accrued Vacation 606 308Other Current Liabilities 6,605 5,330

Total Current Liabilities 62,339 57418

Long-Term Liabilities 61,544 48,916Total Liabilities 123,943 106,334

OWNER’S EQUITY

Capital Stock 10000 10000Retained Earnings 51724 34508

Current Period Net Income 0 0

Total Equity 61724 44508

Total Liabilities and Equity 185667 150842

Figure 6-1: Balance Sheet for West Mountain Construction


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Figure 6-2 shows the income statement for west mountain construction.

WEST MOUNTAIN CONSTRUCTION

INCOME STATEMENTREVENUES 789,839

CONSTRUCTION COSTS

Materials 92,214

Labor 199,690

Subcontract 401,948

Equipment 20,833

Other 1,352

Total Construction Costs 716,037

EQUIPMENT COSTS

Rent and Lease Payments 3,773

Depreciation 6,673

Repairs and Maintenance 2,734

Fuel and Lubrication 7,289

Taxes, Licenses, and Insurance 364

Equipment Costs Charged to Jobs 20,833

Total Equipment Costs 0

GROSS PROFIT 73,802OVERHEAD 53,827

NET PROFIT FROM OPERATIONS 19,975

OTHER INCOME AND EXPENSE 1,162

PROFIT BEFORE TAXES 21,137

INCOME TAX 3,921

PROFIT AFTER TAXES 17,216

Figure 6-2: Income Statement for West Mountain Construction


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Problem 6.4

Determine the quick ratio for the commercial construction company in Figure 6-1 and 6-2 .what

insight dose this give you into company’s financial operations?

The quick ratio can be determined using Equation 6.1

.....(6.1).......... sLiabilitieCurrent

ReceivableAccountsCashRatioQuick

1.713

62,399

74,52632,387RatioQuick

Since the ratio being obtained from the quick ratio is 1.7 which is greater than 1.5 to 1, hence that

indicates the company is liquid and has much cash. Therefore, the west mountain company has

either two options whereby it can invest its capital in elsewhere or disbursing it to its shareholders.

Problem 6.5

Determine the current ratio for the commercial construction company in Figure 6-1 and 6-2 .what

insight dose this give you into company’s financial operations?

The Current ratio can be determined using Equation 6.2

.....(6.2).......... sLiabilitieCurrent

AssetsCurrentRatioCurrent

08.262,399

129,966RatioCurrent

With current ratio of 2.08, it is considered a strong indication that the west mountain construction

company is able to pay its current liabilities. However, the current ratio of the company is below

2.5 to 1 which indicates that this company doesn’t have of its assets tied to the current assets.


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Problem 6.6

Determine the current liabilities to net worth ratio for the commercial construction company in

Figure 6-1 and 6-2 .what insight dose this give you into company’s financial operations?

The current liabilities to net worth ratio can be determined using Equation 6.3

.....(6.3).......... Net Worth

sLiabilitieCurrent Net WorthtosLiabilitieCurrent

101.1%or1.011

61,724

62,399 Net WorthtosLiabilitieCurrent

The obtained percentage of 101.1 % indicates that current liabilities to net worth is slightly worse

than the median for west mountain company but well within the typical range of the commercial

construction company .In addition, because of the ratio is slightly greater than 100% that mean the

current liabilities greater than the company’s net worth or equity, and the short- term creditors

such as suppliers and subcontracts that would have more capital at risk than the owners.

Problem 6.7

Determine the debt to equity ratio for the commercial construction company in Figure 6-1 and 6-

2.what insight dose this give you into company’s financial operations?

The debt to equity ratio can be determined using Equation 6.4

.....(6.4).......... Net Worth

sLiabilitieTotaltRatioEquityDebt to

01.2 61,724

123,943 RatioEquityDebt to

The debt to equity ratio for west mountain Construction Company is higher than median for the

typical commercial construction company. Because the ratio is greater than 2.00 to 1, it indicates

that the company might not be able to service its debt.


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Problem 6.8

Determine the fixed assets to net worth ratio for the commercial construction company in Figure

6-1 and 6-2 .what insight dose this give you into company’s financial operations?

The fixed assets to net worth ratio can be determined using Equation 6.5

.....(6.5).......... Net Worth

AssetsFixed Netratio Net worthtoAssetsFixed

%15.72or0.157

61,724

9,705 ratio Net worthtoAssetsFixed

It can be seen fixed assets to net worth ratio of west mountain construction company is less than

the median for a commercial construction but well within the typical rang, because the ratio is less

than the median, the company has less assets than average company and therefore less dependent

on maintaining steady stream of work to pay for these fixed assets.

Problem 6.9

Determine the current assets to total assets ratio for the commercial construction company in

Figure 6-1 and 6-2 .what insight dose this give you into company’s financial operations?

The current assets to total assets ratio for a company can be determined using Equation 6.6

.....(6.6)..........

AssetsTotal

AssetsCurrentratioAssetsTotaltoAssetsCurrent

70%or0.7 185,667

129,966 ratioAssetsTotaltoAssetsCurrent

It can be noted that the current assets to total assets ratio is within range for a commercial

construction company. This indicates that the west mountain construction company has a heavier

investment in fixed assets than most commercial construction companies.


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Problem 6.10

Determine the collection period with and without retention and receivable turns for the commercial

construction company in figure 6-1 and 6-2. What insight dose this give you into company’s

financial operations?

Because we are comparing the value of accounts on the balance sheet to account on the income

statement, we need to use the average of the beginning and ending balance for accounts on the

balance sheet.

- Including retention, the average for account receivables calculated as follows:

61,930.5$2

4,235)+(38,212+6,888)+(74,526 ReceivableAccount

The collection period is calculated using Eq (6.7)

.....(6.7).......... Revenues

365ReceivableAccounts PeriodCollection

days28.6789,839

36561,930.5 PeriodCollection

The receivable turns is calculated using Eq (6.8)

.....(6.8).......... PeriodColletion

365 TurnsReceivable

12.7628.6

365 TurnsReceivable

- Excluding retention, the average for receivables calculated as follows:

,36965$2

38,212+74,526 ReceivableAccount

days26.05789,839

365367,65 PeriodCollection

4126.05

365 TurnsReceivable

The collection period of west Mountain Company is better than the median for commercial

construction company and within the typical range. It is also below the recommended 45 days .on

average the company is funding the construction costs to the client for 28.6 days. On average, it

takes the company 26 days to collect the payment on a bill sent to a client .


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Problem 6.11

Determine the average age of accounts payable and payable turns for the commercial construction

company in Figure 6-1 and 6-2. Use only the material and subcontractor costs to calcite the average

of account payable. What insight dose this give you into company’s financial operations?



balance sheet.

The average for accounts payable, with retention is calculated as follows:

40,879$2

3,536)+(35,772+3,768)+(38,682 payableAccount

- The average age of accounts payable is calculated using Eq (6.9)

.....(6.9).......... tor Subcontrac+Material

365PayableAccounts PayableAccountsof AgeAverage

days19.03401,948$+92,214$

365$40,879 PeriodCollection

The Payable turns is calculated using Eq (6.10)

).....(6.10.......... PayableAccountsof AgeAverage

365 TurnsReceivable

09.2130.19

365 TurnsReceivable

It can be seen that average age of accounts payable is slightly greater than the collection period-

calculated with retention- it is an indication that the construction company is using its suppliers

and subcontractors to found the construction work.


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Problem 6.12

Determine the assets to revenues ratio for the commercial construction company in Figure 6-1 and

6-2. What insight dose this give you into company’s financial operations?



balance sheet.

The average for the total assets is calculated as follows:

$168,254.5=2$150,842+$185,667=AssetsTotal

The assets to revenues ratio is calculated using Eq (6.11)

).....(6.11.......... Revenues

AssetsTotalRevenuestoAssets

%21.3or0.213=789,839

168,254.5RevenuestoAssets

It can be seen that the assets to revenues ratio of west Mountain construction Company is slightly

near lower limit of the range for commercial construction company. It does not appear that the

company is performing too much work with the assets.

Problem 6.13

Determine the working capital turns for the commercial construction company in figure 6-1 and




balance sheet.

The average of the company’s working ca pital is calculated using Eq (6.12) as follows:

).....(6.12.......... sLiabilitieCurrent-AssetsCurrent=CapitalWorking

$47,075.5=2

57,418+62,399-2

84,002+129,966CapitalWorking


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The working capital turns can be determined using Eq (6.13).

).....(6.13.......... CapitaWorking

tor Subcontrac-Revenues= TurnsCapitalWorking

8.04947,075.5

401,948-789,839= TurnsCapitalWorking

It can be seen that working capital turns of West Mountain Construction Company is less than the

average but well within the typical rang. The company appears to be properly capitalized.

Problem 6.14

Determine the accounts payable to revenues ratio for the commercial construction company in

figure 6-1 and 6-2 .what insight dose this give you into company’s financial operations?

Since we are comparing the value of accounts on the balance sheet to account on the income


balance sheet, we include both accounts payable-trade and accounts payable-retention.

The average for the account payable is calculated as follows:

40,879$2

3,536)+(35,772+3,768)+(38,682= PayableAccunts

The accounts payable to revenues ratio is calculated using Eq (6.14) as follows:

).....(6.14.......... Revenues

PayableAccounts= RevenuestoPayableAccounts

5.2%or0.052=789,839

40,879= RevenuestoPayableAccounts

It can be noted that the accounts payable to revenues ratio is slightly less than the average median

but well within the typical rang for commercial construction company. The west mountain

construction company is probably using its suppliers and subcontractors as source of funding.


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Problem 6.15

Determine the gross profit margin for the commercial construction company in Figure 6-1 and 6-

2 .what insight dose this give you into company’s financial operations?

The gross profit margin can determined using Eq (6.15) as follows:

).....(6.15.......... Revenues

ProfitGross=MarginProfitGross

%9.34or0.093=789,839

73,802=MarginProfitGross

It can be seen that gross profit margin is far away from the average median for commercial

construction company. The company needs to increase its profit and overhead markup or exercises

better control over its construction costs. The company spend 90.66% of its revenues on

construction costs and retained 9.34% of its revenues to cover overhead expenses, pay taxes, and

provide a profit for the company’s shareholders.

Problem 6.16

Determine the general overhead ratio for the commercial construction company in Figure 6-1 and


The general overhead ratio is calculated using Eq (6.16) as follows:

).....(6.16.......... Revenues

OverheadGeneral= OverheadGeneral

6.81%or0.0681=789,839

53,827= OverheadGeneral

It can be concluded that the west mountain company spent 6.81 of its revenues on general

overhead. Since the general overhead ratio is less than 10% therefore, it is acceptable for

commercial construction companies.


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Problem 6.17

Determine the pretax and after-tax margins for the commercial construction company in Figure 6-

1 and 6-2 .what insight dose this give you into company’s financial operations?

The pretax profit margin is calculated using Eq (6.17) as follows:

).....(6.17.......... Revenues

TaxesBeforProfit Net=MarginProfitPretax

%2.68or0.0268789,839

21,137=MarginProfitPretax

The after-tax profit margin is calculated using Eq (6.18) as follows:

).....(6.18.......... Revenues

TaxesAfterProfit Net=MarginProfitTax-After

%2.18or0.0218=789,839

17,216=MarginProfitTax-After

It can be seen that the pretax profit margin for the company is less than the recommended 5%.the

after-tax margin is slightly more than the median for a commercial construction company but well

within the range. The company needs to work on its profitability. This may be done by cutting

costs or increasing the profit and overhead markup.

Problem 6.18

Determine the return on assets for the commercial construction company in Figure 6-1 and 6-

2.What insight dose this give you into company’s financial operations?



balance sheet.

The average for the total assets is calculated as follows:

%$168,254.=2

150,842+185,667= AssetsTotal

The return in assets ratio can be determined using Eq (6.19) as follows:


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).....(6.19.......... AssetsTotal

TaxesAfterProfit Net= AssetsonReturn

10.2%or0.102 168,254.5

17,216= AssetsonReturn

It can be seen that, the return on assets for the company is better than the median for a commercial

company but well below the upper end of the range. Improvement in the after-tax profit margin

will help increase this percentage.

Problem 6.19

Determine the pretax return on equity and after-tax return on equity for the commercial

construction company in Figure 6-1 and 6-2 .what insight dose this give you into company’s

financial operations?



balance sheet.

The average for the equity is calculated as follows:

53,116$ 2

44,508+61,724=Equity

The pretax return on equity is calculated using Eq (6.20) as follows:

).....(6.20.......... Equity

TaxesBeforProfit Net=EquityonReturnPretax

%39.8or0.398=21,137

21,137=EquityonReturnPretax

The after-tax return on equity can be determined based on Eq (6.22) as follows:

).....(6.21.......... Equity

TaxesAfterProfit Net=EquityonReturnTax-After

%32.4or0.32453,11

17,216=EquityonReturnTax-After


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Constr ction B siness Management(ECV5703) Page 13

It can be seen that the pretax return on equity is greater than 15% so the company achieved a good

target, the after-tax return on equity for the company is better than the median for a commercial

construction companies but well below the upper end of the range. Improvement in the after-tax

profit margin will help increase the percentage.

Problem 6.20

Determine the degree of fixed asset newness for the commercial construction company in Figure

6-1 and 6-2 .what insight dose this give you into company’s financial oper ations?

The degree of fixed asset newness is calculated using Eq (6.22) as follows:

).....(6.22.......... AssetsFixedTotal

AssetsFixed Net= NewnessAssetFixedof Degree

%17.2or0.17256,267

9,705= NewnessAssetFixedof Degree

The degree of fixed newness is below 40%, the company’s fixed assets are getting old and will

need to be replaced soon.

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