Construction Financial Business Mangment

FACULTY OF ENGINEERING
Department of Civil Engineering

Master of Structural Engineering and
Construction
CONSTRUCTION BUSINESS MANAGEMENT

(ECV 5703)
CHAPTER 6
ANALYSIS OF FINANCIAL STATEMENT
Assignment Number (2)
Prepared For:
PROF. MADYA .IR. SALIHUDIN BIN HJ HASSIN
Prepared By:
MAGED MOHAMMED AHMMED
Submission Date: 22 March 2016
GS38690
Faculty of Engineering
Construction
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
Current
Year
ASSETS
CURRENT ASSETS
Cash
Account Receivable-Trade
Account Receivable-Retention
Inventory
Cost and Profits in Excess Billings
Notes Receivable
Prepaid Expenses
Other Current Assets
Total Current Assets
Last
Year
32,387
74,526
6,888
0
9,177
3,139
735
3,114
129,966
34,826
38,212
4,235
0
4,549
0
1,061
1,119
84,002
FIXED AND OTHER ASSETS

Construction Equipment
Trucks and Autos
Office Equipment
Total Fixed Assets
Less Acc. Depreciation
Net Fixed Assets
Other Assets
Total Asset
32,229
8,981
8,057
56,267
46,562
9,705
45,996
185,667
39,229
8,981
8,057
56,267
39,889
16,378
50,462
150,842
LIABILITIES
Current Liabilities
Account Payable-Trade
Account Payable -Retention
Billings in Excess of Cost and Profits
Notes Payable
Accrued Payables
Accrued Vacation
Other Current Liabilities
Total Current Liabilities
Long-Term Liabilities
Total Liabilities
38,682
3,768
1,424
4,022
4,574
2,718
606
6,605
62,339
61,544
123,943
35,772
3,536
2,022
5,791
2,254
2,405
308
5,330
57418
48,916
106,334
10000
51724
0
61724
185667
10000
34508
0
44508
150842
OWNERS EQUITY
Capital Stock
Retained Earnings
Current Period Net Income
Total Equity
Total Liabilities and Equity
Figure 6-1: Balance Sheet for West Mountain Construction

Construction Business Management(ECV5703)
Page 1
Construction
Figure 6-2 shows the income statement for west mountain construction.
WEST MOUNTAIN CONSTRUCTION

INCOME STATEMENT
REVENUES
789,839
CONSTRUCTION COSTS
Materials
Labor
Subcontract
Equipment
Other
Total Construction Costs
92,214
199,690
401,948
20,833
1,352
716,037
EQUIPMENT COSTS
Rent and Lease Payments
Depreciation
Repairs and Maintenance
Fuel and Lubrication
Taxes, Licenses, and Insurance
Equipment Costs Charged to Jobs
Total Equipment Costs
3,773
6,673
2,734
7,289
364
20,833
0
GROSS PROFIT
73,802
OVERHEAD
53,827
NET PROFIT FROM OPERATIONS
19,975
OTHER INCOME AND EXPENSE
1,162
PROFIT BEFORE TAXES

INCOME TAX
PROFIT AFTER TAXES
21,137
3,921
17,216
Figure 6-2: Income Statement for West Mountain Construction
Page 2
Construction
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 companys financial operations?
The quick ratio can be determined using Equation 6.1

Quick Ratio
Cash Accounts Receivable

Current Liabilities
Quick Ratio
32,387 74,526
1.713
62,399
...............(6.1)
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 companys financial operations?
The Current ratio can be determined using Equation 6.2

Current Ratio
Current Assets
Current Liabilities
Current Ratio
129,966
2.08
62,399
...............(6.2)
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 doesnt have of its assets tied to the current assets.
Page 3
Construction
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 companys financial operations?
The current liabilities to net worth ratio can be determined using Equation 6.3
Current Liabilities to Net Worth
Current Liabilities
Net Worth
Current Liabilities to Net Worth
62,399
1.011 or 101.1%
61,724
...............(6.3)
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 companys 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 62.what insight dose this give you into companys financial operations?
The debt to equity ratio can be determined using Equation 6.4

Debt to Equity Ratio
Debt to Equity Ratio
Totalt Liabilities
Net Worth
...............(6.4)
123,943
2.01
61,724
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.
Page 4
Construction
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 companys financial operations?
The fixed assets to net worth ratio can be determined using Equation 6.5
Net Fixed Assets
Net Worth
Fixed Assets to Net worth ratio
Fixed Assets to Net worth ratio
...............(6.5)
9,705
0.157 or 15.72 %
61,724
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 companys financial operations?
The current assets to total assets ratio for a company can be determined using Equation 6.6
Current Assets to Total Assets ratio
Current Assets
Total Assets
Current Assets to Total Assets ratio
129,966
0.7 or 70%
185,667
...............(6.6)
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.
Page 5
Construction
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 companys
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:

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

$61,930.5
2
The collection period is calculated using Eq (6.7)

Collection Period
Accounts Receivable 365

Revenues
Collection Period
61,930.5 365
28.6 days
789,839
...............(6.7)
The receivable turns is calculated using Eq (6.8)
Receivable Turns
365
Colletion Period
Receivable Turns
365
12.76
28.6
...............(6.8)
Excluding retention, the average for receivables calculated as follows:

Account Receivable
74,526 + 38,212
$56,369
2
Collection Period
56,367 365
26.05 days
789,839
Receivable Turns
365
14
26.05
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.
Page 6
Construction
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 companys financial operations?
balance sheet.
The average for accounts payable, with retention is calculated as follows:
Account payable
(38,682 + 3,768) + (35,772 + 3,536)

$40,879
2
The average age of accounts payable is calculated using Eq (6.9)

Average Age of Accounts Payable
Collection Period
Accounts Payable 365

Material + Subcontractor
...............(6.9)
$40,879 365
30.19 days
92,214$ + 401,948$
The Payable turns is calculated using Eq (6.10)
Receivable Turns
365
Average Age of Accounts Payable
Receivable Turns
365
12.09
30.19
...............(6.10)
It can be seen that average age of accounts payable is slightly greater than the collection periodcalculated with retention- it is an indication that the construction company is using its suppliers
and subcontractors to found the construction work.
Page 7
Construction
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 companys financial operations?
balance sheet.
The average for the total assets is calculated as follows:
Total Assets =
$185,667 + $150,842
= $168,254.5
2
The assets to revenues ratio is calculated using Eq (6.11)

Assets to Revenues
Total Assets
Revenues
Assets to Revenues
168,254.5
= 0.213 or 21.3 %
789,839
...............(6.11)
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 companys working capital is calculated using Eq (6.12) as follows:
Working Capital = Current Assets - Current Liabilitie s
Working Capital
...............(6.12 )
129,966 + 84,002 62,399 + 57,418

= $47,075.5
2
2
Page 8
Construction
The working capital turns can be determined using Eq (6.13).
Working Capital Turns =
Revenues- Subcontractor
Working Capita
Working Capital Turns =
789,839 - 401,948
8.049
47,075.5
...............(6.13)
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 companys 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:
Accunts Payable =
(38,682 + 3,768) + (35,772 + 3,536)

$40,879
2
The accounts payable to revenues ratio is calculated using Eq (6.14) as follows:

Accounts Payable to Revenues =
Accounts Payable
Revenues
Accounts Payable to Revenues =
40,879
= 0.052 or 5.2%
789,839
...............(6.14)
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.
Page 9
Construction
Problem 6.15
Determine the gross profit margin for the commercial construction company in Figure 6-1 and 62 .what insight dose this give you into companys financial operations?
The gross profit margin can determined using Eq (6.15) as follows:

Gross Profit Margin =
Gross Profit
Revenues
Gross Profit Margin =
73,802
= 0.093 or 9.34 %
789,839
...............(6.15)
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 companys 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:

General Overhead =
General Overhead
Revenues
General Overhead =
53,827
= 0.0681 or 6.81%
789,839
...............(6.16)
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.
Page 10
Construction
Problem 6.17
Determine the pretax and after-tax margins for the commercial construction company in Figure 61 and 6-2 .what insight dose this give you into companys financial operations?
The pretax profit margin is calculated using Eq (6.17) as follows:
Pretax Profit Margin =
Net Profit Befor Taxes

Revenues
Pretax Profit Margin =
21,137
0.0268 or 2.68 %
789,839
...............(6.17)
The after-tax profit margin is calculated using Eq (6.18) as follows:

After - Tax Profit Margin =
Net Profit After Taxes

Revenues
After - Tax Profit Margin =
17,216
= 0.0218 or 2.18 %
789,839
...............(6.18)
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 62.What insight dose this give you into companys financial operations?
balance sheet.
The average for the total assets is calculated as follows:
Total Assets =
185,667 + 150,842
= $168,254. %
2
The return in assets ratio can be determined using Eq (6.19) as follows:

Page 11
Construction
Return on Assets =

Total Assets
Return on Assets =
17,216
0.102 or 10.2%
168,254.5
...............(6.19)
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 companys
financial operations?
balance sheet.
The average for the equity is calculated as follows:
Equity =
61,724 + 44,508
$53,116
2
The pretax return on equity is calculated using Eq (6.20) as follows:
Pretax Return on Equity =
Net Profit Befor Taxes

Equity
Pretax Return on Equity =
21,137
= 0.398 or 39.8 %
21,137
...............(6.20)
The after-tax return on equity can be determined based on Eq (6.22) as follows:
After - Tax Return on Equity =

Equity
After - Tax Return on Equity =
17,216
0.324 or 32.4 %
53,11
...............(6.21)
Page 12
Construction
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 companys financial operations?
The degree of fixed asset newness is calculated using Eq (6.22) as follows:

Degree of Fixed Asset Newness
Net Fixed Assets

Total Fixed Assets
Degree of Fixed Asset Newness
9,705
0.172 or 17.2 %
56,267
...............(6.22)
The degree of fixed newness is below 40%, the companys fixed assets are getting old and will
need to be replaced soon.
Page 13

Construction Financial Business Mangment

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Construction Financial Business Mangment

Caricato da

Copyright:

Formati disponibili

FACULTY OF ENGINEERING

Department of Civil Engineering

CONSTRUCTION BUSINESS MANAGEMENT

Submission Date: 22 March 2016

WEST MOUNTAIN CONSTRUCTION

FIXED AND OTHER ASSETS

Figure 6-1: Balance Sheet for West Mountain Construction

WEST MOUNTAIN CONSTRUCTION

NET PROFIT FROM OPERATIONS

OTHER INCOME AND EXPENSE

PROFIT BEFORE TAXES

Figure 6-2: Income Statement for West Mountain Construction

Construction Business Management(ECV5703)

The quick ratio can be determined using Equation 6.1

Cash Accounts Receivable

The Current ratio can be determined using Equation 6.2

Construction Business Management(ECV5703)

Current Liabilities to Net Worth

The debt to equity ratio can be determined using Equation 6.4

Debt to Equity Ratio

Construction Business Management(ECV5703)

Fixed Assets to Net worth ratio

Fixed Assets to Net worth ratio

Current Assets to Total Assets ratio

Construction Business Management(ECV5703)

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

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

The collection period is calculated using Eq (6.7)

Accounts Receivable 365

The receivable turns is calculated using Eq (6.8)

Excluding retention, the average for receivables calculated as follows:

Construction Business Management(ECV5703)

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

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

Accounts Payable 365

The Payable turns is calculated using Eq (6.10)

Construction Business Management(ECV5703)

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

129,966 + 84,002 62,399 + 57,418

Construction Business Management(ECV5703)

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

Working Capital Turns =

Working Capital Turns =

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

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

Accounts Payable to Revenues =

Construction Business Management(ECV5703)

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

Gross Profit Margin =

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

Construction Business Management(ECV5703)

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

Pretax Profit Margin =

Net Profit Befor Taxes

Pretax Profit Margin =

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

Net Profit After Taxes

After - Tax Profit Margin =

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

Net Profit After Taxes

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

Pretax Return on Equity =

Net Profit Befor Taxes