In the construction industry, margins are tight, project timelines shift, and cash flows are complex. That makes it essential to know how financially healthy a construction company is. Effective, timely financial reporting provides a snapshot of performance, supports strategic decisions, and establishes credibility with lenders, sureties, and partners.
No single number tells the whole story. But key indicators and ratios give a clear view of a construction company’s financial health and efficiency.
Why financial metrics matter for construction companies
Construction firms operate with significant working capital demands, long receivable cycles, bonding requirements, and project financing constraints. Because of this complexity, stakeholders — from internal leadership to external investors — rely on financial metrics to assess stability, profitability, and risk. These indicators are crucial for informed internal decision making and external validation when securing credit or negotiating contracts.
A well-prepared construction financial report synthesizes these metrics, translating raw numbers into actionable insights. It sets the stage for informed planning and highlights areas for improvement before they become liabilities.
Core categories of financial health
Experts and industry sources commonly group financial indicators into four broad categories: liquidity, profitability, leverage, and efficiency. These categories create a structured lens through which to view a company’s performance.
1. Liquidity: Can you meet short-term obligations?
Liquidity ratios measure a company’s ability to pay its short-term debts with its available assets, which is especially important in an industry where payment delays are common.
- Current ratio: Total current assets divided by current liabilities. A ratio above 1.0 generally indicates that a company can cover its short-term debts.
- Quick ratio: Similar to the current ratio but excludes inventory, offering a stricter test of cash liquidity.
- Days of cash: Shows how many days the company can operate on only its current cash. This is particularly relevant in seasonal markets or during downturns.
High liquidity supports operations during slow billing periods and improves confidence with lenders and bonding companies.
2. Profitability: Are you earning what you should?
Profitability ratios show how effectively a company turns revenue into profit:
- Gross profit margin: Indicates how well companies manage direct project costs relative to revenue.
- Operating profit margin: Measures profit after operating expenses but before interest and taxes.
- Net profit margin: Provides a comprehensive view of profitability after all expenses.
- Return on assets (ROA) and return on equity (ROE): These ratios gauge how efficiently assets and owner equity generate returns.
Regular review of these ratios helps leaders spot pricing issues, cost overruns, or systemic inefficiencies.
3. Leverage: How is growth financed?
Leverage ratios measure debt relative to equity and earnings, indicating financial risk and long-term sustainability.
- Debt-to-equity ratio: A key indicator of how much a company relies on borrowed funds vs. owner capital.
- Interest coverage ratio: Shows the ability to cover interest expenses with operating earnings.
Excessive leverage can limit flexibility and increase exposure during market downturns. Conservative leverage profiles generally attract more favorable credit terms.
4. Efficiency: How effectively are resources used?
Efficiency ratios spotlight how well a company uses its working capital or equity to generate revenue.
- Working capital turnover: Total sales divided by working capital; can signal whether the business reinvests capital efficiently.
- Equity turnover: Measures revenue generated per dollar of equity, helping identify growth constraints.
High turnover ratios might indicate strong utilization but also warn of undercapitalization if excessively high. Understanding these nuances is a hallmark of best practices for financial reporting in construction.
Leading construction business measures and benchmarks
The Construction Financial Management Association (CFMA) publishes annual benchmarks that help contractors compare their performance with industry norms across these categories. These benchmarks cover liquidity, profitability, leverage, and efficiency, offering context for whether a company’s ratios align with national averages.
Benchmarking is another best practice for construction financial reporting. It highlights relative strengths and weaknesses, helping businesses set expectations and plan strategically.
Implementing a strong financial practice
Developing and maintaining a reliable financial reporting process requires consistency, transparency, and regular review. It starts with accurate job costing and tracking, continues with monthly or quarterly ratio analysis, and ends with reporting that considers the context for stakeholders.
In today’s competitive market, companies that consistently track and analyze financial data gain an edge over those who just create periodic reports. A comprehensive financial report focused on relevant ratios and benchmarks becomes a strategic tool — helping leadership make informed operational and investment decisions —instead of just a compliance document.
If your construction business needs more consistent financial reporting and analysis, reach out to a Mowery & Schoenfeld advisor today to explore your options. Learn more about the work we do for construction contractors