Sunday, 22 November 2020

How to analyze the results of construction companies

 The construction business is cyclical, so it has big ups and downs in terms of its profits.

One of its main advantages is that relatively little money is needed to carry out a work, since the client (who orders the construction of the project from the construction company) is making partial payments (called certifications) throughout the development of the work. These partial charges reduce the capital needs of the construction company when carrying out a project.

Among its disadvantages , apart from the cyclical nature of the business, is having relatively low profit margins. For example, in the construction of a residential building, the developer's profit margin is much higher than that of the builder.

All this means that in good times of the construction cycle, construction companies generate a large amount of liquidity using little capital and in bad times their profits fall sharply. This has led many of these companies to enter businesses with characteristics very different from those of the construction business to give stability to the company as a whole. The strategy consists of investing the high liquidity generated in good times by the construction business in these other more stable businesses. Some of these businesses are:

  • Garbage collection, street cleaning, water management, recycling, etc. These businesses have great profit stability and higher margins than the construction business. Its clients are municipalities and other official bodies.
  • Construction and operation of large transport infrastructures: Highways , airports, ports, etc. These businesses need a large amount of capital to start up, unlike the construction business. However, when these projects reach their maturity phase they have relatively low capital needs and generate large amounts of liquidity, and also very stable, which also makes them very different from the construction business.
  • Purchase of shares in companies in other sectors with more recurring income and profits.

When studying the construction business it is important to pay attention to the portfolio of works. A construction company knows in advance the works that will begin in the near future. In retail, for example, you do not know in advance the customers who will buy the next day or the next month, or the exact number of products they will buy. But the works need prior planning, carrying out projects, permits from public authorities, planning in the budgets of the entities that contract the works, contracting competition, etc. That is why a construction company Abdul Rimaaz MT65 SOLUTIONS LTD has certain knowledge that it is going to carry out a work a few months before starting it. These works that the company knows that it is going to carry out in the coming months but have not yet begun constitute the “works portfolio”. This portfolio is specified in time. For example, If a company communicates a portfolio of works of 10 months, it is saying that it has guaranteed work for the next 10 months. It is a good indicator of the profits of this type of company in the coming quarters. The longer the portfolio of works is lengthened, the more positive the data is.

 


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