Resources & Insights

4 Financial Performance Ratios Every Contractor Needs to Know

September 12, 2019

Tom Patton,
Surety and Insurance Advisor

Math, management, software, problem-solving and communication. Anyone hoping to do well in the construction business needs those skills and more to pull it off.

Accounting skills don’t hurt, either, but for most general contractors, finding the time to get it all done is always a problem.

We’re not talking about simply recording debits and credits. We’re talking about digging into your balance sheet and income statements to come up with commonly used financial performance ratios. These ratios are based looking at two or more numbers to gauge the profitability, solvency and efficiency of your business.

With all of that in mind, here’s a quick look at four key performance ratios that can help you keep your business on track, not to mention give surety underwriters the peace of mind they need when you’re in the market for a bond.

  1. Current ratio. This figure shows the relationship between two important balance sheet figures, your assets and debt. It’s calculated by dividing your Current Assets by your Current Liabilities. The higher, the more liquid the company is. Generally, a minimum of 1.0 is acceptable.
  2. Debt ratio. This is another calculation based on what’s on your balance sheet. Just divide Total Liabilities by Total Assets. This provides you the percentage of your assets that are financed by debt.
  3. Profit margin ratio. To derive this, just divide Net Profit by Net Sales. This calculation provides you with the net profit in each sales dollar. In other words, it tells us what’s left after all your costs to cover expenses, invest in future business growth and provide you with a return on your investment.
  4. Return on equity. Divide Net Income before taxes by Total Equity. The higher, the better.

There’s more on all of this, as you might image. But tracking solvency, liquidity, profitability and other key performance ratios, or KPIs, are critical to understanding how well you’re running your construction business. Whether you’re thinking about obtaining a bond or not, you can use these ratios to see where your business is doing well and where it needs attention.

Tom Patton is a Surety and Insurance Advisor with CCIG. Reach him at TomP@thinkccig.com or 720-330-7922.

CCIG is a Denver-area insurance brokerage with surety clients nationwide. We also help you lower your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.

Also read9 Warning Signs that Sureties Watch For

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