Financial Statement Analysis for Contractors

Document Type: Guide
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controllers, Management

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Purpose

Provide a framework for analyzing construction company financial statements to drive better decisions.

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Construction Financial Statement Characteristics

Unique Elements:

Element	Explanation
% of Completion	Revenue recognized as earned, not billed
Over/Under Billings	Balance sheet shows timing differences
Retention	AR and AP reduced by held amounts
Backlog	Off-balance sheet critical indicator
WIP	Drives revenue recognition

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Income Statement Analysis

Revenue Analysis:

Questions to Ask:

• Is revenue growing? At what rate?
• Is growth from existing clients or new?
• What's the revenue concentration?
• Are change orders contributing?

Revenue Trend:

Year	Revenue	Growth	Notes
20__
20__
20__

Margin Analysis:

Gross Margin:

Revenue:                $____________
Cost of Revenue:        $____________
Gross Profit:           $____________
Gross Margin:           ______%

Industry Comparison:

Metric	Company	Industry	Variance
Gross Margin		12-18%
Net Margin		2-5%

Margin Trend:

• Improving or declining?
• Why? (Mix, pricing, efficiency, rework?)
• Sustainable?

G&A Analysis:

Category	Amount	% Revenue	Industry
Salaries
Rent
Insurance
Professional
Other
Total G&A			8-12%

Questions:

• Is G&A growing faster than revenue?
• Where are the opportunities?
• Are costs appropriate for size?

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Balance Sheet Analysis

Liquidity Analysis:

LIQUIDITY RATIOS:

Current Ratio = Current Assets ÷ Current Liabilities
                = $________ ÷ $________
                = ______
                Target: > 1.25

Quick Ratio = (Cash + AR) ÷ Current Liabilities
            = $________ ÷ $________
            = ______
            Target: > 1.0

Working Capital = Current Assets - Current Liabilities
                = $________ - $________
                = $________

Leverage Analysis:

LEVERAGE RATIOS:

Debt to Equity = Total Liabilities ÷ Equity
               = $________ ÷ $________
               = ______
               Target: < 3.0

Debt to Assets = Total Liabilities ÷ Total Assets
               = $________ ÷ $________
               = ______%
               Target: < 75%

Asset Quality:

Accounts Receivable:

• AR Days = (AR ÷ Revenue) × 365 = ______ days
• Over 90 days = $___________ (____%)
• Quality issues? Collectibility?

Over/Under Billings:

Costs in Excess of Billings:     $_________ (Under-billed)
Billings in Excess of Costs:     $_________ (Over-billed)
Net Position:                    $_________ (Over/Under)

What This Means:

• Net over-billed: Collected more than earned (good for cash, but liability)
• Net under-billed: Earned more than collected (asset, but collectibility?)

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Cash Flow Analysis

Operating Cash Flow:

Net Income:                          $____________

Adjustments:
  Depreciation:                      $____________
  Change in AR:                      $____________
  Change in AP:                      $____________
  Change in Over/Under Billings:     $____________
  Other:                             $____________

Cash from Operations:                $____________

Key Questions:

• Is operating cash flow positive?
• Does it exceed net income?
• What's driving cash flow?

Cash Flow Quality:

Metric	Strong	Weak
Operating CF vs. Net Income	OCF > NI	OCF < NI
AR trend	Stable/declining days	Increasing days
Free cash flow	Positive	Negative

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Key Financial Ratios Summary

Profitability:

Ratio	Formula	Value	Target
Gross Margin	GP ÷ Rev		over 12%
Net Margin	NI ÷ Rev		over 2.5%
Return on Equity	NI ÷ Equity		over 15%
Return on Assets	NI ÷ Assets		over 5%

Liquidity:

Ratio	Formula	Value	Target
Current Ratio	CA ÷ CL		over 1.25
Quick Ratio	(Cash+AR) ÷ CL		over 1.0
Working Capital	CA - CL		Positive

Leverage:

Ratio	Formula	Value	Target
Debt to Equity	TL ÷ E		under 3.0
Debt to Assets	TL ÷ TA		under 75%

Efficiency:

Ratio	Formula	Value	Target
AR Days	(AR÷Rev)×365		under 45
Revenue/Employee	Rev ÷ FTE		over $250K
Backlog Months	BL ÷ Monthly Rev		6-18

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Trend Analysis

Multi-Year Comparison:

Metric	Year -2	Year -1	Current	Trend
Revenue
Gross Margin %
Net Margin %
Current Ratio
Debt to Equity
AR Days
Backlog

Questions:

• What's improving?
• What's declining?
• Are trends sustainable?
• What actions are needed?

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Peer Comparison (CFMA Benchmarks)

Against Industry:

Metric	Company	25th %ile	Median	75th %ile
Gross Margin
Net Margin
Current Ratio
Debt/Equity
AR Days
Revenue/Employee

Note: CFMA Annual Financial Survey provides detailed benchmarks by contractor type and size.

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Red Flags

Watch For:

Red Flag	Concern
Declining gross margin	Pricing pressure, cost issues
Rising G&A %	Overhead outpacing growth
Increasing AR days	Collection problems
Rising debt levels	Financial strain
Negative operating cash	Business model issue
Over-billing > 10% of backlog	Front-loading revenue
Under-billing > 5% of backlog	Collection risk

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Analysis Checklist

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    FINANCIAL STATEMENT ANALYSIS CHECKLIST
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Period: ___________________________________________________

☐ Revenue trend analyzed
☐ Margin analysis complete
☐ G&A as % of revenue reviewed
☐ Liquidity ratios calculated
☐ Leverage ratios calculated
☐ AR aging reviewed
☐ Over/under billings analyzed
☐ Cash flow reviewed
☐ Trends identified
☐ Peer comparison done
☐ Red flags noted
☐ Action items identified

KEY FINDINGS:
1. ________________________________________________________
2. ________________________________________________________
3. ________________________________________________________

ACTION ITEMS:
1. ________________________________________________________
2. ________________________________________________________
3. ________________________________________________________

Prepared By: _______________________  Date: ________________

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Related Documents

• WIP Reporting
• Financial Reporting
• Cash Flow Management
• Company Metrics Dashboard

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