INTERNATIONAL JOURNAL Of ACADEMIC RESEARCH Vol. 3. No.1.

January, 2011, Part I

ASSESSMENT OF THE FINANCIAL HEALTH

OF MALAYSIAN CONSTRUCTION FIRMS USING FINANCIAL
RATIO ANALYSIS
Mohd. Suberi Ab Halim*, Mastura Jaafar, Omar Osman

School of Housing Building and Planning, University Sains Malaysia (MALAYSIA)

*Corresponding author: quratulwafi@yahoo.com

ABSTRACT

Scholars in the construction industry have identified sound financing as key to business survival. Hence, this
study aims to explore the financial health of Malaysian construction firms using financial ratio analysis. Financial
ratios are statistical yardsticks that relate to two numbers obtained from the income statement of a company,
balance sheet, or both. Financial ratio analysis enables relative comparisons of company performance over time,
as well as comparison of performance across different companies. However, various financial ratio analytical
methodologies exist for evaluating the performance of a construction company. In this study, three phases of data
were collected. Data collection begins with a qualitative case study on the financial analysis of selected companies
using financial ratios. Typical median (industry average) are employed to compare the average ratios of
companies. This is followed by an interview with respondents from selected companies to validate the findings
derived from financial analysis. Furthermore, a questionnaire is developed to assess the perceptions of other
contractors to support the findings from the financial ratio analysis and interview. In this research, triangulation
method is used to enhance confidence in the ensuing findings. Overall results reveal the extreme financial
difficulties these companies may face to sustain their business in the coming years. Majority of the construction
companies do not have sufficient cash capital to finance their construction works, companies benefit low profit
margin from construction projects, and companies were highly dependent on debt capital to finance their
construction costs.

Key words: Construction industry, construction firm, financial ratio

1. INTRODUCTION

The construction industry plays an important role in enhancing the economic performance and the national
welfare of a country by transforming various resources to construct economic and social facilities (Basir, 2000). It
contributes an average of 5%–9% of the gross domestic product (GDP) of developing countries (Cited from Abu-
Bakar, 2002). In the Malaysian economy, the average annual contribution of the construction industry to GDP is
merely 3%; however, the importance of the sector is validated when judged in relation to its role in the economic
development. According to Abdullah (1990), the construction industry provides critical backward and forward
linkages to support the development of other economic sectors.
However, in terms of business survival, the construction industry has constantly experienced a relatively
high proportion of business failure compared to other industries (Yin, 2006). According to Edum-Fotwe et al.
(1996), the failure of the construction industry is a global phenomenon. In the United States (US) construction
industry, the average rate of failure from 1989–2002 was nearly 14% higher than the average rate of failure for all
industries, which was pegged below 12%.
The same phenomenon occurs in Malaysia. According to the Construction Industry Development Board
(CIDB) of Malaysia, 11,321 construction firms were classified as dormant and inactive from January 2006 to August
2008. This figure strongly supports the statement of Yin (2006) that there are very few successful listed
construction contractors in Malaysia. Furthermore, a significant number of construction projects are not completed
within the original schedule.

2. STATEMENTS OF PROBLEM

Previous studies on the impact of financial factors on the failure of construction firms have revealed that bad
financial management and lack of capital are the main determinants of construction failure (Kangari, 1998).
According to Peterson (2005), the Surety Information Office (SIO), an office that collects data on surety bonds in
the US, has proven that the main failure factors are directly related to the financial management of the company.
In the Malaysian construction industry, Yin (2006) finds that most of the contractors do not have sufficient
capital to finance their undertakings. Contractors generally do not have fixed assets, unlike most manufacturers.
Contractors usually do not have land or buildings; however, they have construction equipment. Unfortunately,
banks do not accept these moving assets as collateral for loans. Without bank financing, a contractor has greater
difficulty in undertaking a project. Financial problems faced by the contractor are also because of the low profit
margin from the project. Through the open tender system, contractors always have to produce quality work at the
cheapest price.
The findings of Yin (2006) strongly support the previous findings of Hwee et al. (2002) regarding the crucial
role of cash flow management in the construction industry. Cash flow is the most important factor influencing
profitability when a construction project is in progress. For many years, the construction industry has considerably

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suffered a higher bankruptcy rate than other industries. One of the major causes of bankruptcy is inadequate cash
resources.
Furthermore, Jaafar (2004) shows empirical evidence that smaller capital is used by contractors to start a
construction firm in Malaysia compared to other businesses because of the following reasons:

1. Suppliers are important creditors of construction firms.

2. Sub-contractors give capital support; however, they are only paid when contractors have collected
payment from clients.
3. For government projects, contractors may obtain an advance payment of 25% of the total project price.

The findings of Jaafar (2004) prove that most contractors in Malaysia are highly dependent on outsourced
capital. The said study also supports McMahon (2001), whose findings reveal that business growth outcomes and
better business performance greatly depend on external finance. By using more outsourced capital (debt capital),
the profit margin from the projects definitely decreases. Contractors have to pay higher price for the credit terms, as
well as interest charges of banking facilities.
A study by Lin (2008) on the total amount of loan disbursed by 14 commercial banks in Malaysia to the
construction industry also proves that the construction industry is highly dependent on debt capital in order to
survive. In 2005, the total loan disbursed to the construction industry was MYR 25.26 billion, as compared to MYR
23.29 billion and 21.71 billion in 2004 and 2003, respectively.
Consequently, many loans to construction firms have become collectibles (Lin, 2008). Table 1 shows the
amount of loans and non-performing loans (NPLs) by contractors for the years 2004 and 2005.

Table 1. Amount of NPLs to bank by construction industry in 2004 and 2005

Commercial 2004 2005

bank Loan NPL % Loan NPL %
(MYR’000) (MYR’000) (MYR’000) (MYR’000)
Total 24,698,854 2,703,285 26,586,508 4,681,328 73.17%
Source: Lin (2008).

A recent study by Enshassi et al. (2006) shows that dependency on bank loan and payment of high interest
(i.e., cost of capital) is the main factor behind the failure of contracting firms.
As suggested by Edum-Fotwe (1996), construction firms must undertake regular performance evaluation to
ensure the adoption of timely and appropriate strategies to sustain their businesses. Kangari (1992) suggests that
understanding the causes and symptoms of business failure would help identify early warnings of an impending
financial crisis. Cannon and Hillebrandt (1991) emphasize that the financial aspect, particularly the financial ratio,
often presents a signal to a company’s business (cited in Edum-Fotwe et al., 1995). Analyzing the financial
information can help provide answers to justify the financial health of companies.

3. RESEARCH OBJECTIVE

The critical situation of the construction industry at present makes this study a timely endeavor to evaluate
the financial health of local construction companies using financial ratio analysis. Financial ratio analysis is a
methodology used for predicting company failure in the construction industry. By knowing the early signs of
financial trouble, contractors can develop effective financial plans to keep their companies from failing.

4. FINANCIAL RATIO

According to Moyer et al. (2007), financial ratio analysis is employed for three main purposes: (1) as an
analytical tool to identify the strengths and weaknesses of a firm in order to assess its viability and to determine
whether a satisfactory return will be earned from the risk taken; (2) as a monitoring device to ensure that company
objectives are compatible with its resources; and (3) as an effective tool in planning to achieve company goals.
However, Wong and Ng (2010) highlight the six purposes of ratio analysis previously mentioned by Landford
et al. (1993). Ratio analysis enables the analysts to examine the operating performance in terms of the following:

1. Whether the firm is appropriately utilizing its assets;

2. Whether profit margins of the firm are in line with its assets;
3. Whether there is excessive investment in fixed assets;
4. Whether the business is adequately financed;
5. Whether there are signs of liquidity strain; and
6. Whether the collection of receivables is efficient.

Edum-Fotwe et al. (1995) had classified the financial ratios for construction companies into four broad
categories:
(a) Liquidity ratios (e.g., current ratio, solvency ratio): Used to measure the company’s ability to meet its
short-term obligations and to determine the time and scope of action required.
(b) Profitability ratios (e.g., profit margin, return on assets, return on equity, and earning per share): Used to
measure the return of company’s investment or profit from the operation.

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(c) Leverage ratios (e.g., gearing and interest cover): Used to indicate the extent to which the company is
exposed to financial risk.
(d) Activity ratios (e.g., assets turnover and stock turnover): Used to indicate how effectively the company
utilizes the assets at its disposal and the number of times the firm’s inventory is depleted each year.

As mentioned by Moyer et al. (2007), including all ratios when performing ratio analysis is unnecessary.
Choice of ratios depends on the current needs or objectives of the individual. For example, suppliers and short-
term creditors are likely to be concerned with a company’s current liquidity, whereas shareholders may place
greater premium on high profitability ratio to determine the amount of investment return. In contrast, bankers are
inclined to display greater interest in profitability and leverage ratios prior to approving any loan application.
Proper selection of financial ratios is important in avoiding information overlaps. According to Hsieh and
Wang (2001), in performing ratio analysis, a task often underemphasized is the selection of appropriate ratios to be
used. In a multi-criteria decision-making framework, poor criteria selection, such as financial ratios, undermines the
quality of evaluation. For example, in the study of Singh and Tiong (2005), a study aimed at evaluating the financial
health of construction contractors in Singapore, only five financial ratios are used as measurement tools. In the said
study, three years annual reports for 2000, 2001, and 2002 are analyzed. The following five financial ratios, one
from each classification, are selected for the case studies:

1. Working capital-to-current liabilities ratio (WC/CL) for short-term liquidity;

2. Cash flow-to-current liabilities ratio (CF/CL) for cash position;
3. Net worth-to-total liabilities ratio (NW/TL) for long-term solvency;
4. Return on total assets (EBIT/TA) for profit-generating ability; and
5. Revenue-to-total assets (REV/TA) for managerial performance.

Furthermore, the recent study of Peterson (2005) suggests the use of industry average and range as a
comparative point for ratio analysis to obtain an accurate picture of a company’s financial health. Subsequently, he
employs 17 financial ratios to evaluate financial performance for construction companies (Table 2).

Table 2. Seventeen financial ratios with the proposed industry average and range

Ratios Industry Range Comments

1. Current ratio (CR)
2. Quick ratio (QR
3. Current liabilities-to-
net worth ratio
(CL/NW)
4. Debt-to-equity ratio
(DER)
5. Fixed assets-to-net
worth ratio (FA/NW)
6. Current assets-to-total
assets ratio (CA/TA)
Average
1.5:1 3.1:1–1.2:1 CR is a measurement of a company’s ability to use current assets to pay for its
current liabilities.
1.2:1 2.1:1–0.6:1 QR is a measurement of a company’s ability to pay short-term liabilities with
cash or near-cash assets.
1.12:1 0.32:1–2.4:1 This is a measurement of the risk that short-term creditors assume when
extending credit to a company.
1.3:1 0.5:1–2.7:1 This is also known as debt-to-worth ratio or total liabilities-to-net worth ratio.
0.24:1 0.08:1–0.64:1 This is a measurement of the owner’s equity tied up in fixed assets, such as
construction equipment, buildings, and vehicles.
- 0.70:1–0.80:1 This is a measurement of the liquidity of a construction company’s assets. A
company with high ratio would have majority of its assets in the form of current
and liquidated assets.

7. Collection period 48 days 22–75 days CP is a measurement of the average time it takes a company to collect its
(CP) account receivables. CP is likewise a measure of how long a company’s capital
is used to finance its client’s construction project.

8. Average age of 45 days - This represents the average time a company takes to pay its bills. It is a
accounts payable measure of how extensively a company utilizes trade financing.
(AAAP)
9. Assets-to-revenue 29% 19%–55% This is a measurement of the efficiency of a company in utilizing its assets. It is
ratio (ARR) likewise known as the assets-to-sales ratio.

10 Working capital turns 12.1:1 WCT is a measurement of the efficiency of a company in utilizing its working
(WCT) 23:1–6.1:1 capital (WC), which represents funds available for future operation.

11. Accounts payable- 7.9% 2.9%–13% This is a measurement of the extent to which a company utilizes its suppliers
to- revenue ratio and subcontractors as sources of funds.
(APRR)

12. Gross profit margin 17% - Gross profit margin is the percentage of revenue left over after paying
(GPM) construction and equipment costs.
13. General overhead Less - This is the percentage of revenue used to pay general overhead expenses or
ratio (GOR) than 10% administrative costs.
14. After tax profit 2.2% 8.7%–0.6% This is the percentage of revenues converted into profit after tax deductions.
margin (ATPM)

15. Return on assets 6.5% 21%–2% This is the measurement of the efficiency of a construction company in utilizing
(ROA) its assets.
16. Return on equity 16.7% 53%–5.4% This is likewise termed as return on investment for shareholders.
(ROE)
17. Degree of fixed asset - 60%–40% Degree of fixed asset newness is a measurement of the newness of a
newness (DFAN) company’s assets.

Source: Peterson (2005)

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3. METHODOLOGY OF THE STUDY

This section discusses the research methodology applied in this study. Three types of data were collected
by the researcher as strategy for data collection. Data collection began with the qualitative case study of the
financial analysis of the selected companies using financial ratios. This was followed by interviews with
respondents from selected companies to identify the findings derived from financial analysis. Furthermore, a
questionnaire was developed to assess the perceptions of other contractors in the Malaysian construction industry
from the same category to strengthen the findings of the financial ratio analysis and the interview. In this research,
triangulation method was used to enhance confidence in the findings.
The qualitative case study method was chosen as the first research strategy because the aim is to have an
in-depth understanding of the financial practices of contracting firms. The paper was based on secondary data
extracted from case studies of six representative large- and medium-sized construction contractors in Malaysia.
Annual financial reports of selected construction companies for three years (2005, 2006, and 2007) were
thoroughly studied. Seventeen financial ratios, as proposed by Peterson (2005), were employed as measurement
performance tools. Subsequently, in interpreting these ratios, typical median (industry average) and typical range
were used to compare annual average ratios for the three years.
The second phase of the data collection involved interviews with representatives from six respondent
companies. The interview plan was distributed in advance to each respondent (approximately a week prior to the
interview) to allow the respondent to prepare. The purpose of the interview is to allow contractors to provide
information for findings derived from ratio analysis.
Finally, a questionnaire was designed to assess the perceptions of other contractors in the Malaysian
construction industry who belong to the same category in order to strengthen the findings from the financial ratio
analysis and interview. A questionnaire survey was conducted to solicit the cause of financial problem. Fifty-four
contracting firms participated in the survey.
As mentioned above, data collection for this study was accomplished through three major phases: case
study (financial analysis), in-depth interviews, and questionnaires distributed to the same category of contractors
for validation of findings. All these approaches towards data collection were intended to practically apply the
concept of triangulation to reduce systematic bias in research work (Figure 1).

Fig. 1. Concept of triangulation

4. RESULTS OF CASE STUDY

Table 3 presents the results of the 17 average ratios for the selected construction companies derived from
the case study.

Table 3. Summary of the 17 average financial ratios for the selected construction companies

SUMMARY OF FINANCIAL RATIO ANALYSIS

No. Ratios Company Company Company Company Company Company Median Range
A B C D E F
3.1
1 CR 1.12:1 1.05:1 0.97:1 1.35:1 1.07:1 1.34:1 1.5:1 to
1.2
2.1
2 QR 0.66:1 0.52:1 0.60:1 0.69:1 1.10:1 0.91:1 1.2:1 to
0.6
0.32
3 CL/NW 6.47:1 9.06:1 7.59:1 14.62:1 2.43:1 3.84:1 1.12:1 to
2.4
0.5

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4 DER 6.68:1 9.41:1 8.19:1 37.53:1 2.53:1 3.84:1 1.3 to

2.7
0.08
5 FA/NW 0.66:1 0.71:1 1.65:1 9.28:1 0.35:1 0.16:1 0.24:1 to
or 66% or 71% or 165% 928% 35% 16% 24% 0.64
0.70
6 CA/TA 0.899:1 0.93:1 0.77:1 0.71:1 0.90:1 0.96:1 - to
0.80
22 days
7 CP 47 days 83 days 8.7 days 127 days 22 days 39 days 48 days to
75 days

8 AAAP 63 days 94 days 89 days 146 days 38 days 94 days 45 days

19%
9 ARR 42% 49% 71.7% 96.3% 16.7% 35.5% 29% to
55%
23
10 WCT 43.7:1 3.4:1 33 :1 (0.02) :1 26.9 :1 22.9 :1 12.1 to
6.1
2.9%
11 APRR 14.1% 21.4% 24.8% 24.3% 8.74% 22.8% 7.9% to
13.0%
_
12 GPM 4.7 % 10.6% 6.96% 11.98% 9.06% 7.52% 17%

Less
13 GOR 3.2% 8.97% 5.29 % 17.85% 8.27% 9.26% than -
10%
8.7%
14 ATPM 0.78% (0.14)% 1.17% (5.56)% 0.24% (0.48)% 2.2% to
0.6%
21.7%
15 ROA 1.8% (0.97)% 2.07% (7.4)% 1.69% (1.28) % 6.5% to
2.0%
53%
16 ROE 16.1% (10.5)% 20.25% (72.6) 4.5% (2.45) % 16.7% to
5.4%
60%
17 DFAN 85.6% 74.1% 87.2% 88.7% 85% 83.8 % - to
40%

5. ASSESSMENTS

Table 4 highlights the assessments of findings from case study.

Table 4. Assessments of the 17 financial ratio analysis

No. Ratios Assessments

1 CR
Worse than industry average. CR below 1.5:1 is considered undercapitalized (lack of capital)
and may turn into a financial problem in the future.
2 QR
Worse than industry average but still within the range, except for Company B, whose QR was
slightly less than the minimum range of 0.6:1. A company with a QR of 1.0 or below is considered
non-liquid (lack of cash) and needs to increase its cash through either debt financing or by
converting assets into cash.

3 CL/NW Worse than industry average. Short-term creditors would have more capital at risk, which is not a
good position to be in. The higher ratio shows an indication of intensive use of suppliers and sub-
contractors (highly dependent on debt capital).

4 DER Worse than industry average. The high ratio indicates that the company is highly dependent on
debt capital to perform its business. The company may not be able to fulfill its debt service,
especially during economic downturn.

5 FA/NW The fixed asset to net worth ratio is a measurement of the amount of the owner equity tied up in
fixed assets, such as construction equipment, buildings, and vehicles. A high number indicates that
a company has heavy investment in fixed assets and needs to maintain a steady stream of work to
afford its fixed assets. Most companies have a heavy investment in fixed assets and have much
higher FA/NW than the industry average (worse than industry average), Except for Company F,
which maintained its FA/NW ratio below the industry average.

6 CA/TA CA/TA is greater than the minimum suggested rate of 70% given to a commercial construction firm.
On average, more than 70% of the company’s assets are tied up in current assets and considered
liquidated.

7 CP CP is a measurement of the average time it takes a company to collect its account receivables. A
collection period of more than industry average indicates that the company has poor collection
policies.

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8 AAAP AAAP represents the average time it takes the company to pay its bills and the extent to which a
company utilizes trade financing. The AAAP is greater than its collection period, which is an
indication that the company is highly dependent on suppliers and sub-contractors to finance
its construction work. The suggestion rate for account payables is 45 days. A greater number
indicates that the company is slow in paying its bills.

9 AAR AAR is a measurement of how a company efficiently utilizes its assets. Companies with AAR above
the upper end of the typical range, such as Companies C and D, have performed too much work
for their assets. However, a company with AAR below the lower end of the range, such as
Company C, is underutilizing its assets (not efficiently using assets).

10 WCT WCT is a measurement of how efficiently a company utilizes its working capital. Companies with
WCTs higher than industry average, such as Companies A, C, E, and F are considered
undercapitalized (not efficient) and need to increase the availability of their current assets. The
negative WCT of Company D indicates a negative working capital of the company (lack of working
capital)

11 APRR APRR is a measurement of the extent to which a company utilizes its suppliers and sub-contractors
as sources of funds. Total APRR greater than industry average of 7.9% that most of the companies
are highly funded by suppliers and sub-contractors (lack of capital).

12 GPM Worse than industry average. Lower GPM suggests that the company has a higher cost of
construction work. The company needs to have a better control of its construction cost and to
increase its profit.

13 GOR Within the suggestion rate of less than 10% given to a commercial construction company. All
companies spent less than 10% of its revenue on general overhead.

14 ATPM Less than the suggested industry average of a construction company. ATPM of 2.2% indicates that
most of the construction companies run their business at a loss or with a very minimum profit
margin. The company needs to work on its profitability by cutting costs and by increasing profit and
overhead markup.

15 ROA Less than the industry average of 6.5%, and lower than the minimum range. This figure is strong
indication that the companies run their business with a minimum profit margin or bad financial
management. Improvement in the after-tax profit margin should help increase this percentage.

16 ROE ROE pertains to the returns that company shareholders receive based on the capital they invested.
Practically, ROE is directly related to the company’s profitability. A negative ROE, such as that for
Companies B, D, and F, indicates negative (loss) profitability from their operation. Improvement in
the after-tax profit margin will help increase this percentage.

17 DFAN Greater than the target range of 60% to 40% indicates that the company will have a number of new
machines, which usually involves large loan payments.

6. FINDINGS FROM QUESTIONNAIRE SURVEY AND INTERVIEW

As mentioned earlier, a questionnaire survey was developed to assess the perceptions of other contractors
in the Malaysian construction industry from the same category to strengthen the findings from financial ratios
analysis and interview. A questionnaire survey was conducted to solicit the cause of financial problem as
mentioned by the group of interviewees. Fifty-four contracting firms participated in the survey. Table 5 highlights
the findings from interview and the perception of other contractors on factors contributing to bad performance of
contracting firms.

Table 5. The findings from interview and perceptions of other contractors

on factors contributing to bad performance of contracting firms

Summary of findings derived Summary of findings from interview process Perception of other contractors
from ratio analysis
Agree Disagree Neutral
(%) (%) (%)
1. Insufficient 1. Start business with a small capital 88.9 1.9 9.2
capital 2. Securing a bank loan is extremely
Difficult 83.3 5.6 11.1
3. Late payment of final claim received
from client (final account) 70.4 7.5 22.1
4. Low profit margin 74.1 13 12.9
5. Low percentage of paid-up capital in
the form of cash 66.7 10.6 22.7
6. Payment received less than the actual
Progress 55.5 40.7 3.8
7. Late of progress payment 88.9 7.4 3.7
8. High capital cost 86.8 7.4 5.8

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2. Low profit margin/ 1. Low contract price 94 1.9 4.1

running company 2. Project not completed on time 87 5.6 7.4
at a loss 3. Escalating price of construction 90.7 3.8 5.5
Material
4. Lack of financial management 66.7 13 20.3
5. High capital cost 81.1 5.6 13.3
6. Lack of cost management 71.7 16.7 11.6
7. High price for credit term (material) 81.5 13 5.5
8. High dependence on debt capital 87 7.4 5.6
9. Not prepared projected profit and loss 63 27.8 9.2

3. High dependence on 1. Not enough capital due to the

debt capital expansion of the business 53.7 29.7 16.6
2. High percentage of capital in the form of fixed
assets 70.4 11.2 18.4
3. Small initial capital 81.5 5.6 12.9
4. Contractor attitude/normal practice 57.4 18.6 24
5. Late of progress payment 85.2 7.4 7.4
6. Advance payment –not enough 68.5 18.6 12.9
7. Late of advance payment 68.5 13 18.5

8. Value of running project exceeded

the firm’s capacity 53.7 26 20.3

4. Unable to efficiently 1. High value of the firm’s fixed assets 68.8 20.4 10.8
manage the firm’s 2. High maintenance cost 48.1 31.5 20.4
assets 3. Purposely increased the value of the 40.7 33.4 25.9
firm’s assets for high paid-up capital
4. Purposely increased the value of the 46.3 25.9 27.8
firm’s assets for bank loan

Table 5 highlights the findings gathered from the questionnaire survey on the perception of other contractors
on the issue mentioned by respondents during the interview. The interview was conducted as a second method of
data collection to identify the findings of the financial ratio analysis. The first set of findings from ratio analysis
reveals that the companies were undercapitalized. As mentioned by respondents (interviewees), eight factors
contributed to the situation. Results from questionnaire survey prove that majority of the respondents agreed with
the eight factors contributing to financial difficulty, as mentioned by respondents (interviewees) from the six
selected companies. The companies started their business with a small paid-up capital, late receipt of progress
payment, high capital cost, and by securing a bank loan, which is extremely difficult, as revealed by high
percentage (more than 80%) of respondents. Low profit margin (74.1%), late payment of final account (70.4%), and
low percentage of paid-up capital in cash (66.7%) were the next highest values; payment received less than the
actual progress represented merely 55.5%. In conclusion, the overall results strongly support the eight factors
contributing to bad financial performance of contracting firms, as revealed by the six selected respondents.
The second set of findings from the ratio analysis reveals that construction companies enjoyed low profit
margin or loss from business operations. All profitability ratios were below the industry average. Nine factors
contributing to the situation were mentioned by the group of interviewees (Table 5). Results from questionnaire
survey reveal high support from respondents. Low contract price, escalating price of the construction material,
project not completed on time, high dependence on debt capital, high price of credit term (material), and high
capital costs represented 80% and above of the selected respondents. Lack of cost management (71.7%) and lack
of financial management (66.7%) were the next highest vales; unpreparedness on projected profit and loss
represented merely 63%. On average, results from questionnaire survey provide high support from other
contractors to the nine factors contributing to low profit margin, as mentioned by respondents (interviewees).
High dependence on debt capital seems to be one of the major problems faced by construction companies.
Results from ratio analysis indicate that companies were highly dependent on debt capital. As mentioned by
respondents (interview), eight major factors contributed to the situation (Table 5). Results from the question survey
indicate that more than 50% of the respondents agreed to all the factors mentioned above. Late receipt of progress
payment and small initial capital represented more than 80% of the selected respondents, followed by other factors
such as high percentage of capital in the form of fixed assets (70.4%), advance payment not enough (68.5%), and
late receipt of advance payment (68.5%). Both value of the project exceeding the company’s capacity, and
expansion of business represented 53.7% of respondents.
The last part of ratio analysis highlights that the company’s assets were not properly managed (not
efficiently managed). Four factors were highlighted by respondents during the interview process. A high percentage
(more than 50%) of the respondents did not agree and remained neutral regarding the factors mentioned.
However, 68.8% of respondents agreed that maintaining the high value of firm’s fixed assets contributed a negative
effect (inefficient) to the business.

7. CONCLUSION AND SUGGESTION

Based on the above ratio analysis, the overall performance of the construction companies seems to be
below industry average. With weak liquidity ratios, their cash and capital would be insufficient to finance their

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construction projects. Lack of cash appears to be a critical issue, and a strong indication that companies were
undercapitalized and would experience financial problems in the future. There were eight factors contributed to
insufficient cash flow mentioned by the interviewees (see table 5). The results from interview revealed the high
percentage of respondents were agreed to the eight factors contributed to the financial difficulty. The firms starting
business with a small capital, late of progress payment, high capital cost, and securing a bank loan is extremely
difficult were the top four factors scoring more than 80% supporting from respondents.
Their profitability ratios, which were also below industry average, illustrate that the contractors enjoyed low
profit margins. Lower GPM suggests that a company had higher cost of construction work. However, companies
must monitor construction cost to increase profit. Under this context, open tender system and lowest tender price
were the most difficult obstacles faced by contractors. The results from the interview have revealed the nine
important factors contributed to the problems (see table 5). Low contract price seem to be the most important
factor, scoring 94% of respondents were agreed. However, the overall results from the questionnaire survey
represented high support from respondent. On average more 60% respondents were agreed to the factors
contributing low profit margin.
The debt ratios of the companies were higher compared to the industry average, indicating high
dependence on debt capital to perform their businesses. The average maturity of the accounts payables of the
companies were likewise greater than their collections in a certain period, which indicates that they normally used
capital from sub-contractors and suppliers to fund their construction costs, and that they were slow to pay back
these loans. Results from questionnaire survey revealed that, late of progress payment and small initial capital
seem to be the most important factors representing more than 80 % respondents were agreed.
Lack of capital was the major cause behind their dependence on capital outsourcing in order to sustain the
business. The use of debt capital definitely increases construction costs. Generally, purchasing materials using a
credit facility is more expensive than buying with cash. To overcome this problem, the government has introduced
the advance payment scheme; for every government project, contractors are paid 25% of the contract value in
advance. Unfortunately, the facility is not of considerable benefit to contractors because of the long processing time
required by banks to produce the guarantee requested by clients. One of the solutions to overcome this problem is
for banks to speed up loan approval and to minimize the percentage of collateral. Another suggestion in easing the
financial burden of these contractors is to demand prompt payment. Progress payment is a major source of capital
for the company in financing projects.

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