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Evaluate a construction company by asking what is driving its growth and return on equity (ROE), whether its contracted work can turn into profitable revenue, and whether reported earnings become cash. ROE alone cannot answer those questions: it can rise because profits improved, because assets are being used more efficiently, or because the company has more debt or less equity. Track the drivers over several years, compare similar contractors, and check the pipeline, cash flow, and financing risk together.
Start with several years of growth, not one headline figure
Review revenue, gross profit, operating profit, and net income across consistent reporting periods. Revenue growth shows whether the business is expanding; the profit measures show whether that expansion is profitable and where margins may be changing.
Separate growth from acquisitions, accounting changes, unusual gains, and government support. A jump in revenue or earnings may not reflect a stronger underlying business if it came from a purchase, a one-time item, or a change in reporting. Compare the company both with its own earlier results and with a relevant peer group. CFA Institute recommends using multiple categories of ratios, trend analysis, and industry-specific measures rather than relying on one figure in isolation (CFA Institute’s 2026 financial analysis guidance).
Break ROE into the factors behind it
Calculate ROE as net income available to common shareholders divided by average common equity for the same period. Using average equity helps align a period’s earnings with the capital invested over that period.
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The three-part DuPont identity explains the result:
ROE = net profit margin × asset turnover × equity multiplier
- Net profit margin: net income divided by revenue. It shows how much of each sales dollar remains as profit.
- Asset turnover: revenue divided by average assets. It shows how much revenue the asset base supports.
- Equity multiplier: average assets divided by average common equity. A higher value generally means equity supports a larger asset base, often involving more financing from liabilities.
Extended DuPont analysis can further separate the effects of taxes, interest costs, and operating profitability. This matters when two contractors report similar ROE for very different reasons. A company whose ROE rises alongside stronger margins or asset use may have a different risk profile from one whose ROE rises mainly because its equity base shrank or its leverage increased. Examine debt and interest coverage alongside the ratio; a high ROE by itself does not establish that operations improved.
Use backlog and orders to test the growth story
Construction companies often have a gap between winning work and recognizing revenue. Backlog is contracted but uncompleted work expected to generate future revenue, so it can indicate potential volume and timing. It does not establish that the work will be delivered on schedule, collected, or completed at a profit.
Track backlog with incoming orders and conversion. S&P Global’s construction and engineering KPI guidance identifies beginning and ending backlog, backlog value, net order value, book-to-bill, burn rate, EPC revenue, and operations and maintenance revenue as useful indicators (S&P Global’s construction KPI guide).
- Net order value indicates incoming contract demand. Compare it with recognized revenue and changes in backlog to see whether the pipeline is expanding or contracting.
- Book-to-bill compares orders received with revenue recognized over a period. Read it with backlog and the period’s timing; one period alone may not show a durable trend.
- Burn rate measures revenue recognized against beginning backlog. A faster conversion rate can support near-term revenue, but does not by itself indicate whether that revenue is profitable.
- Project execution affects whether backlog converts as expected. Review cancellations or adjustments, schedules, completion progress, and margins rather than treating the stated backlog as guaranteed sales.
Contract type, project duration, completion progress, and costs such as materials, labor, subcontractors, and equipment all affect how work translates into reported revenue and profit. S&P Global notes that net order value helps analysts assess sales momentum and backlog growth; it is best read with the rest of the operating picture, not as a standalone forecast.
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Check whether earnings are turning into cash
Growth in accounting earnings can coexist with cash pressure. Review receivables days, payables, working capital, and cash conversion alongside the income statement. Also check liquidity measures such as the current or quick ratio, and solvency measures such as debt-to-equity and interest coverage. CFA Institute treats activity, liquidity, solvency, and profitability measures as complementary categories, not substitutes for one another (CFA Institute).
In construction, delayed billing or collections, retainage, unbilled work, and revisions to project costs can affect the relationship between reported growth and cash generation. Check the company’s statements and work-in-progress records before assigning a cause to a gap. Increasing receivables or unbilled work may warrant questions about collection timing and project progress; the figures alone do not prove a specific problem.
Compare with genuinely similar contractors
There is no universal “good” ROE for construction companies. The appropriate comparison depends on the business and the risks it takes. Match peers as closely as possible by specialty, contracting role, company size, region, reporting period, and ownership or reporting structure. A specialty subcontractor, an engineering and construction firm, and a large diversified contractor may have different asset needs, project cycles, and financial profiles.
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Compare growth, margins, ROE drivers, backlog and orders, collection patterns, liquidity, and debt coverage across the same periods. Industry ratios vary in usefulness by sector. CFMA’s Financial Benchmarker describes comparisons segmented by construction type and region; use current, relevant peer data where available rather than treating an older survey as a present-day target (CFMA Financial Benchmarker).
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Read historical benchmarks in context
The figures below come from CFMA and Industry Insights’ 2022 Construction Financial Benchmarker, which reports 2021 results. They are historical survey observations, not current targets, forecasts, or standards for every contractor. The questionnaire received data from 1,294 companies, and 1,209 supplied valid financial statements for the results; the sample was largely U.S. and Canadian, with results segmented by construction type and other factors. Pandemic relief and the unusual operating environment affected reported profitability.
| Measure | Reported result and context |
|---|---|
| Revenue volume | CFMA’s 2022 survey reported a 5% total revenue-volume increase in 2021 over 2020. |
| Return on equity | CFMA’s 2022 survey reported 36.1% overall respondent ROE in 2021, 6.5 percentage points above the cited pre-pandemic 2019 level. |
| Return on assets | CFMA’s 2022 survey reported 15% overall respondent ROA in 2021, compared with 13% in 2020. |
| Current ratio | CFMA’s 2022 survey reported a typical-company current ratio of 1.8 in 2021. |
| Debt-to-equity | CFMA’s 2022 survey reported median debt-to-equity of 1.2 in 2021, compared with 1.4 in 2020. |
| Accounts receivable collection | CFMA’s 2022 survey reported 58 days to collect accounts receivable in 2021, compared with 53 days in 2020. |
| Relief and credits | In CFMA’s 2022 survey period, forgiven or grant-recognized PPP loans and Employee Retention Credits contributed 4% of total revenue to bottom-line profitability. |
Source: CFMA and Industry Insights, CFMA’s 2022 Construction Financial Benchmarker Executive Summary. The reported ROE is not a present-day construction-company benchmark: its survey period, respondent mix, and relief-related contribution limit how it should be applied to an individual company.
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Stress-test whether the pattern can hold
Once the historical picture is clear, consider how results might change under less favorable operating conditions. CFA Institute identifies sensitivity and scenario analysis as tools for financial forecasting (CFA Institute’s financial analysis guidance). For a construction company, useful variables include slower order intake, cost inflation, schedule slippage, lower margins, and higher borrowing costs.
Test what happens to margins, cash needs, debt service, and ROE if one or more of those assumptions worsen. Treat the outputs as scenarios, not forecasts, unless the assumptions are specified and supported. The purpose is to see which growth and return drivers are resilient and which depend on favorable conditions.
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