Prediction of solvency in construction companies

Abstract

This paper reviews two models for testing the financial security of construction companies. It discusses the utility of the ratio analysis technique and the Z model in predicting whether companies are heading for insolvency. It then applies these techniques to three construction companies which failed within the last 5 years to test whether the theoretical predictions prescribed in the techniques are applicable to the construction industry. It concludes that whilst the techniques are of value in predicting some difficulties they need to be used in conjunction with financial performance data of other construction firms, in this way comparisons may be made. The development of a refined and construction specific Z model is recommended.

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