Identification of significant financial performance indicators for the Indian construction companies

Abstract

Financial ratio analysis has been instrumental over the years to evaluate the financial state of construction companies. However, such an analysis is tedious owing to the presence of a large number of financial ratios corresponding to different construction companies. Therefore, the purpose of this study is to identify the significant financial performance factors (SFPFs) for construction companies. A stratified sampling technique was adopted and the list of companies pertaining to the construction industry was prepared on the basis of scope, sub-sectors, age, enlistment at the national stock exchange, and most importantly the availability of financial statements for last ten years. The data pertaining to financial statements for last 10 years was collected from Capitaline database. In this study, a mixed approach (qualitative and quantitative) has been used involving factor analysis on financial ratios of 100 Indian construction companies over the period of ten years (2008–17) for determining the key factors which govern the financial performance of the companies. A total of five SFPFs were identified, namely investor return, business efficiency, operations management, activity efficiency and risk coverage, and asset management. Further, relative importance of each of these factors was determined by means of percentage explanation of variance respectively. These SFPFs can provide important relevant information about the financial performance of the company. This will help the company and its related stakeholders in better planning of its strategies and policies by focusing on a few important areas for overall improvement of the company. This may further lead to develop a financial performance evaluation framework to evaluate and improve financial performance of construction companies.

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