Evaluate a construction company’s growth by checking whether revenue and profits are rising for durable operating reasons—and whether that growth converts into cash. Evaluate return on equity (ROE) by breaking it into profit margin, asset turnover, and leverage, then comparing those drivers with the company’s project pipeline, execution, and debt capacity. There is no single ROE cutoff that makes a construction company “good”: the quality and risk behind the number matter.
Start with the growth trend, not one year’s headline
Review revenue, gross profit, operating profit, and net income over several years. Looking at all four helps distinguish expanding sales from improving profitability: revenue can grow while margins shrink, and net income can rise because of an unusual gain rather than stronger project economics.
Separate organic growth from acquisitions, accounting changes, one-time gains, and government support. Compare the company with its own prior periods and with a peer group that does similar work. CFA Institute’s financial analysis guidance recommends using multiple ratio categories, trend analysis, and industry-specific measures rather than relying on one figure.
Ask what is growing
- Revenue: Is the company doing more work, or did acquisitions, price changes, or a change in project mix lift reported sales?
- Gross profit and margin: Are projects generating more gross profit, and is gross margin stable as sales expand?
- Operating profit: Is growth surviving overhead and operating costs?
- Net income: Does the bottom line reflect recurring operations, or is it affected by financing, taxes, or unusual items?
Understand what ROE measures—and what can move it
ROE measures net income available to common shareholders relative to the common equity invested in the business. Calculate it for a period as:
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ROE = net income available to common shareholders ÷ average common equity for the period
Use average equity—typically the beginning and ending balances for the period—rather than just the closing balance, because the income was earned across the period. Check how the company defines the numerator and denominator, and apply the same method when comparing periods or peers.
Use DuPont analysis to find the drivers
The three-factor DuPont identity breaks ROE into three components:
ROE = net profit margin × asset turnover × equity multiplier
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- Net profit margin = net income ÷ revenue. It shows how much of each sales dollar remains as net income.
- Asset turnover = revenue ÷ average total assets. It indicates how much revenue the asset base generates.
- Equity multiplier = average total assets ÷ average common equity. It reflects how much assets are supported by equity versus other financing, including debt.
This decomposition helps explain whether a higher ROE came from stronger margins, more revenue per asset dollar, or more leverage. Extended DuPont analysis can further separate tax burden, interest burden, and operating profitability; CFA Institute describes both approaches in its financial analysis techniques guidance.
Decide whether the ROE is healthy, not merely high
A rising ROE supported by stronger, repeatable operating margins and effective use of assets is different from one driven mainly by a shrinking equity base or additional borrowing. A high equity multiplier can increase ROE while also increasing financing risk. Examine debt and interest coverage alongside ROE; the ratio alone does not establish that operations improved.
Rank #3
Read backlog and orders as clues, not as guaranteed growth
Construction revenue depends on work won, work performed, and the timing of project progress. S&P Global Market Intelligence identifies beginning backlog, backlog value, burn rate, book-to-bill, net order value, EPC revenue, and operations and maintenance revenue as useful construction and engineering indicators in its construction KPI guide.
- Backlog: Contracted but uncompleted work expected to generate future revenue. Check its value and how it changes over time.
- Net order value: Incoming contract demand after relevant adjustments. A trend in net orders can help indicate sales momentum and backlog growth.
- Book-to-bill: Orders received relative to revenue recognized over a period. Read it alongside backlog and the period’s project activity.
- Burn rate: Revenue recognized against beginning backlog. It indicates how quickly existing work is being converted into reported revenue.
- EPC and operations-and-maintenance revenue: Track these where they apply to the company’s work mix; they can clarify which activities are contributing to sales.
Backlog can inform expectations about future revenue volume and timing, but it does not prove that work will be delivered on schedule, collected in full, or completed at an attractive margin. Review cancellations or adjustments, project execution, and profitability alongside the pipeline. S&P Global notes that net order value helps analysts assess sales momentum and backlog growth; it is an indicator, not a promise of future results.
Check whether reported growth turns into cash and capacity
Profit growth is more convincing when it is supported by cash collection and enough liquidity to fund ongoing work. Construction projects can involve delayed billing or collection, retainage, unbilled work, and revisions to estimated project costs. Those items may help explain differences between reported growth and cash generation, but the cause needs to be verified in the company’s statements and work-in-progress records.
Rank #4
- Receivables and collection days: Check whether receivables are growing faster than sales and whether collection time is lengthening.
- Working capital and liquidity: Review working capital and current or quick ratios to assess near-term capacity to meet obligations.
- Payables: Consider whether the company is relying on slower payment to suppliers to support operations.
- Debt and coverage: Review debt-to-equity and interest coverage alongside the equity multiplier in DuPont analysis.
- Cash conversion: Compare operating cash flow with reported earnings over time; investigate persistent divergence rather than assuming a cause.
CFA Institute groups financial measures into complementary categories such as activity, liquidity, solvency, and profitability. Reading these together is more informative than treating a single ratio as a complete assessment.
Use historical construction benchmarks carefully
The figures below come from CFMA and Industry Insights’ 2022 Construction Financial Benchmarker Executive Summary, reporting 2021 results. They are historical survey observations—not current 2026 targets, forecasts, or universal standards. The questionnaire received data from 1,294 companies, and 1,209 supplied valid statements for financial results. The sample was largely U.S. and Canadian, with results segmented by construction type and other factors; pandemic relief and unusual operating conditions affected reported profitability. See the CFMA executive summary for the survey context.
| Measure | CFMA survey result | How to interpret it |
|---|---|---|
| Total revenue-volume change | 5% increase in 2021 over 2020 | A reported survey-period change, not a present-day growth target. |
| ROE | 36.1% overall respondent ROE in 2021, 6.5 percentage points above the cited pre-pandemic 2019 level | The unusually high survey result should be read in light of pandemic-era conditions and recognized relief. |
| ROA | 15% overall respondent ROA in 2021, compared with 13% in 2020 | A historical return-on-assets comparison, not a universal benchmark. |
| Current ratio | 1.8 for the typical company in 2021 | A survey statistic; liquidity needs differ by business and project mix. |
| Debt-to-equity | Median of 1.2 in 2021, compared with 1.4 in 2020 | A historical median, not a safe leverage ceiling. |
| Accounts-receivable collection | 58 days in 2021, compared with 53 days in 2020 | A survey-period collection measure; compare with the company’s own trend and comparable peers. |
| PPP loans and Employee Retention Credits | Forgiven or grant-recognized amounts contributed 4% of total revenue to bottom-line profitability in the survey period | This relief contribution is one reason not to treat the reported 2021 profitability as a recurring operating norm. |
Compare only with relevant peers
Construction businesses can differ substantially in specialty, contracting role, size, region, ownership, and reporting structure. A specialty contractor, general contractor, and engineering or EPC firm may have different asset needs, project durations, billing patterns, and margins. Match those characteristics, along with accounting period, before treating a peer ratio as a meaningful comparison.
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Use current peer data where available. CFMA’s Financial Benchmarker describes segment- and region-based comparisons for construction companies. A historical survey can provide context, but it should not be presented as a current target for a particular company.
Stress-test whether growth and ROE can hold up
After reviewing historical performance and current indicators, test how the company might fare under less favorable conditions. CFA Institute identifies sensitivity and scenario analysis as tools for forecasting financial performance. These are analytical scenarios, not forecasts unless the assumptions are supported.
- Slower order intake: Consider how reduced net orders or book-to-bill would affect backlog and revenue as existing projects are completed.
- Lower margins or cost inflation: Test the effect of higher materials, labor, subcontractor, equipment, or other project-specific costs.
- Schedule slippage: Consider how delayed completion could affect revenue recognition, cash collection, and working capital.
- Higher borrowing costs: Assess whether interest expense and coverage would remain manageable if financing became more expensive.
State the assumptions behind any scenario and watch how each one affects margins, cash, and leverage. The purpose is to see which ROE drivers are resilient and which depend on favorable conditions.
A practical evaluation sequence
- Build a consistent multi-year view: Collect revenue, gross profit, operating profit, net income, and average common equity for the same accounting periods.
- Explain growth: Separate operating changes from acquisitions, accounting changes, unusual gains, and support programs.
- Calculate and decompose ROE: Use average common equity, then compare margin, asset-turnover, and equity-multiplier contributions.
- Connect pipeline to execution: Review backlog, orders, burn rate, cancellations or adjustments, and project profitability.
- Check cash and financing capacity: Examine receivables, working capital, liquidity, debt, and interest coverage.
- Choose comparable peers and stress-test: Match the company’s work and reporting context, then test plausible downside conditions.
A persuasive growth story has more than rising revenue or a standout ROE: the trend is understandable, the ROE drivers are sound, backlog converts into profitable work, and cash and debt measures remain consistent with the company’s operating needs.
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