Financial Ratios and Profitability - Strategy for Mid-Level Construction Firms: Growth or Value Strategies?

Abstract

Construction firms are in one of the fiercest competitive industries in existence. These firms, like most businesses, operate towards the primary objective of making money. Financial strategy is thought to be a critical tool aiding firms in accomplishing this goal. Structured literature research indicates that the current construction literature does not address the topic of financial strategy in construction and how this can potentially impact overall firm profitability. Therefore, this study is intended to fill this gap and to lay the groundwork for future research on the topic. The aim of this study is three-fold, first to analyze the statistical correlation between profitability and the presence of financial strategy. Second formulate a strategic suggestion framework based on current financial position. Third to fill the industry literature gap regarding financial strategy.

Using Pearsons correlation and ordinary linear regression analysis, this study found that no significant correlation existed between the selected profitability metrics and five financial ratios selected to indirectly indicate the presence of financial strategy. However, based on a structured literature review and metonymic mapping, a strategic selection framework was created to suggest a firm’s pursuit of either growth or value strategy. These statistical analysis and subsequent findings would indicate that a more direct method of determining the presence of financial strategy within a firm is needed in order to firmly establish the impact of financial strategy on firm profitability. The framework created from this study contributes to the construction literature by filling an apparent gap and establishing a basis from which other studies may evolve.