PROFITABILTY AND LIQUDITY IN UK CONSTRUCTION INDUSTRY
Profitability and Liquidity in UK Construction Industry
Abstract
The UK construction industry is estimated to be worth £200 billion. It is a highly dispersed industry estimated to comprise over 200,000 enterprises, which range in size from large multinational construction groups, to small companies of self-employed individuals. The sector is a major employer in the UK economy and it accounts for 8.3% of employed population - 2008. For many years, the industry has been plagued by numerous problems including issues such as not completing projects on time, failure to stick to original budget, and failure to meet client's expectations. However, in the past decade, the government has introduced various policies in an effort to improve the performance in the construction industry.
Profitability of a firm is vital for the company's survival and growth. The goal of a firm therefore, is to maximise profit by utilizing its assets. Construction firms need to have a strong liquidity to withstand the protracted timescales often associated with construction projects. The main aim of this study was to specifically examine the relationship between liquidity and profitability of UK construction firms.
The results of this study supported the hypothesis that there is a negative relationship between liquidity and profitability of the UK construction firms. Moreover, fundamental analysis of profitability of UK construction companies supported the hypothesis that there is a negative correlation between the size of a UK construction firm and profitability.
Table of Contents
Abstract2
Chapter I: Introduction6
Overview6
Chapter II: Literature Review11
Profit efficiency at the firm level11
Known prices and technology11
Known prices, unknown technology14
Unknown prices, known technology14
Unknown prices and technology16
Absolute price normalizations17
Industry level analysis27
General27
Shadow price approach32
Top-Down approach33
Bottom-Up approach36
Price normalizations at the aggregate level39
Monte Carlo simulations40
Summary67
Chapter III: Data And Methodology69
Firm Selection and Data Collection69
Methodology71
Fundamental analysis of profitability and the size of UK construction firms71
Trends of Turnover Growth71
Analysis of Profitability and Company size72
Examined the empirical relationship between profitability of the firms and their liquidity, gearing and sizes72
Chapter IV: Results and discussions84
Results and discussion of Part 184
Analysis of Turnover Growth84
Correlation analysis between the size of the company and Profitability85
Results and discussion of Part 289
Descriptive Statistics89
Correlation Coefficient Analysis90
Regression Analysis92
Chapter V: Conclusion And Recommendation95
Recommendation96
References98
Chapter I: Introduction
Overview
According to the neo-classical microeconomic theory, the firm behavior is usually characterized by profit maximization. Therefore, it is generally interesting to test if the empirical production data are consistent with the profit maximization hypothesis (Afriat, 1972, Hanoch and Rothschild, 1972 and Varian, 1984). If profit maximization fails empirically, one may proceed to estimate the resulting loss. The notion of profit efficiency was first introduced by Nerlove (1965) in the context of parametric estimation of production functions. The nonparametric estimation of profit inefficiency can rely on the same well-established theoretical principles and axioms; see e.g. (Banker and Maindiratta, 1988; Färe and Grosskopf, 1995). In the recent years, the measurement and analysis of profit efficiency has attracted increasing attention in the operational research literature (Thanassoulis et al., 2008)
Construction of a well-defined index of profit efficiency presents two fundamental challenges. First, both observed and maximal profit can be positive, negative or zero, and ...