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 ...