Contractor financial ratios, worked example
Contractor financial ratios turn a balance sheet and income statement into a few numbers that show whether a company can pay its bills, how much it relies on debt, and how much it keeps from each dollar of work. Sureties, banks and owners read them before they bond, lend to or hire a contractor, and the contractor should read them first.
One invented contractor
Balance sheet at year end
| Assets | Liabilities and equity | ||
|---|---|---|---|
| Cash | $120,000 | Accounts payable | $260,000 |
| Accounts receivable, including retainage | $380,000 | Accrued expenses | $40,000 |
| Inventory | $40,000 | Billings in excess of costs (overbillings) | $50,000 |
| Prepaid expenses | $10,000 | Current liabilities | $350,000 |
| Current assets | $550,000 | Long-term debt | $250,000 |
| Equipment, net of depreciation | $500,000 | Total liabilities | $600,000 |
| Owner's equity | $450,000 | ||
| Total assets | $1,050,000 | Total liabilities and equity | $1,050,000 |
Check: 550,000 + 500,000 = 1,050,000, and 600,000 + 450,000 = 1,050,000, so the sheet balances.
Income statement for the year: revenue $4,000,000; cost of construction $3,520,000; gross profit $480,000; overhead $360,000; net profit before tax $120,000. Check: 4,000,000 - 3,520,000 = 480,000, and 480,000 - 360,000 = 120,000.
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Procurement and Contracting Requirements
A subcontractor on a bonded public project has not been paid for completed work. Which bond is meant to protect it?
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Liquidity: can it pay its bills?
| Ratio | Formula | This contractor |
|---|---|---|
| Current ratio | Current assets / current liabilities | 550,000 / 350,000 = 1.57 |
| Quick (acid-test) ratio | (Cash + receivables) / current liabilities | (120,000 + 380,000) / 350,000 = 1.43 |
| Working capital | Current assets - current liabilities | 550,000 - 350,000 = $200,000 |
Check: 350,000 x 1.57 = 549,500, close to 550,000 after rounding; 350,000 x 1.43 = 500,500, close to 500,000. The quick ratio leaves out inventory and prepaid items, because they cannot be turned into cash quickly. Higher is stronger. Working capital is the cushion that carries payroll and retainage while owners pay slowly, and some sureties size bonding capacity partly as a multiple of it. The multiple varies by surety.
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Leverage: how much is borrowed?
- Debt to equity = total liabilities / owner's equity = 600,000 / 450,000 = 1.33
- Check: 450,000 x 1.33 = 598,500, close to 600,000 after rounding (the exact value is 1.333).
Each dollar the owners have in the company carries $1.33 of liabilities. A lower number means less reliance on creditors.
Profitability: what does it keep?
- Gross profit margin = gross profit / revenue = 480,000 / 4,000,000 = 12%
- Net profit margin (before tax) = 120,000 / 4,000,000 = 3%
- Check: 4,000,000 x 0.12 = 480,000, and 4,000,000 x 0.03 = 120,000
Break-even revenue is overhead / gross profit margin = 360,000 / 0.12 = $3,000,000. Check: 12% of 3,000,000 is 360,000. Below that volume, at this margin, the company loses money. The job costing and overhead guide shows how overhead is recovered job by job.
Efficiency: how fast does it collect?
- Days in receivables = receivables / revenue x 365 = 380,000 / 4,000,000 x 365 = 34.7 days
- Check: revenue per day is 4,000,000 / 365 = 10,958.90, and 380,000 / 10,958.90 = 34.7
- Working capital turnover = revenue / working capital = 4,000,000 / 200,000 = 20
Over and underbillings
On jobs reported by percentage of completion, billing ahead of the work earned creates overbillings, a current liability, because the company owes the work. Billing behind creates underbillings, a current asset. Large underbillings can mean unbilled change orders or hidden cost overruns, which is why sureties ask about them. Work one job with the free over and under billing calculator.
Common mix-ups
- Putting inventory in the quick ratio. Only cash and receivables (and marketable securities, where held) go on top.
- Using total assets in the current ratio. Only current assets and current liabilities.
- Mixing margin and markup. Profit margins divide by revenue. See markup vs margin.
- Reading one ratio alone. A strong current ratio with slow collections can still run out of cash.
On the NASCLA exam
Financial statements and ratios fall under Procurement and Contracting Requirements, 31 of the 115 scored questions. Tab the financial statements and ratios topic in the NASCLA Contractors Guide to Business, Law and Project Management, write each formula before you put in numbers, and check the balance sheet balances.
Practice it
See why sureties read these numbers in bid bond vs performance bond vs payment bond, and how the company's form affects its balance sheet in business entity choices for contractors. Sureties turn these numbers into a bond limit; see bonding capacity and surety prequalification, and try your own working capital and net worth in the free bonding capacity estimator. Find the sales volume that covers overhead with the free break-even calculator.
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Sources
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- PSI Candidate Information Bulletin 1458, content outline and reference list, updated 7 Jul 2026. Retrieved 5 Nov 2026.
- NASCLA Commercial Exam, NASCLA. Retrieved 5 Nov 2026.
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From the blog
- Over and under billing, walked through on the calculator
- Preparing your company for a bonding line increase
- Reading a surety's prequalification questionnaire