Crediting of the construction companies: The case of Turkey

Once the credit relationship has been established between construction firms and financial institutions, it is likely that there will be some unanticipated adversities in the financial situations of construction companies which can inhibit their loan repayments and create obstacles for fulfilling their obligations. Analysis of financial data is very critical important during the credit analysis phase stage of construction firms. Often the results obtained from the ratio analysis method amid the financial analysis not necessarily reflect the actual situation of the construction companies. Among the reasons for this is that the income and expenditures of the projects undertaken by the companies, subject to the applicable tax laws are transferred to the income statement after the project is completed and the revenues and expenses accrued during construction continues to be recorded in the balance sheet. The main emphasis of this study is to draw attention to the differences of financial data of the construction companies subject to other companies operating in all sectors, based on sector balance sheets for the 2000-2016 period issued by the Central Bank of the Republic of Turkey. During the credit analysis of an hypothetical construction company for 2014-2016 period, which is constructed in accordance with the market practice and carries out its activities profitably, no significant change in the rate of liquidity, efficiency and revenue generation capacity -which are frequently used in the ratio analysis method- was detected. However, when supplementary ratios -developed specifically for this study- were included in the analysis it was observed that the ongoing construction projects may not be completed profitably, the sales from the housing project has not been realised as forecasted, requirement for the net working capital was increasing, partners have to transfer funds to the company on a regular basis, some part of the income acquired from construction works was transferred to business units diverting from the main activity of the company, due to foreign currency denominated loans the company is highly exposed to currency risk and the amount of the short position has almost reached the level of the equity. It has been concluded that during the credit analysis of a construction company, the supplementary ratios which are formed specifically for this study should also be taken into consideration on a regular basis along with core ratios. Keywords: Construction Companies, Credit Analysis, Ratio Analysis.