Research Reports

Domestic and global economic growth is slowing down, and the domestic construction market is stagnating. As the construction industry is more sensitive to internal and external risks than other industries, management strategy to overcome difficult times is needed. This study derives elements for improving the profitability of the construction companies and provides implications for government policies. This study applies DuPont analysis (also known as DuPont identity or DuPont model) as an analysis framework to objectively and consistently grasp the internal competencies of construction companies. It decomposes profitability (ROE, return on equity) into (1) operating efficiency (net profit margin), (2) asset use efficiency (asset turnover ratio), and (3) leverage (equity multiplier). By analyzing financial statement items that affect each factor, this study derives management strategies to improve profitability. The results of time series analyses are as follows: the profitability of the construction industry is highly volatile, and has improved recently but is still lower than that of the manufacturing industry. The main reason for the lower profitability is higher cost, especially the cost of raw materials and labor expenses. Higher credit risk of construction industry due to the high volatility of profitability increases bad debt expenses and interest expenses. The results of cross-sectional analyses are as follows: the recent improvement of profitability is due to the increase of net profit margin and asset use efficiency. Construction companies with relatively higher profitability have lower labor expenses, bad debt expenses, and interest expenses. Those with higher asset use efficiency have more current assets. Leverage is negatively related to the profitability.