The Balance Sheet Key Performance Indicators for A&E

The annual Deltek Clarity Architecture & Engineering Study includes a section called “The Balance Sheet” which are highlighted in this blogpost. We encourage readers to download the full report to benchmark their firm by size or firm type. <Download report>

Similar to the Income Statement Key Performance Indicators covered in the Deltek Clarity study, all of the balance sheet ratios grew stronger on average this past year:

Current Ratio: For firms of all sizes this ratio has increased strongly for the past four years, indicating that increased profitability has enabled A&E firms to increase cash and receivables and pay down liabilities. Also known as the “Working Capital Ratio”, the Current Ratio measures liquidity and is used to gauge a company’s ability to meet short term obligations.  It is calculated by dividing Current Assets (cash and near cash assets) by Current Liabilities (those due in one year or less)

Debt to Equity: The Debt to Equity ratio is a measure of a firm’s financial leverage.  There is no hard and fast rule on what constitutes a good or bad Debt to Equity Ratio.  For the last two years this ratio has declined, indicating firms are better able to pay down debt and increase retained earnings.  A continuing tight lending environment makes it more difficult for firms to increase leverage. Many firm leaders are averse to increasing debt after the experience of the great recession.

Backlog: The average A&E firm’s Backlog has increased for the last two years.  Backlog is the total dollar value of projects under contract minus job-to-date revenue from those projects. Backlog in months indicate how many months a firm can operate at its current run rate, assuming no new projects.  This is calculated by dividing Backlog dollars by annual Total Revenue, times 12. Because monthly invoices continually reduce the firm’s backlog volume, it is essential to continually replace invoiced fees with newly contracted fees. A desirable target for backlog volume is equal to, or greater than, the firm’s budgeted annual net operating revenue.

Average Collection Period: The Average Collection Period is the length of time it takes to collect Accounts Receivable from clients, from the time the invoice is entered into A/R to when it is credited against A/R.  It is calculated by dividing A/R by annual Total Revenue, times 365. The Average Collection Period was unchanged at 76 days from 2012 to 2013 and is a relatively weak spot for A&E firms (10 days slower than it was in 2000.

Working Capital per Employee: Average Working Capital per Employee increased strongly again in 2013. High performing firms have significantly higher Working Capital per Employee than other firms. This is another liquidity measure that shows the ability of an A&E firm to meet its short term obligations and continue operations without borrowing cash. Working Capital per Employee is calculated by the formula Current Assets minus Current Liabilities, divided by the current number of employees.

Return on Equity: Return on Equity (ROE) measures the potential reward of an ownership interest in a firm.   It’s primarily of use for investment analysis. ROE declined from 21.8% in 2012 to 18.1% in 2013. Since its initial recover in 2010 it has fluctuated in a range between 18% and 22.5%. ROE has fluctuated since it’s recovery in 2010. ROE is calculated by dividing Pre-Tax Income (Operating Profit less bonuses, interest, and other income or expenses) by Stockholders’ Equity times 100.

For more Balance Sheet KPIs and detail on each, we encourage readers to download the full report. “35th annual Deltek Clarity A&E Study” <download report>.