Profitability in construction: how does building renovation business fare compared to new building business

Abstract

In recent decades, energy-efficiency improvements and ageing dwelling stocks have grown the renovation need in many countries. This research compares the profitability of building renovation companies and companies specializing in new construction using financial statement analysis and analysis of variance. Profitability is assessed through EBITDA and return on assets (ROA). Debt to equity (D/E) ratio as a solvency measure supports the analysis. The findings show micro and small companies in the new building sector have a statistically significant advantage in EBITDA over renovation in same size groups; projects in the renovation sector appear to be more complex, especially in terms of design, causing cost overruns. The more cyclical nature of new construction, however, equalizes EBITDA differences over time. Medium-size companies overall had the lowest EBITDA following the 2008–2009 financial crisis. ROA was generally higher for the renovation sector highlighting the more capital-intensive nature of new construction; unsold apartments and land for future projects hold capital, which results in higher D/E ratios. D/E ratios also revealed that both sectors have faced the COVID-19 pandemic less indebted compared to the 2008–2009 financial crisis. Since both sectors’ profitability has been decreasing during the research period (2005–2019), actions are needed especially in the renovation sector, which has an increasingly important role in developed societies.

Keywords:

• Profitability
• building renovation business
• new building business
• construction industry
• solvency

Disclosure statement

No potential conflict of interest was reported by the authors.