Five ways to... improve the reliability of order book figures
01 Why does it matter?
Forward order book figures are one of the key indices used to generate investor confidence in listed construction companies and our analysis of the order books of UK construction firms shows widespread inconsistency in how the figures are assembled. Also, we identified a significant discrepancy between a rise in order book value and static share prices. In December 2011, the total order book figure rose 1.85% to £56.45bn compared with the year before, which is not reflected in share price movements.
02 Doing it by the book
Standard best practice in assembling a firm’s order book should be adopted by all companies in the sector as this will improve the reliability of the figures. There are a number of ways to do this. First, when compiling the order book, companies need to separate out orders by organisational division and the geography of these orders to enable investors to clearly identify growth areas to aid investment decisions.
03 Clarity is key
Construction companies should state the percentage of the order book that is secured compared to orders that are yet to be finalised. They should also clearly identify the period it covers so companies can be meaningfully compared. Setting out the annual order book against forecast revenue will also help in this. Trading statements should include order book details and all listed companies should report order book values to ensure a full and timely update from the quoted construction sector.
04 Long-term versus short-term
To assist investors and stakeholders in deciding between making a long-term investment or short-term profits, construction companies should separate out short-term orders and longer-term projects that are likely to take longer in delivering returns.
05 Accounting for acquisitions
Should an acquisition be made, the order book must clearly state the effect the deal has on the order book figures. If it is not stated, a huge influx in orders will either worry investors in terms of capacity to complete the orders or give the impression that orders will continue to grow at a similar pace.
By Phil Westerman, head of construction at chartered accountant and business consultant Grant Thornton