Looking to the future

Looking to the future

Of all the companies in the metal treatments industry, 41 per cent increased their level of borrowings in their latest financial year. Have these companies new-found confidence? Are they looking to borrow to finance a brighter future or are they struggling with past constraints?

Of all the companies, 15 per cent made a loss in their last financial year. Although a loss could be part of a sustained strategy to gain market share, it is more likely to be the result of competitive pressures. In any event, around half of the loss makers increased their level of debt, evidence to suggest they needed short-term help to remain in the marketplace. But what about profit-making companies? How are they financing their future?

Of those companies making a profit, 50 per cent increased their total asset value in their last financial year and over two-thirds of this group did so using external sources of finance,so increasing their borrowings. The remainder of the industry will be drawing on retained profits or shareholders funds to provide the backing for future plans and ambitions.

So it would seem that many in the industry have the confidence in their business to be able to take on extra liabilities in the expectation of reaping benefits in the future, while others are confident enough to put up their own money. Their optimism may be well founded; the metal treatments industry as a whole grew by 5.7 per cent during the last year, while almost one in five of the industry managed an amazing 20 per cent or more increase in sales. Equally important, profit margins for the industry were averaging 5 per cent, but again a small proportion, almost one in five of the industry, easily outperformed this, making in excess of a 10 per cent pre-tax profit margin as a proportion of sales.

Borrowing can make good business sense and, indeed, provided a company can make a surplus of profits over and above the cost of servicing the loan, this increases the return to the shareholders. In the metal treatments industry, however, the financially strong companies reduced the level of their loans by some £228 million and the financially weak companies increased loans overall by £340 million.

Of course, if profits cannot meet the cost of servicing a company's loans, things can turn sour. A sudden increase in borrowings should not be taken in isolation as a measure of a company's overall financial position. That they are able to gain external sources of finance reflects that management and the loan provider, at least,have confidence in the future of their company.

To gain a clear picture of a company's financial status, other factors such as sales growth, profitability,trading stability, immediate liquidity and working capital should also be given due consideration. John Folkes (Lye Forge) Ltd is an example of a company analysed using the Plimsoll Model, which gives consideration to all these factors with the "Plimsoll Chart" providing an ultimate indication of the company's financial health. This is done by giving a weighting to all the factors and combining them, with the exception of sales growth, to provide this indicator of the company's financial position.

The Plimsoll Portfolio Analysis ­ Metal Treatments (first edition) 1998 individually analyses 1,437 UK limited companies involved in the industry and claims it will allow the busy manager to assess the financial position of any company they may come into contact with in their day-to-day trading.

Further details are available from: Mark Haynes. Tel: +44 (0) 1642 230977; Fax: +44 (0) 1642 243560.