Who's breaking the profit limit?
Who's breaking the profit limit?
Keywords: Aerospace industry, Profitability
Getting a pre-tax margin above "average" is proving harder given that the industry average of profit making has improved from 2.9 per cent in 1993 to a 1997 average of 6.7 per cent. This represents over 100 per cent improvement in pre-tax profit margins. However, becoming a top company in terms of pre-tax profit in the industry and staying on top is even more difficult. A finding from the latest Plimsoll Portfolio Analysis - Aviation Equipment, April 1999, found that of the top 50 profit makers in 1993 only ten are now in the current top 50.
Interestingly, the average pre-tax profit margin of these top 50 has increased from 15 per cent in 1993 to 17 per cent in the latest year (Figure 1 and Table I). Even though these are excellent margins, this finding seems to indicate that the best profit makers cannot increase their margins any more!Within these top 50 companies, total actual profit has changed quite a bit. This is mainly due to dramatic changes in the companies. The average company in 1993 had sales of £12 million, yet the current top 50 only have average sales of »14 million indicating that the top profit makers are getting bigger.
Another finding is that since these companies reached the top 50 in 1993,six of these companies have recorded a loss since that date. This is in line with the rest of the industry. Around half of companies analysed have made at least one year of pre-tax loss within the last four years!
BBA Group plc has been identified as one of only 94 companies in the aviation equipment industry that has not made a loss in the last four years and even managed to improve its pre-tax profit actual every year over the last four years. In fact, this company has managed to increase its pre-tax margin from 4.6 per cent in 1994 to an average of 13.1 per cent in its latest financial year. This represents a »93 million profit improvement.
Figure 1 Aviation equipment sector: trend in pre-tax profit margin between 1993 and 1998
Table I Pre-tax profit margin (%)
Making a single year of pre-tax loss, provided that it is not too severe, is"acceptable" and may not deplete a balance sheet reserves too much. However, two years or, even worse, three years is rather harder to accept. In fact, 80 companies in the industry are showing two consistent years of pre-tax losses. One of these companies made a pre-tax loss of £73 million.
It is vital that these companies stem these losses and return to profitability as investment in these companies will be under serious review or indeed parent company or director's support, in some cases, will be vital to support a loss making entity. One thing is certain, nobody will support forever and patience will run out!
For the company on the acquisition trail, any company making a loss is a potential target. The need to strengthen the company could indeed bring rewards for both parties. Of the 173 loss makers in the industry, 41 of these are showing an above average gross profit margin indicating that their costs are out of line. Under new management, these companies could be turned around. For example, if we applied this theory three years ago to Rolls-Royce Leasing Ltd,it was making a loss but had an above average gross profit margin and in their latest year, it made over £3 million in pre-tax profits!
Companies making pre-tax losses are losing pace with the industry, becoming less competitive and cannot invest in new technology not to mention jeopardising jobs. The ability, or lack thereof, to make a profit drives industry changes. Job losses and gains, investments and sell-offs, mergers and acquisitions could all be down to the bottom line of a company's balance sheet. Just who is going to be in the quarter of the industry making a loss this year? Find out in the next Plimsoll Portfolio Analysis.
So how does a busy manager find out about the profit makers in their industry? All of the above companies have been identified from the Plimsoll Portfolio Analysis Aviation Equipment, April 1999. This report individually analyses some 1,217 companies involved in the industry. Using the last four years of audited accounts, Plimsoll's unique method of analysis allows the user,principally the busy manager, to identify immediately where the strengths or weaknesses of a company lie.
The analysis is used typically to check on the financial viability of customers and suppliers, to assess the risk from the competition and to identify suitable acquisition prospects. It is also possible to identify financially strong and growing companies to approach for new business; trading with companies such as this is one way in which a company can improve its own prospects.
Details from Plimsoll Publishing Ltd, Broadcasting House, The Vanguard Suite,Middlesbrough, Cleveland. TS1 5JA. Tel: +44 (0)1642 257800; Fax: + 44 (0)1642 257806. Call Jennifer on + 44 (0)1642 257800 if you would like to request a free individual company entry or to order a copy of the complete analysis of the 1,217 companies for £305 including next day delivery.
