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Emerald Group Publishing Limited
Copyright © 1998, MCB UP Limited
Looking to the future
Looking to the future
Of all companies in the aviation equipment industry, 46 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 companies, 18 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 over half of the loss makers increased their level of debt, evidence to suggest they needed short-term help in order to remain in the marketplace. But what about profit making companies, how are they financing their future?
Of those companies making a profit 47 per cent increased their total asset value in their last financial year and around three quarters 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 aviation equipment industry as a whole grew by 10.8 per cent during the last year, while almost one in three of the industry managed an amazing 20 per cent or more increase in sales. Equally important, profit margins for the industry were averaging 4.8 per cent but again a small proportion, almost one in three of the industry, easily outperformed this making in excess a of 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 aviation equipment industry, however the financially strong companies reduced the level of their loans by some £908 million and the financially weak companies decreased loans overall by £2,766 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 the 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, working capital etc. should also be given due consideration. Fairey Hydraulics 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 powerful and easily comparable indicator of the company's financial position.
The Plimsoll Portfolio Analysis Aviation Equipment, first edition 1998, individually analyses 977 UK limited companies involved in the industry, allowing the busy manager to assess the financial position of any company they may come into contact with in their day to day trading.
To obtain a copy of the report or more information, contact Mark Haynes at Plimsoll Publishing. Main reports at £305 and the supplements (where available) at £205.Tel: +44 (0) 1642 230977; Fax: +44 (0) 1642 243560; E-mail: email@example.com