Analysis and Comment on High-low Engineering

Analysis and Comment on High-low Engineering

Profitability

Commenting on Highlow Engineering's profitability and referring initially to the primary measure of Return on Capital employed (ROCE) we can see that the return is good (possibly a little low) but does improve from 2002 to 2003.

Gross profit at 33.0 % in 2003 is excellent and shows a healthy year on year increase from 2001 onwards.

Overheads remain steady at around 17 % throughout the period (though there is a slight improvement between 2002 and 2003.

Distribution costs could be of some concern due to the marked upward movement between the years, these costs should be investigated to see if they are justified or if there is some need for budgetary control.

Administration costs are favourable and good control is in place. Referring later to Average wage to employee it may be possible that the company has given low pay-rise's over the last few years and this again would need to be investigated to ensure there is not a disgruntled workforce.

Sales to gross capital employed is decreasing over the period as is sales to fixed assets.

LIQUIDITY

Liquidity is an issue as there has been a steady (not sharp) marked decline in liquidity and though we have not calculated the ability of the business to generate cash from trading operations we know it has declined relative to the short term debts of 2002 and 2003.

The liquidity problem may be a planned short term position and linked to the heavy purchases in vehicles and equipment in 2002 and 2003. The quick ratio being a little more stringent when checking liquidity shows the value moving towards 1, if the ratio becomes less than 1 then 'liquid' current assets will not cover current liabilities, which would further illustrate the potential liquidity problems in the business.

The business has paid back 8 % loan stock over the period and favoured more longer term 10 % loan stock which simply does not make any sense. It has also markedly increased it's overdraft which shows that the business needs an injection of shareholder's funds (and needs to re-appraise it's CAPEX). The gearing ratio remains solid however as it shows the long term position of debts and the capital structure of the business it does not reflect the increase in overdraft due to CAPEX requirements.

WORKING CAPITAL

As mentioned above. There is a reduction in Sales to gross capital and sales to fixed assets, it is ...