by Alfredo Ballarini24   Novembre   2014

Trading companies over prices

According to a study carried out by Alfredo Ballarini and concerning a sample of 54 companies, the decreasing profitability may be due to a rise in selling prices which adds itself to higher management costs.

Tiles trading companies, also known as commercial tile companies, have been observed through a representative sample of 54 companies, even handed distributed along the three years considered. The survey has showed a 2.93% increase in sales for the year 2012, with a turnover going from €408 million to €420 million. Nevertheless EBITDA has decreased from 5.98% to 4.64% of the produced value. This negative fall is due to two reasons: a lower added value both in percentage and absolute value; and a rise in costs items such as cost of labour and other management costs. An increased turnover and at the same time a decreased added value are likely to indicate a trade weakness in negotiations on price. It is important to understand that a commercial policy resulting in a diminished added value is to avoid as much as possible or to be reviewed in case some impact has already been made. A 5% loss of price, where that price included a 35% added value, requires a 17% increase of sales just to be able to get lost added value back. If loss of price reached 10% an increase in sales of more than 40% would be needed to get back to the initial added value. Added value must be the main concern for business operators: managing directors, executives, employees, suppliers and salesmen, all must act conferring this parameter the importance it has if they want to have a positive balance at the end of the year. A further increase in amortization and provisions brings to EBIT being halved. Net financial charges are clearly increasing, hence the income statement is able to limit its final loss thanks to extraordinary income and to reduction in income taxes.

The burden of financial costs is not immediately explainable by observing the Net Financial Position, that is financial debts causing payable interests, net of cash. The NFP has accounted for 15.5%/15.6% of turnover over the last three years; this percentage indicates good management and a general financial balance. Hence one of the causes of the considerable increased net financial charges is to be found in higher management costs of such charges, which are mainly due to exchange losses and extra charges and not to interest payments.

As it is often the case, the financial cycle clearly shows that collection and payment schedule is unbalanced, with collection delayed compared to payments. Cash flow is increasing, thus maintaining the general financial balance.
Forecasts on profitability indicate EBITDA is more thank likely to increase over 5.4%, although it may well be that it remains still. It is on the other hand quite unlikely that it should fall below 4% of produced value, at least if general conditions and management quality remain unvaried.
Ideally summarizing the economic and financial scenario of this industry through a unified rating process, we would have (by simplified calculation) a Standard&Poor’s BBB+ rating.