One in four companies using debt to finance growth

Citation

(2002), "One in four companies using debt to finance growth", Anti-Corrosion Methods and Materials, Vol. 49 No. 3. https://doi.org/10.1108/acmm.2002.12849caf.002

One in four companies using debt to finance growth

One in four companies using debt to finance growth

Keywords: Finance, Risk, Industry

Is it shrewd or risky business gaining market share through funding from banks? With almost half of the entire UK metal treatments industry increasing debt last year, remarkably 53 per cent are reported to be putting this extra finance to good use.

A total of 105 "chancers", named in the Plimsoll Strategic Risk Index of the metal treatments industry, are using debt to gain market share. Last year these "chancers" increased sales by almost ten times the industry norms, capturing extra market share. Yet they are carrying nearly two and a half times the level of debt of their competitors.

Perhaps it is no surprise that almost three-quarters of these companies are at high financial risk according to Plimsoll's own rating system.

However risky it might sound, it seems a popular strategy. "Taking other people's money and using it to generate a profit is great in the good times," says David Pattison, senior analyst at Plimsoll. "The dilemma for these companies is that they will need to keep charging a price premium to finance the debt."

Current pre-tax profit margins are 3.5 per cent compared with the industry norm of 3.1 per cent. Adding back interest payments, profitability is healthy at 5.5 per cent, well above the industry average. It seems that their strategy is finding reward.

Perhaps of greatest surprise is that it's the larger players in the industry that seem particularly drawn to this risk strategy with 34 per cent of the "chancer" companies having sales above £10 million.

Over a third of the companies in the industry with sales over £10 million have been named as "chancers" in the analysis.

Last year the industry only saw stagnant sales growth. There is little doubt that companies will associate this level of market pressure with a recession, as the market simply cannot sustain this level of behaviour.

Other companies in the metal treatments analysis are also considered and named as the 109 shown as having a losing strategy; the 108 named as "winners" and the 110 "sleepers" of the industry.

In a second analysis recently published by Plimsoll we are informed that the UK metal treatments market is set to decline by 0.7 per cent in 2002.

Sadly, this decline will be seen across most of the industry. Studying the latest figures from the largest 1,000 companies in the metal treatments industry, market analysts Plimsoll revealed that half of the industry may not see growth at all and could lose 12.6 per cent of sales on average this year.

Adding to their distress, three-quarters of these companies saw profits fall in 2001 and almost 36 per cent are currently loss-making. Despite these factors very few reduced staff and only 52 per cent made attempts to reduce their asset base.

So who is set to thrive in 2002 despite this gloomy outlook? Plimsoll's 1st edition names 212 companies that shared an astonishing 11.5 per cent growth last year. Within this group an exciting 53 companies individually increased sales by a minimum of 32 per cent last year! Many of these high growth companies are quite large. In fact, eight of them are amongst the largest of the companies in the UK metal treatments industry.

Plimsoll has named some of the highest market share earners. Listed in Table I are the eight largest companies in the metal treatments industry. (Order of listing corresponds to overall size of company, largest to smallest.)

Fortunes will certainly change in the coming year, as competitive pressure grows to secure market share. In analysing the largest 1,000 players in the metal treatments industry through the graphical Plimsoll model, the individual strengths and weaknesses of every company are revealed.

According to David Pattison, "I don't think directors realise how necessary it is to know how other companies in the market are performing. Quite honestly, every director must factor competitive behaviour into their own company thinking. Plimsoll hopes to put this revealing information in the hands of the decision maker."

Order this publication now by calling Plimsoll on 01642 626400 and receive a 5 per cent discount and free next day delivery.

Details available from: Plimsoll Publishing Ltd. Tel: +44 (0) 1642 626400; Fax: +44 (0) 1642 626410; E-mail: plimsoll@dial.pipex.com; Web site: www.plimsoll.co.uk