Monday, March 1, 2010

Reporting season wrings out the Profits

With the notable exception of a couple of NZX listed companies the current reporting season has been a case of squeeze until your business expenses fill your cup.

Apart from the fact that it is a good idea to keep running costs low during an economic downturn (it would be nice to do the same during the good times as well) cost cutting can improve efficiency and show up where the company might have been holding some fat around its hips.

Profits have mostly been flat to slightly down, with some good rises over the last half year; Sky City Entertainment Group[SKC.NZ] Michael Hill International [MHI.NZ] and Sky Network Television [SKT.NZ] are some recent examples of excellent profit rises.

A large number of companies though have reported reasonable profits on flat to down revenue and a number of capital raisings in 2009 have been responsible for lower interests costs on borrowings that went straight to the bottomline.

How long can companies wring these sorts of results out of cost savings?

I think the bulk of savings have already been made for most but expect more companies selling and leasing back offices if they haven't already, consolidating branches and staff and continuing to put off capital expenditure.

The problem with this is that if cost savings go too far, in the long term it can affect the future of the company in question.

Telecom NZ [TEL.NZ] is a prime example of underinvestment in its business and over a long period this had led to its current demise.

Companies need to find a balance between expense savings and capital expenditure in order to progress further when the economy rebounds - whenever that will be is anyone's guess.

There is little doubt though that most of the savings have already been made (with the notable exception of executive pay and directors fees) and the next reporting season that kicks off in August will show that profits will be down due to the lack of fat to be cut.

Relying on more costs cuts for profit boosting will disappoint, as will increased revenue levels except in a number of rare cases.

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