In May, FOBIA newsletter presented an overview of Finnish harvesting contractors’ financial performance which showed that bigger companies were more profitable than smaller ones. Since then, researchers at the Swedish University of Agricultural Sciences (SLU) have investigated the situation in Sweden by analyzing financial statements for approx. 500 harvesting contractors.
The preliminary results show that also in Sweden the smaller companies have the smallest profits. However, there are also concerns about the bigger companies’ situation, especially concerning their level of liquidity.
Stable turnover but varying profitability
During the studied time period, 2012-2016, the harvesting companies’ revenues were rather stable on aggregated level. The average turnover in 2016 was 700 000 € and the median turnover was 530 000 €. The net profit margin increased slightly during the period but can still be regarded to be at low levels, as the median net profit margin was 2 %. When dividing the companies into four groups based on turnover, with approximately the same number of companies in each group, we found that the group with the smallest companies had the lowest net profit margin (1.1 %). The best performing group was the one with a turnover between 500 – 800 000 €, which had a median net profit margin of 3.2 %. For the two remaining groups, with a turnover between 250 – 500 000 € or more than 800 000 €, the median net profit margin was 1.8 %.
Figure 1. Turnover (mean and median values) and net profit margin (median) for harvesting contractors grouped by size of turnover.
A similar pattern was seen when measuring their profitability as return on equity and return on investment (equity and borrowed capital). In 2016, the median return on investment was 3.3 %, ranging from 1.8 % for the worst performing group (the smallest companies) to 4.2 % for the best performing group (turnover 500-800 000 €). These profit margins are in general considered as poor, or even very poor. The median return on equity was the same year 7.1 % on aggregated level, and ranged from 1.1 to 8.8 % when looking at the different turnover groups. Here, the smallest companies stand out from the rest with a considerably lower return on equity than other groups.
Figure 2. Return on investment and equity (median values) for harvesting contractors grouped by size of turnover.
Poor liquidity among larger harvesting contractors
The harvesting companies’ solidity increased slightly during the period and the median solidity in 2016 was 30.8 %. At the same time, their relative indebtedness (measured as total debt/turnover) decreased, and the median debt ratio was 59.2 % in 2016. The companies’ liquidity was measured by relating their liquid assets (cash or other assets which quickly can be converted to cash) to their short-term liabilities. A value of 100 % indicates that the liquid assets are equal to the short-term liabilities and, on aggregated level, the harvesting companies’ liquidity can thus be regarded as acceptable as the median was 102.4 %. However, two of the groups, those with a turnover between 250 – 500 000 € or more than 800 000 €, showed values below 100 %. The median solidity for the largest companies was in 2016 just 89.3 %, while the median liquidity for the other of these two groups was 94.8 %. This implies that their liabilities exceeded their liquid assets. Noticeable, is that the largest companies was the group with poorest liquidity during the whole period.
Figure 3. Liquidity (quick ratio calculated as liquid assets/liabilities), solidity and relative indebtedness (total debt/revenues) for harvesting contractors grouped by size of turnover.
The low levels of profitability in combination with a poor liquidity makes the harvesting contractors vulnerable for unforeseen events. For example, in connection to the draught and forest fires taking place during this summer there were several reports in media about the severe financial pressure that this caused for many harvesting contractors due to stopped forest operations or increased work costs.
The business model’s effect on profitability
The conducted analyses showed that are large variations in profitability between individual companies. The next step in the project will therefore be to investigate if the differences in profitability can be linked to differences in the companies’ business models and characteristics. This will be done through a survey targeted to all harvesting and silvicultural contractors in Northern Sweden (approx. 800 limited companies). The results from this study is expected to be presented in spring 2019 and the aim is that the results will increase our understanding of for which internal and external factors that have the largest impact on the contractors’ profitability. A prerequisite for FOBIA’s ambitions to contribute to the development of innovative and more profitable business models for forestry service contractors.
Text: Thomas Kronhom, SLU (thomas.kronholm@slu.se)