Annual Financial Analysis – Consulting Firm
This company is a downsized version of a global, publicly-traded advisory firm that assists companies with restructuring, litigation services, mergers and acquisitions (M&A), antitrust and more. With such a broad range of financial services, you might assume they would have their own finances in order but that’s not the case.
Annual revenues have been dropping year after year. Apparently as a fix, management decides to let prices slide 8% in one year through a combination of lower service pricing and higher costs of revenues. But – not a fix – all this did was tank the net income.
Actual cash flow before financing has been negative to flat for four years. Overall return on book assets is a miserable 5% annually – not enough to offset the risk of being in business. Company holds too much cash in working capital and other assets driving down the return on assets and raising the cost of capital – going the opposite negative direction on both accounts.
With this management of working capital it is now no surprise that the cash conversion cycle is getting longer and, as a result, cash flow is dropping. Remember, the balance sheet structure is management’s choice.
Looking at the company’s financial performance, one would assume that trying to drive up stock value is not a priority for management. The cost of capital is higher than it needs to be and the return is substantially less than the cost to obtain funds both borrowed and through equity. Over the last four years this company has been an active destroyer of wealth. Do you really want to take their advice?