Annual Financial Analysis – Engineering Firm
This downsized version of a publicly-traded engineering firm provides consulting, project management, and other services to both public and private clients. Precision is the name of the game for engineering services and also true in financial operations. So how is this firm doing with financial precision?
Revenues have slowed but are still growing at a healthy clip, and more importantly, the real revenue growth is growing fairly well in line with the revenue sustainability around the balance sheet resources. Yet, management of the pricing policy of services has allowed the gross profit margin to decline 6% over the last five years.
Declining margins in the gross profits have resulted in declining cash flows for almost every year. Just like knocking down dominoes this is not the only area of financial management in decline. Working capital cash has collapsed due to net trade cycle inefficiencies in working capital.
If a building was designed by this engineering firm on their financial principals, the elevators would only go down to the basement because the return on capital cannot ever exceed the cost of capital, driving the economic value right into the basement year after year. With all this precision why can’t they get the directions right?