Cutix, an engineering technology firm, is maintaining stable growth in earnings in its current financial year. The company, which was groomed in the emerging market segment before it was admitted into the main market, has shown a great deal of operating tenacity that is the secret of its survival and growth.
There is a strong growth in revenue for the company in the current financial year ending April 2014. It is also keeping expenses at a level that permits profit to grow at par with revenue. Consistency on the growth path is the key of the company’s good performance through the years.
At the end of its third quarter operations in January 2014, the company improved turnover by 19.4% to N1.64 billion over the corresponding period last year. Based on the third quarter growth rate, it is expected to close the year with a turnover of N2.5 billion. That will mean an expansion of 29.6% in turnover for the company at full year.
Profit is growing virtually at par with revenue and this is an indication of cost management success. After tax profit amounted to N121 million at the end of the third quarter, which is a rise of 19.8% over the corresponding figure in the preceding year.
Based on the current growth rate, net profit is projected at N175 million for Cutix in 2014. That will be an increase of 16% over the profit figure it reported in 2013.
The company is able to keep profit growing at equal pace with revenue because two major cost lines moderated at the end of the third quarter. These are administrative expenses and interest cost. Administrative expenses grew well below turnover at 12% compared with 19.4% in the third quarter. The moderation is expected to be maintained to full year.
Interest expenses also moderated at an increase of 13.5% relative to revenue growth. It is however expected to accelerate in the final quarter in reflection of rising short-term debts. This is likely to cause a slowdown in profit growth in the final quarter.
Revenue saving on the two expense lines neutralised the incursions into revenue from cost of sales and distribution expenses. Cost of sales grew slightly ahead of turnover at 20%, which depressed gross profit margin. Gross profit margin therefore declined slightly at 28.7% at the end of the third quarter.
Distribution expenses rose well ahead of revenue at 34.1% and therefore claimed an increased proportion of turnover during the review period. There was also a decline of 14.2% in other income to N6.0 million but the cost saving compensated for both the cost increases and the decline in other income.
The ability to convert revenue into profit was therefore preserved, as net profit margin was unchanged at 7.2% over the review period. Compared with the 2013 full year record however, net profit margin has declined from 7.8% the company achieved in the year.
Major changes in the company’s balance sheet during the period include an expansion of 57.2% in short-term borrowings at N404 million. The increased borrowings happened due to cash flow constraints facing the company.
Inventories dropped by 19.2% to N307 million, trade debtors and other receivables rose by 66.3% to N444 million. Trade and other payables grew by 88% to N156 million while cash and bank balances advanced by about 126% to N61 million..
The changes in the balance sheet led to a major increase in net cash flow generated from operating activities from N70 million in the comparable period in 2013 to N328 million at the end of the third quarter.
There were equally major increases in net cash utilised in investing and financing activities, which worsened the cash flow pressure facing the company. New borrowings had to be contracted to meet the cash flow needs of the company.
The company earned 14 kobo per share at the end of third quarter, up from 11 kobo in the corresponding period last year. Earnings per share is expected to come to 20 kobo for Cutix at full year.
The company has a track record of regular dividend payment. Its records of stable growth in earnings and regular dividend payment have not been matched by even some giant companies with larger resources, large market share and credit availability at prime cost.