ETCO Engineering Limited is a family-owned enterprise, which has headquarters in the West Midlands, UK. The company was founded in 1973 by Harry Clarke who managed the firm until 2014 when his daughter Lauren and son Charles took over. Following the transition, the firm’s performance has been on a downward trend. This report analyses the organization’s financial statements to determine the possible causes of below-par results posted over the last three accounting years. In particular, the article reviews the profit margins and operational efficiency ratios for the period between 2014 and 2016. In addition to the univariate analysis, the report conducts a trend evaluation to compare the company’s performance with the industry averages. According to Bragg (2018), trend analysis is an essential procedure for identifying what a specific organization or a particular industry achieved over a certain duration. Further, the paper will examine the possible reasons for the results posted and explain how every metric affects the business. The reports end by providing recommendations for the organization to help rectify the current situation and to ensure sustainability and profitability in the foreseeable future.
Analysis of Company Results
The company’s revenues reduced significantly during the period under review. From a £2.3 million in 2014, the firm’s sales declined to £1.85 million in 2015 and £1.6 million for the year 2016. The revenues figures represents about 30% decrease in just three years, which is a prominent indicator of a struggling enterprise. There is a decline in the operating profit margin (OPM) and the gross profit margin (GPM), which have since fallen below the industry averages. Peavler (2018) noted that the OPM, which is also called the net profit margin, is an explicit indicator of an organization’s profitability with regards to the costs of doing business. Whereas, the GPM shows the gains relative to the money spent in purchasing the inventories. The two measures are calculated as illustrated below.
ETCO Engineering posted 37%, 23%, and 19% OPM figures for the financial years 2014, 2015, and 2016 respectively. On the other hand, the GPM results were 60%, 57%, and 56% for 2014, 2015, and 2016 respectively. The company’s GPM is consistently above the industry average of 55%, 56%, and 55% over the same period. Both ETCO and industry GPM results depict that there is stability in the prices and the cost of sales in the market. However, since Harry Clarke left the company in 2014, the company’s OPM fell below the sector averages. The firm under the new management only posted acceptable net profit levels in 2014, a results which bore some contribution of the former executive. While the company maintained the same level of dividend payment (£0.25 million) over the period, the amount of retained earnings have significantly fluctuated from £0.61 million in 2014 to £0.05 million in the latest financial results. The trend depicts a sharp decline in the size of reinvested profits, which could be detrimental to the firm’s growth.
In regards to the efficiency of company operations, ETCO Engineering experienced a substantial reduction on the return on capital employed (ROCE) figures. The ROCE indicates the gains with respect to the resources used to generate the outcomes (Maverick 2018). Therefore, it indicates the contribution of each unit of capital on the final net profit value. A higher figure shows efficient utilization of resources while a lower statistic illustrates that an organization is not effectively generating returns from the shareholders investments. ROCE is calculated as shown below.
Despite the current management increasing the amount of capital outlay by £0.5 million, the profits kept declining. ETCO’s ROCE dropped from 8.2% in 2014, to 3.8% 2015, and later 2.7% for the 2016 financial period. The dip indicates a reduction in efficiency of resource utilization by the current management of the firm. In the contrast, the industry’s average ROCE figures rose from 9% in 2014 to 9.5% in 2016. The results show that ETCO is among the least efficient companies in the sector at the moment. The inadequate exploitation of the available resources adversely affects the company’s ability to compete in the market (Stucke 2013, p.162). Further, the firm recorded reduced labour and operational efficiency statistics. The frequency of staff absenteeism rose from 2.3% in 2014 to 4.9% in 2016. Over the same duration the number of production staff leaving during the year increased from 3 to 12, while the mean production per individual labourer reduced from 50 to 45 units. The total figures revealed a decline in annual output from 780,000 to 666,000 units in 2016, rise in defective goods from 1.1% in 2014 to 2.3% in 2016, and a drop in yearly wages from £858,000 to £772,000 during the three years.
Cause and Effect of Company Results
The results posted by ETCO Engineering between the period between 2014 and 2016 had some bearing on the changes instituted by the new management team. For instance, the reduction in revenues could be as a result of ineffective marketing activities and a possible indicator that the company is losing customers to the rival businesses. The low incomes negatively affect the OPM especially because the operating expenses of the firm remained at the same level. Secondly, the reduced profitability, which is indicated by the falling OPM and GPM statistics, represents a prominent concern for the stockholders. Even though ETCO’s management paid a steady dividend over the period, the decreasing amount of retained earnings depicts that there is no significant growth of shareholder funds. If the current trend continues, the organization might begin incurring losses and might be unable to meet the financial obligations in future.
The organization is not efficiently utilizing the physical and human resources as shown by the comparatively lower ROCE (Anon 2018). While profits reduced significantly, the company maintained the same level of operating capital. With much lower ROCE than other industry players, ETCO might struggle to attract new investors (Stein 2012). The diminishing ROCE, therefore, limits the company’s capability to raise additional finance they might need for expansion activities. Moreover, the new management has failed to motivate staff adequately and are unable to exploit the full potential of the team. The decreasing wage cost could be the reason behind most of the unwanted statistics in the human resource department. When monetary rewards reduce without corresponding improvement of working conditions, employees will certainly feel less-motivated (Harunavamwe and Kanengoni 2013, p.3929; Milne 2007, p.28). The effect is rising cases of workers absconding duty, which is depicted with the rise in absenteeism and the decreasing number of production workers. The low motivation causes lower commitment among remaining staff, which possibly explains the increase in the percentage of defective products. All these factors result in reduced productivity of the employees as shown by the falling annual output.
Solutions to the Company Problems
There is a need for the management of ETCO Engineering to implement a raft of measures to revive the company’s fortunes. The organization should consider possible solutions for improving the success of marketing activities and motivating their staff. A careful application of the following strategies can assist ETCO to enhance employee performance, profitability, and efficiency of the firm.
Firstly, ETCO should begin by analysing how the competitors promote their products to get valuable insights on what could be the most appropriate approach to increase their market share. Kappel (2017) proposes social media marketing as one of the most effective strategies in the present-day marketing. With over 2.6 billion people using Facebook, Twitter, and other platforms (Anon 2018), there is every indication that it is a sure way of reaching customers all over the world. ETCO should frequently update their social media pages and invite feedback from their customers to improve their services. Additionally, the company can initiate outdoor promotional activities such as road shows and direct marketing to increase their sales (Kim, Freling and Eastman 2013, p.90).
The company should enhance employee motivation practices to increase workforce productivity. According to Ganta (2014, p.121), a proper reward system for workers is vital to the performance of any firm. Motivation increases job satisfaction and commitment levels among employees (Vnoučková and Klupáková 2013, p.79). The strategy can help ETCO to reduce cases of staff absenteeism and to minimize the percentage of defective goods, which results from substandard performance of less committed workers. In particular, the company should ensure that they pay competitive wages to increase job satisfaction as suggested by previous studies (Chatzopoulou, Vlachvei and Monovasilis 2015, p.136; Achim, Dragolea and Balan 2013, p.685). Therefore, the management must adopt policies that will guarantee a highly inspired team to achieve significant success.
In conclusion, while ETCO Engineering Limited is still a healthy and profitable company, the performance trend is worrying. The organisation suffers the impacts of a less motivated workforce and ineffective marketing. The decreasing productivity, inefficient resource utilization, and the drastic drop in profitability are enough evidence that the management needs to readjust their system of operation. The team should consider a proactive measure to increase their marketing prowess and review their employee motivation policies to inspire the workforce. A change in strategy is essential to reviving the financial fortunes of the firm.
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