The Holy Grail

King Arthur: Go and tell your master that we have been charged by God with a sacred quest. If he will give us food and shelter for the night, he can join us in our quest for the Holy Grail.

French Soldier: Well, I’ll ask him, but I don’t think he will be very keen. Uh, he’s already got one, you see.

King Arthur: What?

Sir Galahad: He said they’ve already got one!

King Arthur: Are you sure he’s got one?

French Soldier: Oh yes, it’s very nice!

– Monty Python

Monty Python spends 91 hilarious minutes telling the story of King Arthur and his search for the holy grail.  The holy grail is something that you want very much but that is very hard to get or achieve.¹  Profitability is the holy grail that Clarius Group are searching for but in the last few years it has been very elusive.  Clarius Group haven’t had to deal with the Black Knight, Knights who say Ni or the Castle of Aaaaargh but their annual reports do tell a story of an inability to rise to challenges it has faced in the last few years.

Profitability ratios help evaluate the financial health of a business² and after looking at Clarius Group’s net profit margin and return on assets, I would have to say they are not healthy at all and it might be time to call the doctor.

Doctor Jones, Jones
Calling Doctor Jones, Doctor Jones, Doctor Jones, get up now

– Doctor Jones, Aqua

Net profit margin (NPM) is supposed to show how well a firm can convert its revenue into profits.  It answers the question of how much profit can be extracted for every dollar earned by a firm.  Clarius Group’s NPM shows that for the last four years,they lost money on each sale:

2015 2014 2013 2012
-6.3% -0.9% -18.7% -3.5%

So what affects NPM?

  • Net profit after tax (at a basic level revenue less expenses)
  • Sales (after allowing for any returns and/or refunds)

Let us have a look at the trends for sales, expenses, NPAT and NPM (where the benchmark is the 2012 figures).

trends

 

2013 was a year full of economic and political instability which led to market uncertainty and a decrease in business confidence.  I address this in greater detail in The Perfect Storm blog post.  This triggered impairment of goodwill which was a rather large once off expense.  However, a reduction in other operating costs plus a restructuring (leading to salary savings) meant expenses decreased from 2012 levels.

Pricing was affected as there was a reduced demand for recruitment services and pressure was placed on margins from existing major accounts as they also re-negotiated terms.  Clarius Group also walked away from a major client they provided managed services to and there was also a reduction in contractor margins which are Clarius Group’s main revenue source.  Unsurprisingly, all these factors contributed to a drop in sales compared to 2012.

Unfortunately, the drop in sales was much larger than the reduction they had managed in expenses so Clarius Group posted the worst NPM out of all the years in 2013 and lost almost 19 cents for each $1 of sales.

NPM actually improved dramatically in 2014 (although still negative) but this isn’t because sales went up.  Sales actually dropped another 16.8% from 2013.  Clarius Group focused on reducing cost base and operational efficiency, this had a major affect in reducing on hired labour costs.

In 2015, Clarius Group got a new CEO and went through a period of transformation.  I cover that a bit more closely in the Road to Perdition.  Clarius Group held on grimly to their NPM by the tips of their fingers and ultimately steadied things, showing only a small decrease from NPM in 2014.  Sales look to have stabilised and reached a new level of “normal” but still dropped a minor amount.  Expenses blew out and caused another negative NPAT because of more one-off costs from restructuring and software impairment losses.  The bad and doubtful debts allowance was also considerably higher in 2015.  These factors provided the second worst NPM result and in 2015 Clarius Group lost 6 cents for each $1 of sales it made.

Examining the NPM ratio has not raised any new questions about Clarius Group at all.  I have one question I have constantly asked and that is, how long can Clarius maintain a business that has not seen a profit in four years?  King Arthur doesn’t find the holy grail in the movie, lets hope that does not happen to the Clarius Group.

This post became rather long so I will cover ROA in a separate post….

  1. 2015, Merriam-Webster, http://www.merriam-webster.com/dictionary/Holy%20Grail
  2. 2009, Hofstrand, D, https://www.extension.iastate.edu/agdm/wholefarm/html/c3-24.html

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