Accumulated losses of the first 3 years have only been neutralized in the last accounting period for which actual results are available. Consequently, the company has never declared a dividend, and does not even forecast one for the first year of forecasted business results.
2. The Gross Margin has improved from 18.75% in 2004 to 21.57% in 2005. The forecast Gross Margin for 2006, at 22.92% is only slightly higher than the latest achievement of 2005. However, fuel costs, which are significant for a business such as that of PDS is forecast to rise to 26.04% of revenue, as against 25.49% in 2005 and 25% in 2004. It appears that PDS is not able to secure protection against a major inflation driver in to its business contracts. However, PDS has been able to reduce variable labor expenses from 56.25% of revenue to just 52.94% in 2005, and expects the trend to continue with a forecast of just 51.04% in 2006. These are significant productivity gains in a challenging human resources environment. Similarly, staff salaries are forecast to remain constant in 2006 compared to 2005, though net profits will more than double.
3. Leased capacity utilization has improved very significantly during the past five years, considering the remarkable rise in revenues. However, depreciation at less than 5% of the gross block in vehicles seems to totally inadequate. The depreciation reserve is entirely inadequate, and distorts the profitability picture, including the basis for taxation.
4. Though the debenture loan and bank overdraft show plenty of scope for gearing compared to the Gross Block, the company does not have any immovable fixed assets. Apart from the earlier comments on the distorted depreciation reserve, the profit and loss statements make no separate mention of insurance cover, which must be crucial for a business so dependant on vehicles and road conditions.
5. Debtors at 43 days of revenue in 2005 seem excessive for the likely delivery cycle in a road transport business within the U.K. The management forecasts this to rise further to 49 days of revenue in 2006!
It is possible to conclude that while the management has shown immense effectiveness in growing the business, and in improving capacity utilization, and expenses on human resources, the financial statements are not appropriately structured as yet for injection of fresh long term debt, or for private equity from any outside source.
The free cash flow analysis is the second important factor of financial analysis (1994, 145, Damodaran). The 2005 picture of accumulated profit after tax plus depreciation, less change in net working capital, at just over 5 million pounds is impressive. The projection of free cash flow of 8.6 million pounds also offers many avenues for deployment.
The company's founders have diluted control in bids to finance the business during the past. The bank overdraft and the debenture loan are small compared to additional funds brought in by the promoters. None of the three founders has a controlling stake if stocks are traded openly. Convertible preferred securities (2006, 86, Claessens & Laeven) would have been ideal for PDS, but this mechanism has not been used. Control and ownership issues of the company are