Financial Analysis of Electrocomponents

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Brief: 193028 Title: Financial Analysis of Electrocomponents Electrocomponents is a distributor of electronic, electrical and industrial products to customers mainly in the research and development or maintenance field. The company was established as Allied Electronic in North America in 1928 and as Radiospares in London in 1937[1]. It floated as Electrocomponents plc on the London Stock Exchange in 1967.

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The company has a global presence with operating companies in 26 countries and distributors in many more countries. It trades as RS in most of Europe, Africa and Asia, Radiospares in France and Allied Electronic in North America. For the year ended 31 March 2006, the company had an annual turnover of £828.5 million, an increase of 7.1% over the year ended 31 March 2005 (See Appendix I for details). Though the revenues increased by 7.1%, gross profits increased by 3.5% only indicating a drop in gross margin and tighter markets. Operating profits were lower by 32% due to higher marketing and distribution costs. Profits before tax were lower by 34.8% due to higher financial expenses and reorganisation costs. The profit after tax margin in the year 2006 was 5.3% while the corresponding figure in 2005 was 8.7%. This drop indicates lower profitability partially due to one-off reorganisation costs and partially due to marketing and distribution expenses. The distribution industry is much segmented with a large number of small and medium players. One reason for large number of distributors is the presence of large number of small manufacturers who have entered exclusive distribution rights with different distributors. The company faces following main risks:

  • Economic slowdown. Slowdown in global economy will reduce the demand of its products and hence profits. Fixed costs in terms of warehouse facilities can’t be scaled down easily impacting profitability more.
  • Foreign exchange. As Electrocomponents operates worldwide, strengthening of Pound against Euro, US Dollar and other major currencies will lower its revenues and profits in Pounds.
  • Interest rate. Increase in interest rate will reduce profits

Chart I shows the two-year share price graph of Electrocomponents. After the end of last financial year in March 2006, share price dropped due to lower profits. But since Sep 2006, share price has again moved upwards expecting higher profits in future. Company announced six months results after Sep 2006. The after tax increased by 4.4% over the corresponding period ended Sep 2005. Increase in profits after a drop in the previous year gave confidence about the company and its share price has increased since then. Chart I – Electrocomponents’ share price movement Chart (Source: Yahoo Finance, Electrocomponents’ share price is 290.5 pence[2]. Price to earning ratio is 28 based on the financial year mar 2006. Even if Electrocomponent reaches 2005 earning per share of 15.5,

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