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We take a look at Statistics South Africa's latest Quarterly Financial Statistics (QFS) results and dig into the financial ratios of smaller firms per industry. So should someone want to invest or start a small business in South Africa, in which industry should they look to start up in? And if someone is already in a industry, what financial ratios in that specific industry should they keep in mind and look out for while running their business.
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Are small firms more profitable than larger firms?
First question that needs answering is whether smaller firms are more profitable than their larger counterparts. If they are not, the question is whether it is worth the risk in investing in a small firm or starting a firm when you can just buy shares in larger listed companies? Well some thrive on the risk, and for others owning or starting a small company means they decide on the direction and path the company takes. Below the gross profit margins earned by various enterprise sizes (for all industries).
From the graph above, based on the QFS results for period ending (December 2016) medium sized companies have the highest gross profit (profits before taxes) of all the enterprise sizes. Small companies achieved the lowest gross profit margins for the period under consideration. Concerning for new business start ups should be the fact that the margins achieved by small firms are lower than more established larger firms. Does it offer enough compensation for additional risk taken on by those looking to invest in or start small enterprises?
The polar chart below shows the gross profit margin for small enterprises across various industry types. And from this it is clear industries one doesn't currently want to be active in as a small enterprise is Mining and Quarrying and Construction.
While Mining and quarrying shows a gross profit margin in the polar chart of 0.0% these enterprises actually had a loss making margin of -18% (wasn't possible to show this on Polar chart hence their margin was made 0% on the chart). Construction companies made a gross profit of just over 1%, which is an extremely low return on investment, considering that taxes still has to be paid on the money made. Net profit margins in construction for small enterprises seems non existent.
Industries that showed decent gross margins include Social and Personal Services, Manufacturing and Finance Real Estate and Business Services industries.
Industries that showed decent gross margins include Social and Personal Services, Manufacturing and Finance Real Estate and Business Services industries.
So what is eating into the margins of the small enterprises across various industries? Is it staff costs? Below we take a look at the percentage staff costs makes up of total expenses for small enterprises per industry.
As the polar chart shows the majority of industries have employee costs higher than the average for all smaller industries. The reason that the average percentage spent on employee costs by small enterprises is so low (when most industries shows percentage values well above 20% ) is due to the fact that a large number of people are employed in the trade industry by small firms, and their employee costs is just 8.8% of total expenditure.
The 17.3% of total expenditure spent on employee costs by small enterprises is still far higher than that of medium and large enterprises who spent 15.7% and 12.7% on employee costs respectively.
The polar chart below will take a look at the value of closing inventories as percentage of total income. Industries with high values in this category is either struggling to move goods and inventories are piling up, or its an indication of an industry with a high product turnover rate (I.e loads of goods sold regularly, thus high levels of inventories).
The 17.3% of total expenditure spent on employee costs by small enterprises is still far higher than that of medium and large enterprises who spent 15.7% and 12.7% on employee costs respectively.
The polar chart below will take a look at the value of closing inventories as percentage of total income. Industries with high values in this category is either struggling to move goods and inventories are piling up, or its an indication of an industry with a high product turnover rate (I.e loads of goods sold regularly, thus high levels of inventories).
From the polar chart above its clear that the Mining and quarrying, Manufacturing and Trade industries all have values of inventories as percentage of total income well above the average level experienced across all small enterprises. For trade and manufacturing one would assume this is as a result of high product turnover and therefore large levels of inventories are maintained to ensure continued business operations even if there are short term supply interruptions.
Mining and quarrying on the other hand, large levels of inventories could signify that not everything that is mined is sold off immediately (due to lack luster demand) or due to lower prices (in which case firms might hold on to stock to sell at a later date at a better price). The other industries do not really have inventory levels to speak of or worry about.
So what about capital expenditure items such as machinery and equipment, plants and manufacturing or storage space? Does this make up a significant part of small enterprises total expenditure? The polar chart below takes a look.
Mining and quarrying on the other hand, large levels of inventories could signify that not everything that is mined is sold off immediately (due to lack luster demand) or due to lower prices (in which case firms might hold on to stock to sell at a later date at a better price). The other industries do not really have inventory levels to speak of or worry about.
So what about capital expenditure items such as machinery and equipment, plants and manufacturing or storage space? Does this make up a significant part of small enterprises total expenditure? The polar chart below takes a look.
As the values show, the percentage of expenditure by small enterprises going towards CAPEX is very low. Clear indication that there is not a lot of expansion or growth taking place within small enterprises. As CAPEX is usually a strong indicator of expected future growth or expansion by firms.
Another question that pops up regularly is how much do small enterprises spend on repaying debt? If it is a lot it shows that small firms use loans to access money and to start businesses. If this percentage is low then one can assume a large number of equity was placed in the business and therefore interest repayments would not be very high. The polar chart below shows the percentage of total expenditure that is paid towards interest by small enterprises, per industry type.
Another question that pops up regularly is how much do small enterprises spend on repaying debt? If it is a lot it shows that small firms use loans to access money and to start businesses. If this percentage is low then one can assume a large number of equity was placed in the business and therefore interest repayments would not be very high. The polar chart below shows the percentage of total expenditure that is paid towards interest by small enterprises, per industry type.
As the polar chart shows, only two industries had significant interest repayments as percentage of total expenditure. And they are the Water, electricity and gas industry and the Real Estate and Business Services industries. The rest of the the industries does not have very high interest repayments as percentage of the total expenditure.