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Report Card on Company Profitability in 2015

When looking at the profitability of the nation’s largest companies, as IBISWorld does each year, the picture can be worrying. In its latest analysis of the 1,467 large companies that account for over 38% of the nation’s $4.8 trillion revenue in 2015, IBISWorld found that 22% ran at a loss over a five-year period. Revenue from these accounted for one-seventh of the $1.8 trillion collective revenue of the 1,467 companies. Fortunately, many will return to profitability, but these will be replaced by others that will run at a loss. It seems that around one-fifth of our large companies run at losses over any five-year period. These losses dragged the average return on shareholder funds after tax (ROSF) performance down to 3.8% for the nation’s near 1,500 companies in this latest survey. This is not much better than the long bond rate average of 3.5% over the same five-year period.

1-Profitability-of-Australia's-Largest-Enterprises

The better news from the latest analysis was that the 1,1 companies that ran profitably had an average ROSF of 15.0%, which is good by international standards.

The spectacularly good news came by separating out the 100 best companies over the five-year period to 2015. In selecting these high-flyers, any company with overly thin capitalization (equity less than 5% of total assets) was discarded, removing six companies that were showing stratospheric profitability. The remaining Best 100 had an average ROSF of 57%, one of the highest ever recorded, despite slow economic growth, an exchange rate all over the place, and a lack of competent government leadership by Labor and Coalition parties. They accounted for just 4.0% of the revenue of the 1,467 companies.

More about these shortly.

Before looking at our best, it is useful to see how profitable the latest 1,467 companies were when grouped into industry divisions, as the next exhibit does.

2-Australian-Profitability-by-Industry-Divisions

Here we see devastation in the Mining industry with the collapse of mineral prices. In a sense, our Utilities division (electricity, gas and water) has no such excuse, or at least not the same excuse.

The contrast with the nation’s Best 100 companies, which are also clustered by industries, is stark.

3-Australian-Profitability-Best-100-companies

On the surface, it is easy to say that the economy has good and bad industries over longish periods, such as the latest five years. This is too simplistic; good and bad management causes such performance, not the industry’s inherent nature.

Australia’s highest performing businesses largely follow similar success guidelines to average over 35% ROSF in any five-year period. And they only drop out of this elite list when they are taken over, abandon the success guidelines with new CEOs or board members, or have been found to have dodgy accounting (rare, but happens). In the latest five-year period, the weighted average ROSF was a staggering 57%.

Of the nation’s 19 industry divisions, 13 scored a guernsey. The six that didn’t in this latest analyses were Education and Training, Arts and Recreation, Personal and Other Services, Hospitality, Utilities, and Agriculture.

However, if the list had been extended to the best performing 200 companies, all 19 divisions would have been represented and averaged a ROSF of over 24%, being world best practice. Now that is impressive. Again, it reminds us that there is no such thing as a bad industry, only bad management. It is very encouraging to have all of our industry divisions represented with world best practice players from our best 200 companies. We need more of our boards of directors understanding what leads to such success, as obviously most of them don’t: settling for a good result rather than a great result.

The most common characteristic of these successful companies is that they were focused on just one of the 509 classes of industry in the economy: 95 were focused, the other five were theme conglomerates (two or more classes, but in the same industry division) and none were in the classic conglomerate category (diversified across two or more of the nation’s 19 industry divisions).

This characteristic and others are listed below.

4-The-100-Best-Companies

Interestingly, while the particular industry does not matter when it comes to being very profitable, as mentioned earlier, neither does ownership. Of the Best 100 in the five years to 2015, 53 were foreign-owned (averaging 60% ROSF) and 47 were Australian-owned (averaging 53%); both outstanding. When it came to ownership, 68 were private companies (averaging 57% ROSF), 29 were listed (55%), and three were government-owned (55%).

Most of the Best 100 could give a tick to nearly all of the key success guidelines listed below.

5-What-the-Best-Enterprises-are-Doing

The best 100 companies had combined revenues of $72.0 billion, ranging from over $4 billion (such as Apple, CSL and TCorp), to well below $100 million (such as Bakers Delight, Harry The Hirer and Cigweld).

So which companies were the 10 with the highest ROSF over the latest five years? They were Philip Morris (189%), Fedex Australia (120%), British American Tobacco (107%), Wood Group Australia (104%), AIRR (101%), Jan De Nul (101%), GSM Holdings (99%), Urbis (97%), Hays Specialist Recruitment (95%) and Winslow Constructors (91%). An eclectic mix.

Just getting into the Best 100 were Ferrero Australia and Ainsworth Game Technology (both on 35%) and Omya Australia and Smith & Nephew (both on 36%).

There is little excuse for bad performance, even in the complex and sometimes scary world we now operate in. Yes, acts of God happen from time to time, but not every year. And it doesn’t matter what type of ownership we have, whether the business is local- or foreign-owned, or what industry it is in.

Good and great performances can be found everywhere.

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