The way I usually judge the quality of financial results is how...

The way I usually judge the quality of financial results is how easy it is to reconcile them with my financial models.  In the case of this SDI result - P&L, Balance Sheet, Cash Flow Statement - I don't think it as much as 6 or 7 minutes.

Every now and then, say one in every five results, there is some oddity in SDI's accounts that don't quite meet muster, quality-wise, but this was one of the cleanest results from the company.

While some may lament what looks like sluggish top-line growth given the weak A$ in the second half (Revenue growth was just 2.8% in the second-half, lower even than the modest 3.5% growth in the first half), it needs to remember that in FY2024 the company was cycling the very strong pcp when one-off abnormal amalgam sales occurred due to the exiting of the market by a competitor.

The other side of that sales dynamic coin is that the Gross Margin has recovered strongly, to normalised level in the low-60%s:


If there is a brickbat to be used against the performance of the business then it is not about just the performance specifically over the past 6 months but over a longer period of time, and in relation to Cost of Doing Business-to-Sales, which is not doing what it should be doing, namely falling, according to the theory that as businesses scale up, the expanding top line "franctionalises" fixed overheads.



While Revenue is today fully double what it was, say a decade ago, CoDB to Sales is today actually higher it was back then, meaning the CoDB has more than doubled over that time period.  From a shareholder value creation standpoint, a sub-optimal outcome [*]

To contrast this with what could be, have a look at a business called Supply Networks (involved in the seemingly dull business of distributing truck and bus spares), where CoDB-to-Sales has fallen as theory suggests it should:



When that sort of thing happens, the resulting EBIT margin looks as follows:


Needless to say, the shareholder value that arises from that profile is very significant.


That's the sort of outcome SDI should be emulating.


[*] I did notice that CoDB-to-Sales for SDI in the second half of FY2024 was 40.8%, which is the lowest June half number for several years (first half number was a lot higher, at 45.7%, but it must be remembered that seasonally, June half  revenues are strongest).  However, one half-year data point doesn't constitute a trend, so its too early to get animated about it. But for every SDI result that comes out, its the first metric I check.  Trouble is, I don't expect any favourable movements in this regard as Project Montrose gets rolled out, because there is certain to be some not insignificant duplication of overheads related to Montrose over the next 3 years.


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