'Plus worth pointing out the deal required a gross profit margin of 50% so your numbers seem a little off. If they have a gross profit of 50% and your accounting only 400K net profit pre tax it seems to be a poor business right away. I guess without looking at the books we would not know but I imagine they went over them pretty thorough at XPE. I mean to me, gross profit, for a business is after costs. Why are you saying the profit would then also have the costs taken out after? Isn't that completely incorrect? Why would you claim gross profit as X-overheads. Overheads are part of the cost of running business, you calculate gross profit buy subtracting overheads and costs from revenue?
It looks like you are halving the actual profit of the company in your calls?'
Morning Hudson,
Gross profit is net sales minus the cost of goods sold. (Some people use the term gross margin and gross profit interchangeably. Others use gross margin to mean the gross profit ratio or the gross profit as a percentage of net sales.)
Gross profit is presented on a multiple-step income statement prior to deducting sellling, general and administrative expenses and prior to non-operating revenues, non-operating expenses, gains and losses.
Based on what we know I've assumed that JCT's net sales are $1.8m and its cost of goods sold is $800k. Using those figures their gross profit would be $1m ($1.8m minus $800k) and their gross profit ratio or gross profit percentage would be 55% ($1m divided by $1.8m).
Net profit before tax is then calculated by deducting selling, general and administrative expenses and the non-operating items from the gross profit figure. Thus arriving at $400k NPBT might be being a bit generous after all post gross profit expenses are taken into account.
JCT's performance milestones (under the proposed SPA) specifically talks about 'x' revenue with minimum 50% gross profit margin. As you can see from the above workings, this does not mean net profit. In theory JCT's net profit before tax could be nil if they are spending excessively in the areas of selling, general and admin to maintain or bolster their revenue.
IMO JCT's and Xped management's performance shares should be based on NPAT and not revenue or gross profit margin %. The current performance milestones are a rort IMO as both parties could theoretically pocket millions of performance shares without adding any additional value whatsoever to the bottom line.
Compare this to SRT's RTO with Intiger Asset Management for example. Consideration for Intiger is based exclusively on NPAT performance milestones that relate up to $40m NPAT in a 3 year period to June 2019. Now that's what I call 'performance' and a low risk/excellent deal for all shareholders. Their is no performance based dilution to the scrip until real profit (i.e. profit either used to create dividends or self-funded growth) is generated.
Hope this helps to explain the concerns that I have raised here and am about to raise with our management.
Cheers
Elpha
XPE Price at posting:
4.2¢ Sentiment: Buy Disclosure: Held
(20min delay)