@rivella, (and
@TheTapeTrader ),
Actually, "creating hollow logs" in the context used by me refers to the act of profit smoothing, whereby managements - when business conditions are particularly strong - intentionally bring forward certain operating expenditure and business investment originally planned for future periods, and bring them to account in current the strong periods, in order to provide some "cushioning" or "prudential padding" for future financial results when times might not be so rosy.
This can take numerous forms, such as:
- Aggressive raising of provisions (which end up being written back in subsequent periods),
- Investing in working capital to higher-than-normal levels,
- Bringing forward capacity expansion plans ahead of the required timing, or
- Directly expending costs which could otherwise easily qualify to be capitalised.
Clearly, these have the effect of presenting financial performance in a conservative and under-stated way.
Which, from an investor's standpoint, is desirable because it means that the potential for future earnings disappointment is reduced.
With a bit of relatively basic forensic accounting work, one is able to detect whether or not companies make use of these financial management practices (not to the precise dollar, admittedly, but one is able obtain a reasonable feel of the general extent to which it occurs.)
In SNL's case there is ample evidence of the company's directors and management being perfectly happy to invest in costs well ahead of the curve (i.e., take early cost hits to the P&L to support growth, when those costs could easily have been staged over later periods; or capitalised and amortised over time).
Getting back to the current financial year, the first-half was crazy strong, with NPAT ($~6.1m) coming in a whopping 38% ahead of DH2019. And remember, none of this growth is acquisition related; it is purely organic. And predicated on pretty modest capital investment of less than $5m (not much at all in the context of a $220m business) over the preceding two years.
And, as can be seen from the half-yearly chart, December halves are typically a touch weaker, seasonally.
So one might have expected DH2020's NPAT result to come in a touch below, or possibly in-line with, JH2020's $4.9m figure. Instead, it is 23% higher!
And with the third Sydney site and the new Townsville site currently being opened - along with other sites that are sure to be opened in different locations across the country - I strongly suspect the trajectory of that chart still has several more years to run.
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(20min delay)