Polyram published its second quarter report. Its gross margin is unusual for the industry, and what happens after it is no less unusual.
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The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 85.8 | |
| Gross profit | 67.3 | 78.5% |
| Operating profit | 18.5 | 21.5% |
| Pre-tax profit | 6.4 | 7.4% |
| Net profit | 4.8 | 5.6% |
| Attributable to shareholders | 4.4 | |
| Basic earnings per share | NIS 0.07 | |
| Total assets | 419.0 | |
| Equity | 194.3 |
A Ladder That Loses Height at Every Rung
This is the clean way to read these accounts - follow what is left at each stage:
| Share of revenue | What came off | |
|---|---|---|
| Gross profit | 78.5% | |
| Operating profit | 21.5% | NIS 48.9 million |
| Pre-tax profit | 7.4% | NIS 12.1 million |
| Net profit | 5.6% | NIS 1.6 million |
From 78.5% to 5.6%.
And the first stage is the large one, but the second is the interesting one.
From gross to operating, NIS 48.9 million came off - 57 percentage points. These are selling, marketing, research and development and administrative expenses. At a company selling compounds tailored to the customer, that part includes substantial technical work, not only selling.
And from operating to pre-tax, a further NIS 12.1 million came off.
And that is the number worth stopping on: NIS 12.1 million is 65% of operating profit.
That is, two-thirds of what the activity produced disappeared below the operating line. At an industrial business of this size such an item is usually financing - on a balance sheet of NIS 419.0 million against equity of NIS 194.3 million, meaning about NIS 225 million of liabilities.
On the Gross Margin
78.5% is a very high figure for a raw-materials producer, and it is worth explaining why it does not contradict the nature of the business.
Polyram makes engineered plastic compounds - materials tailored to a customer's specification rather than generic commodity. In a tailored product, price derives from the value to the customer more than from the cost of the raw material.
And still one caution is warranted: gross margin depends on what is included in cost of revenue. A company classifying part of its indirect production costs as operating expenses will show a higher gross margin and a lower operating margin - and that is exactly the pattern visible here.
So at a company like this, the operating margin - 21.5% - is the safer basis for comparison against peers.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
What I read in these accounts is not the gross margin but the distance between 21.5% and 5.6%.
An operating margin of 21.5% at an industrial company is a good level. What happens after it is the story: two-thirds of it disappears before the tax line.
And that moves the question from operations to the balance sheet. A company with NIS 419 million of assets and NIS 194 million of equity carries a debt structure that charges a fixed price every quarter - and when operating profit is NIS 18.5 million, a price of NIS 12.1 million is a very large share of it.
And what I would check first in the coming quarters is not revenue and not the margin, but whether the ratio of operating profit to financing cost improves. Today it is about 1.5 to one. At an industrial business that is a narrow ratio.
The practical distinction: a company with a good operating margin and a heavy financing line does not have an operating problem - it has a capital structure problem. Those are two entirely different things, and they are solved differently.
(An important note: this is my personal opinion only, and nothing here is a recommendation to take any action.)
