Elec & Eltek International Company Ltd Sees Sharp Drop In Profit: Is Everything Okay?

Dual-listed Elec & Eltek International Company Ltd (SGX: E16) announced its third quarter earnings yesterday night. The company is an established printed circuit board (PCB) manufacturer listed in both Hong Kong and Singapore.

For the quarter ended 30 September 2014,  the company had been seeing weaker customer demand from its servers and other computer related products, which offset growth in other areas of its business. This ultimately led to a 1.1% year-on-year decrease in total quarterly revenue to US$134 million.

Some of Elec & Eltek’s high-growth businesses include its High Density Interconnect (HDI) PCB product. In the third quarter of 2013, sales of HDI PCBs made up 28% of the company’s total PCB sales; in the third quarter of 2014, the ratio had jumped to 37%.

Some worries

But despite growth in parts of its business, there are worrying signs about the company.

The first deals with its profit margins. During the quarter, Elec & Eltek’s gross margin had been reduced from 10.0% a year ago to 8.6%. The slight drop in gross margin has a dramatic effect on the company’s net profit due to the operating leverage inherent in its business.

As a result of said leverage-effect, Elec & Eltek’s quarterly operating profit before tax of US$4.255 million a year ago had become a pre-tax operating loss of US$474,000. Similarly, the company’s profit of US$4.01 million had turned into a loss of US$940,000. For the first nine months of 2014, Elec & Eltek’s profit got crushed by some 64.2% year-on-year to US$4.35 million.

The other worrying sign is that the company’s account receivables has increased by 27% since 31 December 2013 even though its revenue has hardly increased. This can be a sign that the company is relaxing its payment-terms for its customers, which is not a good thing.

A bright spark – sort of

Elec & Eltek’s balance sheet is still considered strong – the company’s net debt to equity ratio is only 19% as of 30 September 2014. But, there might be problems down the line if the company can’t fix the issue with its accounts receivable or if revenue just doesn’t grow. In fact, the company might even have to reduce its dividend payouts significantly (in the event that its business continues to worsen) if it wants to maintain the health of its balance sheet at current levels.

Foolish Summary

Elec & Eltek is still optimistic about its long-term prospects. It is currently upgrading its production facilities to boost its production capacity in the future. The company seems to be confident of growing its market share in the communications and automotive PCB-market. Let’s see if these are enough to dispel the rain clouds which are lingering above the firm at the moment.

To learn more about investing and to keep up to date about the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead. Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.