The importance of the gross margin in assessing a company’s financial status and competitive moat cannot be understated. My colleague Royston Yang had previously written an article on the gross profit margin and its usefulness. If a company reports a negative gross profit margin, it implies that the selling price of its goods or services is lower than the cost it took to manufacture its products or provide its services. Such a situation is fairly uncommon as most companies are able to price their products above their costs. In this article, I would like to explore two companies which…
The importance of the gross margin in assessing a company’s financial status and competitive moat cannot be understated. My colleague Royston Yang had previously written an article on the gross profit margin and its usefulness.
If a company reports a negative gross profit margin, it implies that the selling price of its goods or services is lower than the cost it took to manufacture its products or provide its services. Such a situation is fairly uncommon as most companies are able to price their products above their costs.
In this article, I would like to explore two companies which had recently reported negative gross profit (or a gross loss), resulting in a negative gross profit margin. I will end off with what we can learn from these examples and how we should think about companies with gross losses.
Yongnam Holdings Limited (SGX: AXB) is a specialist in steel construction and fabrication. The company has two production facilities in Singapore and Johor, Malaysia, with a total annual production capacity of 84,000 tons.
In its latest 2018 third-quarter earnings update released on 13 November 2018, Yongnam reported revenue of S$33.9 million and cost of sales of S$47.3 million, resulting in a gross loss of S$13.4 million and a net loss of S$14.4 million. The company explained that “lower overall revenue and business activities” had caused it to incur a gross loss.
After browsing through SGXNet, the webpage of Singapore Exchange on which Singapore-listed companies have to publish their documents, I found out that Yongnam had been winning multi-million dollar contracts in the past few months, some of which are stated below:
1) S$53.4 million worth of Singapore-based contracts announced on 1 November 2018
2) S$23 million worth of Singapore-based contracts announced on 10 July 2018
3) A S$553.8 million Singapore-based contract announced on 23 May 2018
However, if Yongnam continues to report gross losses on its projects, it will not matter how many contracts it clinches. The root of the problem in 2018’s third quarter is that its costs had likely spiralled out of control even after it had billed its customers for work done, which led to the aforementioned gross loss situation. Yongnam has to rectify this issue urgently, or else it would continue to incur gross losses for the foreseeable future.
Sunmoon Food Co Ltd (SGX: AAJ) is a distributor and marketer of fresh fruits and vegetables as well as fruits-and-vegetables-based consumer products. The company has retail outlets in several parts of Singapore selling a variety of fresh fruits and other produce.
In Sunmoon’s latest fiscal second quarter earnings update released on 14 November 2018 (the reporting period is for the third quarter of 2018), the company reported revenue of S$14.3 million, cost of sales of S$15.7 million, and thus a gross loss of S$1.5 million. The reason provided was seasonally low pricing of certain key products in China, which meant that the company was not able to price its products above what it purchased them for.
The above examples of Yongnam and Sunmoon Food illustrate two different reasons why companies report a gross loss: First, there’s the inability to properly control costs; second, there’s the inability to price a product competitively, perhaps due to the commodity-nature of the product. Both situations could result in a gross loss being reported, and such companies have an uphill task of trying to rectify the situation as the problem may be deeply rooted within their business models.
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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in any companies mentioned.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.