Slater & Gordon: A faintly familiar story continues

More revenue growth, but profit falls

Slater & Gordon Limited (ASX: SGH) published its preliminary full year results on Friday. Even though revenues were up 19.4% to $218m, net profit dropped by 10% to $25m. Management’s view was that if the Vioxx class action failure was excluded, normalised profit actually increased.  Shareholders should be relieved, given the number of large acquisitions that have taken place.

Low Cashflow

Operating cashflow deteriorated to $15m, and cash from investing activities chewed up a massive $70m.  Finance costs totals $6.8m for the full year.  Yet curiously enough, despite this cashflow situation, Slater & Gordon will pay significant dividends again.  The following is a table summarising the cashflow situation for the last five years.

  2007 2008 2009 2010 2011 2012
Revenue 63 79.7 103 122 178 214
NPAT 10.6 15 17 19.8 27.9 25
Operating Cashflow 8.5 11.5 -0.7 24.7 20 15
Free Cashflow 4 -3 -11 9 -47 -55

Increasing Debt

Once again, the latest cashflow deficiency was plugged by an increase in borrowings.  The total liabilities of are now $282m.  On the asset side of the balance sheet, there is $128m in accounts receivables, and $246 m comprising “Work-In-Progress”.  With $15m of cashflow to cover $6.8m in finance costs, there really is not much room for error, and shareholders will hope that the costs of funding do not spiral out of control, and that debt rollover takes place smoothly.

ROE and ROIC versus Money in the bank

As at 30 June 2012, Slater & Gordon had total assets of $525m and net assets/equity of $243m. It made $15m in net profits.  This is about 2.85% per annum return on total assets, and 6.2% per annum return on equity.  At these rates of return, shareholders are not compensated for the additional risks involved.  Returns need to be at least double this to qualify as investment grade.

Foolish bottom line

Slater & Gordon has made its way into the good graces of Mr Market in the last six months.  Current prices imply a market valuation of about $320m for SGH, which is an increase of 28% in the last six months. We would prefer to watch this from a safe distance.

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Peter Phan doesn’t own shares in Slater & Gordon. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

More on Investing