Basic metal manufacturing companies are undergoing substantial strategic changes resulting from global changes in demand. During such periods managers should closely monitor and benchmark the financial results of companies operating in their section. Proper and timely identification of the consequences of changes in these areas may be crucial as managers seek to exploit opportunities and avoid threats. The paper examines changes in financial ratios of basic metal manufacturing companies operating in Poland in the period 2006-2011

A. Samolejova

P. Pomykalski

S. Bakalarczyk

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Benchmarking polish basic metal manufacturing companies

Basic metal manufacturing companies are undergoing substantial strategic changes resulting from global changes
in demand. During such periods managers should closely monitor and benchmark the fi nancial results of companies
operating in their section. Proper and timely identifi cation of the consequences of changes in these areas may
be crucial as managers seek to exploit opportunities and avoid threats. The paper examines changes in fi nancial
ratios of basic metal manufacturing companies operating in Poland in the period 2006-2011.Web of Science53114113

Pomykalski, Przemysław

Bakalarczyk, Sebastian

Samolejová, Andrea

DSpace at VSB Technical University of Ostrava

139METALURGIJA 53 (2014) 1, 139-141P. POMYKALSKI, S. BAKALARCZYK, A. SAMOLEJOVABENCHMARKINGPOLISH BASIC METAL MANUFACTURING COMPANIES Received – Prispjelo: 2013-02-11Accepted – Prihvaćeno: 2013-05-20Review Paper – Pregledni RadISSN 0543-5846METABK 53(1) 139-141 (2014)UDC – UDK 669.7.0.061.5:336.438:657.472=111P. Pomykalski,S. Bakalarczyk,Faculty of Organization and Management, Lodz University of Technology, Poland.A. Samolejova, Faculty of Metallurgy and Materials Engineering, VŠB–Technical University of Ostrava, Czech Republic.Basic metal manufacturing companies are undergoing substantial strategic changes resulting from global changes in demand. During such periods managers should closely monitor and benchmark the fi nancial results of compa-nies operating in their section. Proper and timely identifi cation of the consequences of changes in these areas may be crucial as managers seek to exploit opportunities and avoid threats. The paper examines changes in fi nancial ratios of basic metal manufacturing companies operating in Poland in the period 2006-2011.Key words: metal enterprises, fi nance, manufacturing, PolandINTRODUCTIONThe U.S. sub-prime crisis followed by a global ﬁ -nancial crisis and consequently by the Euro zone crisis, increased the awareness of uncertainty and risk in man-agerial decisions. Shifting demand and changing prices of raw materials and energy pose challenges for all pro-ducers. Companies operating in mature, commoditized markets are particularly affected during crisis as low proﬁ t margins force decisions related to survival rather than growth. Volatile ﬁ nancial markets are placing a high premium on risk, so factors such as strong balance sheet and proﬁ tability gain in importance. All of these factors are relative and should be compared to branch and sector data. This economic downturn has been a painful lesson for many businesses and industries. Fore-casted growth in demand and stable access to ﬁ nancing was the key to many business decisions. Based on these assumptions many companies have made over-optimis-tic investment decisions that will hamper their growth for years. The long awaited recovery is slow and seems to indicate that future economic environment will be different to the one before the crisis. Managers should establish information ﬂ ows enabling benchmarking and conduct continuous analysis of branch, sector and competition with regards to balance sheet structure and proﬁ tability. KPMG survey results indicate that the industry is undergoing substantial strategic changes. According to Lakshmi N Mittal (chairman and CEO of ArcelorMittal) volatile economic environment, requires that businesses have a clear strategy, under-pinned by a set of core strengths. For ArcelorMittal these strengths are: quality core assets, ability to make cost re-ductions, market leading automotive steel, world class mining business and a stronger balance sheet [1]. It is interesting to note that two of these strengths are ﬁ nancial and refer to proﬁ tability and ﬁ nancial standing rather than creating value for the shareholder.The contribution of this paper is to document a new set of facts that during the recent economic crisis vast changes in proﬁ tability and sales volume of basic metal manufacturing companies encouraged decisions to change their ﬁ nancing structure. This creates growing evidence of link between investment and ﬁ nancing de-cisions during economic downturn and enhances the importance ﬁ nancial analysis in crafting of business strategies.DATA DESCRIPTIONDataset is based on survey data published by the Polish Central Statistical Ofﬁ ce (GUS).  The survey covers economic entities with 10 and more people em-ployed. Manufacturing refers to NACE section D. Man-ufacture of basic metals refers to NACE section D code 27 (Table 1). Dataset has been limited to include the period 2006-2011 in order to emphasize (rather than di-lute) the effects of the current economic crisis.Table 1 Number of entities covered by the datasetNumber of entitiesYear Total Group D Code 272011 54 189 14 802 2722010 53 220 14 637 2562009 53 847 15 030 2632008 53 148 15 785 2762007 48 165 15 354 2672006 47 048 15 103 259140  METALURGIJA 53 (2014) 1, 139-141P. POMYKALSKI et al.: BENCHMARKINGPOLISH BASIC METAL MANUFACTURING COMPANIESRESULTS AND DISCUSSIONThe impact of the crisis on basic metal manufactur-ers in Poland was substantial (Figure 1). Decrease in revenues caused a substantial drop in asset turnover and proﬁ tability (measured in relation to revenues - ROS). The number of entities has dropped from 276 in 2008 to 256 in 2010 and recovered to 272 in 2011. Changes ex-ceeded those observed in manufacturing companies and total companies. Assessment of changes in the industry follows the methodology based upon the standard du Pont Model [2].Investment and ﬁ nancing decisions, in theory, can be viewed independently. Referring to fundamental the-ory, Modigliani and Miller (1985) stated in their theo-rem, that the choice between debt and equity does not affect the value of a ﬁ rm or its cost of capital [3]. Taking into consideration, that the ﬁ nancial crisis violated the-orem’s assumptions related to asymmetric information, efﬁ cient markets and cost of borrowing, ﬁ nancing deci-sions became important in assessing ﬁ rm’s value. Cost of ﬁ nancing and access to capital may be inﬂ uenced by the structure of ﬁ nancing. Myers and Majluf (1984) model, presented in their seminal paper, implies that, due to information asymmetry, ﬁ rms will prefer internal ﬁ nancing and debt to equity if they need external funds [4]. Myers and Majluf refer to investment opportunities. During an economic downturn, decisions may focus on securing the continuity of operations rather then identi-fying and exploiting new investment opportunities. Es-sentially retaining proﬁ ts, decreasing receivables and inventories and reducing (or delaying) investments, aim at improving internally generated cash ﬂ ow. These ac-tivities increase the share of equity in ﬁ nancing (either by increasing equity or by decreasing liabilities). It is essential to understand that ﬁ nancial theory doesn’t become inapplicable during ﬁ nancial crises. We should rather accept that the assumptions to some mod-els are temporarily violated and conclusions should be restated. Assuming that ﬁ nancing structure matters and should be compared to investments, managers should revert to traditional ﬁ nancial ratios and benchmark their ﬁ nancing structure.The share of current assets in total assets in basic metal manufacturers has decreased in 2009 (Figure 3). Companies decreased inventories and receivables fol-lowing the drop in revenues, net loss decreased cash positions and equity, increasing the share of ﬁ xed assets in total assets. In the period 2006-2008 the share of ﬁ xed assets in total assets was comparable to the share of equity in ﬁ nancing. Losses incurred in 2009 have changed this relation. In 2010 companies continued to increase the share of equity in their ﬁ nancing while de-ferring capital investments (purchases of new ﬁ xed as-sets).Since continuity of business operations is growing in importance changes in asset structure should also be addressed. Internally generated cash ﬂ ow has to be al-located. In theory, corporations (separate business enti-ties) should not accumulate cash. Interest rates on de-posits and returns on short-term ﬁ nancial investments are lower than expected by investors. In other words rational investors will expect the management to invest available resources in their operating activity. Some cash is necessary to maintain liquidity (ability to pay amounts due in time) but any remaining amounts should be paid out to investors.The structure of current assets indicates that since 2008 companies are accumulating cash (the share of cash in total assets has increased from 3,3 % in 2006 to Figure 1  Return on Sales (ROS) and Asset Turnover (AT) in Polish companies 2006-2011Comparably weak proﬁ tability and asset turnover conﬁ rm the need for continuous analysis of ﬁ nancial standing. Losses incurred in 2009 and feeble perform-ance in 2010 weakened the branch position on ﬁ nancial markets. Basic metal manufacturers decreased the share of debt ﬁ nancing, measured by capital multiplier (Figure 2). Changes of ﬁ nancing structure are even more visible than in proﬁ tability and asset turnover. What’s more, these changes result from management decisions and cannot be attributed to falling revenues during the eco-nomic crisis. By decreasing the capital multiplier, while return on sales and asset turnover were falling, managers enhanced the drop in return on equity. The scope of changes in the structure of ﬁ nancing in basic metal manu-facturers provokes questions related to ﬁ nancing struc-ture decisions during economic downturns. Figure 2  Return on Assets (ROA) and Capital Multiplier (CM) in Polish companies 2006-2011141METALURGIJA 53 (2014) 1, 139-141P. POMYKALSKI et al.: BENCHMARKINGPOLISH BASIC METAL MANUFACTURING COMPANIES13 % in 2010). In nominal terms the total amount of cash held by basic metal manufacturers has grown ﬁ ve-fold during that period. This can be explained by lack of trust in ﬁ nancial institutions. Companies accumulated cash to secure against events that would force them to repay bank loans. In 2011 the share of cash in total as-sets dropped to 6,5 %.Basic metals producers in Poland (and many other countries) are to a large extent consolidated. Financial results of individual large business entities may have a signiﬁ cant impact on branch data and results. Further analysis including data and ratios of individual compa-nies can provide additional information that can be used in assessment and forecasting of competitive changes within the branch (based on strengths and weaknesses of individual competitors). [5, 6] The paper focuses on the analysis of asset and ﬁ -nancing structure it is however essential to remember that this is a part of broader ﬁ nancial analysis. Current economic downturn and decreasing sales stipulated changes in costs. Most manufacturers scaled down pro-duction and even closed facilities. Capacity planning [7] and detailed analysis of cost structure and its bench-marking remains vital and should accompany broader benchmarking initiatives. Due to accounting principles some initiatives may not be recorded as assets. Improve-ments in production processes and changes in distribu-tion channels can create a signiﬁ cant competitive ad-vantage. Their effect may however be initially over-looked by competitors as increasing revenues are attrib-uted to market revival.CONCLUSIONSVast changes in ﬁ nancial standing of basic metal manufacturers indicate that managers should gather and carefully analyze ﬁ nancial data of competitors to bench-mark their performance and position. The effects of the crisis upon companies in this branch have been far big-ger than in the case of all manufacturing companies or all businesses in Poland. Falling proﬁ tability and asset turnover in 2009 and 2010 has forced the companies to change the structure of ﬁ nancing and increase cash holding. These results are also interesting for research-ers as factors inducing management decisions in pro-longed economic downturn conditions are to a large degree unknown. It is difﬁ cult to talk about rationality and forming theories, as equilibrium and timing are dif-ﬁ cult to forecast during the crisis.REFERENCES[1] Arcelormittal, Annual Report 2011, p. 3.[2] M. C. Erhardt, E. F. Brigham, Corporate Finance. A Focu-sed Approach., 4th Edition, South-Western Cengage Lear-ning, Mason, 2011, 106-107.[3] F. Modigliani, M. Miller, The cost of capital, corporation ﬁ nance and the theory of investment, American Economic Review, 48 (1958), 261-297.[4] S. Myers, N. Majluf, Corporate ﬁ nancing and investment decisions when ﬁ rms have information that investors do not have, Journal of Financial Economics, 13 (1984), 187-221.[5] K. Janovska, S. Vilamova, A. Samolejova, I. Vozňákova, Determination of complex energy consumption of metal-lurgical production on the base of mathematical modelling of interdisciplinary linkages, Metalurgija, 51 (2012) 4, 571-573.[6] K. Janovska, I. Voznakova, L. Svajdova, The Veriﬁ cation of Applicability of Economical-mathematics Methods of Structural Analyses as a Tool for Optimising Economic Proceedings of Metallurgical Enterprise. In Conference proceedings of 19th International Metallurgical and Mate-rials Conference METAL 2010, Ostrava: TANGER, 2010.[7] R. Lenort, D. Stas, A. Samolejova, Capacity Planning in Operations Producing Heavy Plate Cut Shapes. Metalurgi-ja, 48 (2009) 3, 209-211.Note:  The responsible translator for English language is M. Flis, Lodz University of Technology, PolandFigure 3  Asset structure of basic metal manufacturers in Poland 2006-2011

Benchmarkingpolish basic metal manufacturing companies

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Benchmarkingpolish basic metal manufacturing companies

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