RECOGNIZING SYMPTOMS OF CRISIS BY ANALYZING FINANCIAL RESULTS – CASE OF ELEKTROPROMET d.d.

Abstract

Up until 2010 Elektropromet d.d. was one of Croatian market leaders that supplied major Government companies, such as HEP Group (Croatian national energy company) or Croatian railways. Company had more than 600 employees in the 90’s, working in 4 divisions. Global and local market changes led to revenue decrease and questionable profitability. Company structure did not change in time, and market share was lost, bit by bit, although there was time for changes. The company did not have a quality control system and they did not recognize the symptoms of crisis. Those symptoms of crisis were visible from financial results in period from 2003 up to 2006 and the company prepared for restructuring in 2007 and 2008. Since the restructuring program was not applied, the company continued with the same business model. Results in that period, and the following years without making any changes led to decreasing business trend with negative result. The goal of this study is to analyze financial results from 2003 up to 2013 and confirm the hypothesis that crisis symptoms in Elektropromet d.d. were visible from financial result analysis. Financial results were measured and observed using different profitability formulas providing insight for crisis symptoms and providing answers on how to prevail business crisis. The results were analized using Year-over-year (YoY) result comparisons. Just by using YoY comparisons it was clear that the results are not profitable. Financial results from 2003 and 2004 provide an insight to early crisis. Profit was not generated from commercial business and regular sales, because expenses were higher than revenue and earnings. Calculating EBIT provides an answer on how profit was made and that early crisis symptoms were visible. After that it would be easy to define crisis stage and work on a model and define phases how to prevail the crisis. Management did not decide to recognize the crisis in that early period and the company continued with the same business model for next few years. The restructuring was prepared for 2007 and 2008, but it came too late and was canceled in early stage. Since Elektropromet is a stock corporation it was up to supervisory board to warn the shareholders that the board members are not leading the company in the right direction. The result and conclusion should assist corporations, medium size and small companies to recognize crisis symptoms and help them use financial management and controlling experience to avoid possible revenue and profitability loss.