One in four parts firms fund growth through debt

One in four motor parts companies are using debt to finance growth, according to a new survey.

The findings have been outlined in the 'Plimsoll strategic risk index of the auto parts – traders industry', which reveals that a total of 164 companies (out of a total of 504 analysed) in the sector are carrying twice as much debt as their competitors in order to win market share, or almost 10 times the industry norms.

The evidence is in the profit margins. The 164 companies, which Plimsoll refers to as 'chancers' are making just 0.8% profit on sales, compared to an industry average of 1.2%. However, taken with back interest payments profitability is a 'healthy' 2.2%.

David Pattison, Plimsoll senior analyst, said: “Taking other people's money and using it to generate a profit is great in the good times. The dilemma for these companies is that they will need to keep charging a price premium to finance the debt.”

He said that the larger players in the industry are taking the most risk, with 47% of the 'chancers' having sales above £10m.

Last year the industry suffered stagnant sales growth. “There is little doubt companies will associate this level of market pressure with a recession as the market cannot sustain this level of behaviour,” said Mr Pattison.