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Profitability, Liquidity and Solvency of Wood Harvesting Contractors in Finland

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Abstract

In order to respond to global competition challenges, the wood-processing industry in Finland and elsewhere is outsourcing roundwood harvesting to harvesting contractors. The industry also seeks to negotiate with fewer, larger and more diverse contractor enterprises. The weak profitability, liquidity and solvency of harvesting contractors and the consequent difficulty in hiring qualified machine operators make networking and enterprise growth a complicated process. Financial data of 1,060 Finnish wood harvesting contractors from the period 2001 to 2007 were studied using the ‘closing of the accounts’ data. The material represents most of the full-time contractors. For 2007 net profit was about 6%, credit share of turnover over 50% and median financial reserve €18,000. High machine depreciation and interest expenses together with low solidity make it difficult for small enterprises to absorb seasonal variations and to cope with recessions. Profitability varies considerably amongst smallest enterprises, which most often are sole-operator enterprises. Moreover, even the median profit of the smallest enterprises tends to be negative, which means that enterprise capital will be consumed and many enterprises are at risk of failure. Larger enterprises are more likely to be limited liability companies. Their median profit is clearly positive and the profit varies relative little between enterprises.

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Notes

  1. The Nordic cut-to-length system is predominant in Finnish wood harvesting. Trees are cut and processed to wood assortments by harvesters (weight 14–19 tons) and then transported to roadside by forwarders (tare weight 12–18 tons).

  2. Distinctions between wealth maximization and the more widely examined construct of profit maximization are explained in Poitras (1994).

  3. The definition, structure and use of financial ratios is based on the definitions of CCA (2005) and Yli-Olli and Virtanen (1985).

  4. The abbreviations EBITDA and EBIT refer to 'earnings before interest, taxes, depreciation and amortisation' and 'earnings before interest and taxes'.

  5. Some sources use words ‘income ‘or ‘result’ instead of profit such as ‘net income’ or ‘net result’.

  6. The EU 4th company law directive establishes the minimum requirements for published financial information (annual accounts) by limited liability companies. It requires that the costs must not be divided into variable and fixed costs. This prohibition has been incorporated in the Finnish accounting decree (Teränne 1993). The gross margin on sales, computed as turnover minus variable costs, is therefore not available.

  7. For example Stora Enso's target is to achieve 13% ROCE (Stora Enso 2007). In SMEs, one can hardly distinguish ROI and ROCE.

  8. SMEs have been studied in Finland using the growth-profitability-financing approach, the so-called KASKARA model. This model has also been applied to wood harvesting contractors by Kärhä (2000).

  9. The use of ratios is based on the definitions of CCA (2000, 2005) and Yli-Olli and Virtanen (1985).

  10. It has been argued that real-world entrepreneurs may not be profit maximisers; being constrained by limited business acumen they may be content to achieve a satisfactory economic result—the so-called satisficing principle (e.g. Earl 1983).

  11. If an enterprise borrows money, say at 5% interest rate and the business yields, say, 8%, a 3% profit can be earned. In contrast, supposing that the business yields only 2%, as during a recession, a 3% loss eats into the equity capital of the enterprise. Where the own capital share is modest, the leverage phenomena can benefit or seriously reduce the ROE (e.g. see Tornator 2003).

  12. The median of turnover divided by total assets over all enterprises has been surprisingly stable, remaining at the 1.1 level. The trend by turnover class has also been stable and has not revealed any success or failure factors. The small enterprise group performed least well, slightly below 1.0, and the largest enterprise group performed best, at approximately 1.4, but all groups were highly stable in all years.

  13. The quick ratio measures whether an enterprise can cope with the ‘quick’ short-term liabilities to be paid during the current fiscal year.

  14. The equity ratio relates shareholder equity to the total assets of the balance sheet. It can be considered to measure the business’ own capital financing, the alternative to which is financing with debts, as measured by the debt ratios. This is, however, a very crude indicator, especially in the case of SMEs other than limited liability companies. The net debt ratio provides a more accurate picture than the equity ratio.

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Acknowledgments

We gratefully acknowledge very helpful comments of main editor Steve Harrison. The English language of the paper has been checked and improved by Dr. Ashley Selby.

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  1. Finnish Forest Research Institute, Box 18, 01301, Vantaa, Finland

    Markku Penttinen, Arto Rummukainen & Jarmo Mikkola

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  1. Markku Penttinen
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Correspondence to Markku Penttinen.

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Penttinen, M., Rummukainen, A. & Mikkola, J. Profitability, Liquidity and Solvency of Wood Harvesting Contractors in Finland. Small-scale Forestry 10, 211–229 (2011). https://doi.org/10.1007/s11842-010-9143-x

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