In Topic 6 of the new edition of Reading and Understanding the Financial Times I have examined how Woolworths was damaged by a combination of business and financial risk (see page 120). Another superb example of these factors damaging corporate profitability is revealed by the latest trading update from Eurotunnel.
Let us start with the business risk. The company's profits were severely hit by a combination of the tunnel fire and the adverse weather conditions which resulted in lower rail traffic. The impact of the fire lasted from September right through to February with many hauliers deciding to switch to other modes of transport. This was followed by the pre-Christmas snowfall which caused massive problems for the company. In the short-term services were heavily restricted and this was followed by the need to pay compensation to their travellers who had their trips disrupted.
In terms of financial risk the high level of indebtedness has been an ever present problem for Eurotunnel since it opened in 1994. The company would be highly profitable but for the massive interest payments it has to make each year to service this debt. As a result Eurotunnel continues to suffer due to the financial risk attached to the level of borrowings as well as the regular business risk shocks such as the 2009/10 winter snow.
Mar 10, 2010
Business risk hits Eurotunnel
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In regards to Eurotunnel, the entity has been facing a combination of business and financial risk. As the blog carefully shown, the loan that Eurotunnel took in 1994 had high interest payments. This showed that the financing was highly geared; otherwise Eurotunnel would have been highly profitable. Perhaps Eurotunnel can do some capital restructuring and introduce lower yield coupon bonds which can be backed up by the national treasury. Furthermore they can issue more shares to the public. They may not be able to lower systematic risk, (in the case of adverse weather conditions etc); however they can lower their portfolio risk or unsystematic risk, by spending money on things which will benefit them and with lower risk. This is often referred to as diversifying the risk, by investing in commodities with lower risk attached.
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