Shine Lawyers - The Profitability Challenge

Posted at Legal Practice Intelligence - 14 September 2016 - by Peter Frankl

Shine Lawyers listed on the ASX in May 2013. At that time the company published its prior years' financial statements.

Looking at the financial statements from 2011 to 2016 reveals that Shine Lawyers has been successful at growing the size of its revenue and profit but profitability has not changed by much.

From 2011 to 2016, Cash Receipts from Customers increased from $58m to $153m.

In all but one year (in 2012) staff costs have been in a narrow band of between 51% to 54% of Cash Receipts from Customers. Its classification "Other Expenses" have also been in a narrow band, averaging 31% of cash revenue over the six years.

Although revenue has increased significantly, employee benefits and other expenses have also increased in proportion. Debt (balance sheet liabilities) has also increased in proportion to revenue.

The company has grown its non-personal injury revenue over the past three years from $18m to $41m. While this is a significant change in the mix of work, the staff and overhead structure of the business as a whole has not significantly changed. The rate of profitability has remained fairly static.

The profitability challenge is not unique to Shine Lawyers. Law is a labour intensive business. It follows therefore that making labour more productive will make a big difference to the bottom line.

When staff costs represent around 50% of revenue, and overheads (before finance costs) are around 30%, it doesn't take much of a shock to the business for shareholders to have a very dry year. The competitive environment for its services is also critically important.

In its 2016 Annual Report, the Chairman of Shine Lawyers uses the phrase “highly competitive marketplace”. Elsewhere in the Annual Report the Directors state, “The year ended 30 June 2016 was a challenging one for the Group. Competition in its major markets continued to increase with many smaller local firms as well as the larger national competitors spending more on marketing activity than had been the case previously. This primarily impacted organic growth.”

The profitability challenge could be even more challenging in the next phase of the company's development as it faces more competition and more regulatory change in Personal Injury work.

Family law is a practice area that the company is considering expanding nationally. 

Increasing the rate of profitability to any significant degree has been elusive in the past six years. However, this is only one metric of performance out of many. For example, Shine has had success in growing and diversifying its revenues. While the rate of profitability has not increased by any significant margin, it has been held relatively steady during its recent history of revenue growth.  


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