According to a widely quoted and rarely documented but nonetheless believable figure, 90% of new restaurants fail in their first year. Substitute the somewhat more expansive term "small business" for "restaurant," dial the failure rate back just a bit, and I think you're still on target. Small businesses in general have a tough time of it in America. And as demonstrated by the fiscal 2005 third-quarter earnings report just out from Motley Fool Hidden Gems "Tiny Gem" RF Industries
Yesterday, RF reported a 22% year-over-year increase in sales of its products year-to-date -- but a 34% decline in profits. Ouch.
The culprit? In large part, it was Sarbanes-Oxley, which has tightened financial-reporting requirements on companies large and small but appears to be only a nuisance to the large and the veritable bane of the small. According to RF, over the past three fiscal quarters, SOX compliance has cost the company $400,000 in expenses. That might not sound like a lot to RF's competitors such as Amphenol
That said, even as a stockholder in RF, and even as a subscriber to the Hidden Gems service that recommended the company, I'm not willing to let RF completely off the hook for its poor profits performance this year. Yes, SOX is a problem. Yes, it imposes unfair and disproportionate costs on small businesses. But it's not RF's only problem. You see, over the past nine months, RF earned $1 million in pre-tax profits, compared with last year's $1.4 million. So even had the company not had to pay $0.4 million in SOX expenses, pre-tax profits would have been stagnant despite its 22% rise in revenues.
The company cited "competitive factors and increases in materials and labor expenses" as contributing to its losses this year. It seems these are the real reasons RF has been unable to boost its pre-tax and pre-SOX profits. And things don't look to be changing anytime soon.
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