Bottom Line: Ransomes' Catch 22

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The Independent Online
A MOUNTAIN of debt has boxed Ransomes, the lawnmower maker, into an unenviable catch-22 position.

The company plainly needs a financial reconstruction. In 1989 it borrowed heavily to fund a large acquisition in the US. Total debt has now risen to pounds 85m - equivalent to gearing of 300 per cent. Trading profit only just covers interest, and the company cannot pay dividends to either ordinary or preference shareholders.

But a reconstruction where lenders swap debt for equity is all but out of the question because the equity is worth so little. Why are the shares worth so little? Because of the debt.

A rescue rights issue - with the price down 5p at 19p yesterday - is improbable for the same reason. And despite a good brand name, any potential bidder will be brave indeed to take on the company saddled with so much debt.

Overall pre-tax profits for the half-year to 30 June bear the scars of deteriorating trading profitability and continuing heavy interest payments. Taxable profits were pounds 1.2m, down from pounds 1.8m. Operating profits fell from pounds 6.2m to pounds 5.4m and the interest bill was pounds 4.2m compared to pounds 4.4m last time.

Ransomes made only 6 per cent on sales this time, where it earned 7.8 per cent before. The picture is particularly bleak in the US, where operating profits fell from pounds 4m to pounds 2.4m, and margins slumped from 8.6 per cent to 4.9 per cent.

The impossible debt position means Ransomes will do well to notch up earnings for this year or next. The chance of any dividend income is similarly slight. Avoid the shares.