TClarke, test for financial distress

PUBLISHED: Apr 21 2018 @ 06:52 | Comments (0) |

We have already established that TClarke’s shares (LSE:CTO) are lowly priced relative to the earnings per share it has produced when averaged over the last 13 years (see Thursday’s Newsletter). But Mr Market is obviously nervous about this company so we need to check a few more things to establish if that hesitancy is justified.

Today I’ll look at an indicator of likelihood of financial distress, Piotroski factors analysis. In this particular case Piotroski analysis does not provide complete reassurance because it fails to examine a real concern with the pension fund deficit (standing at £23.4m compared with market capitalisation of £35m), so I’ll first examine the make-up of that deficit and the key assumption made by the actuary, and then look more widely at factors that might allow the company to reduce the risk of having a large official deficit, that is, stock of net cash, cash flow and profits.

Piotroski’s nine factors applied to TClarke

Is the company profitable?

Yes, £5.6m after tax. One Piotroski point scored.

Does the company produce positive cash flow from operations?

Yes, £6.8m (£8.5m before deducting additional investment in working capital, tax and interest). A clear Piotroski point is scored here.

Has the return on capital employed improved?

Defined as net income before exceptional items/beginning of year total assets.

2016: £4.9m/£109.4m = 4.48%

2017: £5.2m/£121.5m = 4.28%

A deterioration, so no Piotroski point.

Is cash flow greater than profits?

Yes. Another Piotroski point.

Has the ratio of long-term debt to total assets of the year diminished?

Net cash position in 2016: £9.3m

Net cash position in 2017: £11.7m

One Piotroski point

Has the current ratio improved?

Current assets/current liabilities:

2016: £91.5m/£83.4m = 1.098

2017: £110.9m/£100.1m = 1.108

One more Piotroski point

Has the company avoided raising cash through the sale of shares?

Yes. Sixth Piotroski point scored.

Has the gross profit margin improved?

2016: £32.4m/£278.6m = 11.6%

2017: £38.2m/£311.2m = 12.3%

Seventh Piotroski point

Has the ratio of turnover to total assets improved?

Defined as revenue/beginning of year total assets.

2016: £278.6m/£109.4m = 2.55

2017: £311.2m/£121.5m = 2.56

Eighth Piotroski point

Summary

Totting it up, a Piotroski score of eight indicates a very high level of financial strength and trend in financial strength.

It would take a very shocking turn of events to cause the bankruptcy of the company in the medium term.

Pension deficit

But we can imagine one shocking turn of events that might imperil the company. It’s one that Mr Market seems to have latched onto, which is not surprising because the headline number is so large. That is, the possibility the company might be unable to meet its legal obligations regarding the defined benefit pension scheme. The deficit stands at 56p per share, against the current share price of 80p – 85p.

If the company has a long period where it makes losses and………..

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