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Connect (LSE:CNCT) has net debt of £83.6m, but continues to be profitable and has a healthy positive free cash flow. Today I’ll undertake Piotroski analysis for the half-year results to the end of February 2018 to examine a number of distress risk factors. But note, there has been a deterioration since February due to the losses on Tuffnells and PMP.
- The first factor asks if there are profits. Connect made profits in the period (£18m), therefore it scores one Piotroski point. Best guess for year as a whole: still profitable.
- Did it generate positive operating cash flow? Yes (£10m) so it gains its second point. Best guess for year as a whole: still positive cash flow generation.
- Was return on equity better in the most recent period than a year before? This is measured by net income before exceptional items divided by beginning of year total assets. No, and so no Piotroski point is awarded. Best guess for year as a whole: a deterioration.
- Was operating cash flow greater than profit? No, so no Piotroski point. Best guess for year as a whole: no Piotroski point.
- Has long term debt reduced as a proportion of average total assets? Yes – so another point. Best guess for year as a whole: difficult to say. On the one hand it is generating profits and cash flow. On the other it has already paid high dividends. If dividends are cut significantly then the debt might fall.
- Has the current asset to current liability ratio moved toward more safety year on year, i.e. more current assets relative to current liabilities? No, so no Piotroski point. Best guess for year as a whole: no improvement.
- Has the company avoided issuing shares in the period (other than for managerial incentives, etc.)? One more Piotroski point earned. Best guess for year as a whole: it can avoid a rights issue due to strong cash flow.
- Has the gross profit margin improved year on year? No Piotroski point. Best guess for year as a whole: a further weakening.
- Has the ratio of sales to total assets improved (more sales per unit of assets used)? Yes, so one more Piotroski point. Best guess for year as a whole: likely to be worse than last year.
A score of five out of nine indicates a reasonably low level of financial distress risk for the half year results. But my guess for the year as a
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