Caffyns – financial distress risk

PUBLISHED: Jul 30 2018 @ 01:00 | Comments (0) |

I’ll use Piotroski’s nine variables to think about the potential for financial distress hitting Caffyns (LSE:CFYN).

Is the company profitable?

In the year to March 2018 Caffyns made £1.03m profit after tax from continuing operations, therefore it gains a Piotroski point.

Does the company produce positive cash flow from operations?

In recent years Caffyns has generated satisfyingly positive cash flows. In the case of 2018 it produced £0.7m net cash flow from operating activities, thus a second Piotroski point is gained.

Has return on assets improved?

Net income before taking account of exceptional items in 2017 was £1.284m, but was only £1.030m in 2018. Given that beginning of year total assets also rose we can say that the return on assets declined. The annual report and comments at the AGM describe three contributory factors to the fall off in profits: (a) The rise in vehicle excise duty in April 2017 caused many customers to bring forward purchases to March 2017 thus shifting profits to previous year; (b) business rate rises knocked off £0.25m from profits, (c) The general downturn in the new car market – off 11% overall and 26% for diesels. Despite these solid excuses I’ll not allow a Piotroski point.

Is cash flow greater than profits?

No.

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

For 2017: £10.375m/£82.111m = 12.6%.

For 2018: £13.5m/£87.113m = 15.5%

Also total net debt has risen from £8.6m to £14m. Admittedly, this money has gone into building a new showroom and buying land in Eastbourne and so enhances the company’s property portfolio, but nevertheless rising debt is a concern.

Has the current ratio improved?

Current assets divided by current liabilities.

2018: £44.024m/£39.657m = 1.11

2017: £40.063m/£34.876m = 1.15

There has been a deterioration, and so no point is scored.

Has the company raised cash by selling shares recently?

No, it has no need to. One Piotroski point scored.

Has the gross profit margin improved?

2018: GPM was 11.34%

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