N Brown - Financial Distress Analysis

I’ll use Piotroski’s nine factors, aimed at a detecting a trends in financial distress risk, to gather some thoughts on N Brown’s vulnerability to running into serious problems. Note however that there is a difficulty in using Piotroski factors here.  They were designed for a commercial non-financial organisation. Here we have a company with a part that generates three-quarters of turnover but makes loses, and a financial arm that makes profits by borrowing at 2.3% and lending that money out at over 50% APR. Financial firms naturally have raised borrowings compared with others because their very essence is the use of other organisations’ money to make a profit by charging its clientele a premium for convenience and default risk.

With that caveat in mind we can still use Piotroski factors to examine N Brown’s financial vulnerability.

The nine factors:

1. Did it produce a net income before extraordinary/exceptional items?

Yes, a profit of £58.5m before exceptional items.  A Piotroski score of 1.

2. Cash flow from operations?

Yes, cash flow from operations of £65m. Second point gained.

3. A positive change in return on assets employed in the business from the previous year?

A decline in ROA: No Piotroski point.

4. Cash flow is greater than profit

This is the case for N Brown, so another point is scored.

5. Has the firm’s long-term debt reduced relative to its average total assets?

No. Long term debt rose from £355m to £405m to support further loans to customers. Despite this being a good thing for generating profit no Piotroski point is awarded.

6. Has the firm’s current ratio (current assets di……………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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