J Smart – Piotroski analysis and conclusions

PUBLISHED: Jan 30 2019 @ 06:12 | Comments (0) |

Joseph Piotroski published academic work showing nine accounting variables were useful in differentiating between those firms whose share returns are negatively affected by potential financial distress and those that are likely to outperform based on a good score regarding financial distress indicators.

The indicators fall under three headings: (1) Profitability; (2)Leverage, liquidity, and source of funds, and; (3) Operating efficiency

Profitability factors

If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally. A positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.

Positive net income before extraordinary items for the year to end July 2018? J Smart (LSE:SMJ) is profitable and has been for many years. A score of one is given.
Positive cash flow from operations before investment in working capital? Yes, so we can add another one to the score.
Improvement in return on assets employed in the business from the previous year? Net profit/beginning of year total assets: 2017: £3.727m/£108.1m = 3.4%, 2018: £4.851m/£109.1m = 4.4%. Third Piotroski point.
Is cash flow greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’)? No, so no Piotroski point.

Leverage, liquidity, and source of funds

Change in leverage over one year. Has the firm’s long-term debt reduced relative to its total assets? At 31^st July 2018 and 2017 the company had no debt and net cash of £1………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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