​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.

1. Positive net income before extraordinary items for the year to end July 2020? J Smart (LSE:SMJ) is profitable (£3.6m) and has been for many years. A score of one is given.
2. Positive cash flow from operations before investment in working capital? Yes (£4.9m), so we can add another one to the score.
3. Improvement in return on assets employed in the business from the previous year?  Net profit/beginning of year total assets: 2019: £6.2m/£114m = 5.4%, 2020: £3.7m/£118m = 3.1%.  A reduction, therefore no point.
4. Is cash flow greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’)? Yes, so a third Piotroski point.

Leverage, liquidity, and source of funds

1. Change in leverage over one year. Has the firm’s long-term debt reduced relative to its total assets?  At 31st July 2020 the company had net cash of £13m. Fourth Piotroski point.
2. Has the firm’s current ratio (current assets divided by current liabilities) improved over the past year? 2019: £37.8m/£16.4m = 2.3,  2020: £32.7m/£13.2m = 2.5.  The current ratio has improved for J Smart. Fifth Piotroski point.
3. Has the firm avoided raising fresh equity capital (e.g. rights issue or placing) in the last year? J Smart has not had to raise money this way.  This takes us to six points.

Operating efficiency

1. Has the gross………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
    
   

At one time J Smart (LSE:SMJ), the Edinburgh-based family-controlled property company, concentrated on being a constructor of commercial property for other organisations. Today, that business is diminishing after years of losses. Now the main attraction for share investors is the large collection of industrial units and offices it owns and rents out in the Scottish Central belt.
The company holds 1m sqft of property available for letting. Three-quarters of the value is in industrial units; the remainder offices.
Investment property is revalued by the directors each year, with a sample checked by professional valuers.
Market capitalisation of J Smart: £1.253 x 42.4m shares = £53.1m.
Net income from renting and servicing offices is around £5m. This source of income decreased in 2020 because a lease on one industrial unit came to an end and J Smart directors took the opportunity to demolish with the view of building later. The vacant land is held with inventories as “land held for development”. In 2020 “Excluding the rent from this property, over the remainder of our investment property portfolio our rental income has increased due to both rental growth and increased occupancy” (2020 Report).  Not many landlords can say that for the pandemic year.
Notwithstanding the 2020 dip, note the steady rise in net rent income in recent years.   ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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I’ve bought J Smart (LSE:SMJ) at 125.3p for my Net Current Asset Value portfolio.  Market capitalisation is 42.4 shares x £1.253 = £53m.  I estimate its net current asset value, NCAV at £96m.  It is consistently profitable and has a very low-risk balance sheet.
The lion’s share of its assets are industrial properties (e.g., modern warehouses and light industrial units on modern estates).  The market value of these is £57.9m and they are 100% let even after a year of Covid.
It also holds £20.6m of offices and has £23.1m of cash.
Rent collection levels at the last rent quarter date before the year end (June 2020) are an impressive 96%. The annual report for the year ending 31st July 2020, published in November, stated:
“Rental growth and occupancy levels have continued to improve, as have property valuation levels. Concerns were raised regarding payment of rent, but rent collection levels at the last rent quarter payment date prior to the financial year end, currently sit at 96%. Regrettably, we have lost some tenants whose businesses have been affected by the coronavirus crisis. However, we have been able to fill these vacancies with new tenants.”
Its only liability of any significance is an overdraft of £10.1m.  There is a tiny pension deficit of less than £1m.
And the key directors, members of the founding family, show remarkably good character by frequently waiving their dividend, by taking only modest remuneration, and by deciding that the company should repurchase around 1.5% of its shares each year.
I held J Smart’s shares from 30th January 2019, bought at £1.13, until 15th April 2020 when they were sold at £1.102 as my fear of deep recession made me very cautious and I raised cash. I’m very pleased to be able to buy back in at a good price now that the risk of deep recession has diminished dramatically.
(Earlier newsletters on J Smart: 1st – 7th March 2018, 23rd 30th January 2019).
The three businesses
The directors see the company as having two divisions.  The first holds property which is then rented and sometimes traded, the second permanently employs about 100 tradesmen skilled in building houses, offices and industrial units for external organisations such as housing associations and councils.
To gain greater clarity I prefer to split the company into three by drawing out from the two divisions mentioned above the cash, shares and land not directly supporting either the property portfolio nor the construction business.

1. Investment property holding division.

This owns property worth £78.6m.  It is rented out (with a few voids) for an annual income of £6.4m.  Also, J Smart levy service charges on their tenants of £0.8m.
After deducting the costs of running this property portfolio we have an annual income of about £5m.
2. Cash, land and shares division.
This has £23.1m of cash sitting in various bank accounts.  If we deduct £10.1m overdraft (the only borrowings) then net cash is £13m.
But that is not the end of the story.  It has so much liquid resource floating around that the directors have placed it elsewhere, £0.9m into shares on the LSE and £0.05m into deposits requiring more than three month’s notice to release.
On top of this it has £4.2m invested in land held for development and £1.9m in work in progress which is mostly land and buildings.
All in all, there is a net (after paying off borrowings) liquid resources, fairly liquid anyway, in this division of more than £20m.
3. The busy-but-unprofitable Construction division.
A great grandfather started this business in 1947.  As well as building h………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1