GLEN ARNOLD INVESTMENTS
  • About
  • Henry Spain
  • Books
    • My Books
    • Other Books
  • Blog
  • Portfolio
    • Buffett-style
    • Modified price earnings ratio
    • Net Current Asset Value
  • Resources
    • glossary of investment terms >
      • A - B
      • C
      • D - E
      • F - G
      • H - I - J - K
      • L - M - N
      • O - P
      • Q - R
      • S
      • T - U - V - W - Y - Z
    • TOP 10 TIPS FOR INVESTORS

Highcroft Investments – financial risk

26/7/2021

0 Comments

 
Financial distress investigation using Piotroski factor analysis
Joseph Piotroski published a landmark academic paper in 2000 showing that nine accounting variables can be used to give an edge in investing in value shares because they allow a sifting out of those shares with high probability of trouble, and those which, while also having low share prices relative to the value criteria, do not show much indication of difficulty.
(Earlier Newsletters outlining Piotroski’s work: 5th Feb 2015, 9th Feb 2015)
Profitability factors
If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally.  Furthermore, a positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.
  1. Net income before extraordinary/exceptional items?   Highcroft produced a profit of £3.5m on the underlying business of renting out property. However, the general decline of commercial property values in 2020 led to a valuation loss on its portfolio of £4.7m. This valuation loss would only affect Highcroft’s ability to source debt capital and therefore suffer financial distress if it was operating on a high loan to value ratio. But drawn debt of £27.2m is only 34% of its property value of £78.8m, so it is far from troubling its lenders.  And it has £3.3m in cash and is currently marketing for sale a property worth £3.25m. Given all of this I’ll award it a Piotroski point on the grounds that on a day-to-day basis it is profitable.
  2. Cash flow from operations? Yes, Highcroft produced cash flow from operations of £4.4m. Another point is gained.
  3. A positive change in return on assets employed in the business from the previous year?  ROA is measured by net income before exceptional items divided by beginning of year total assets. There was a decline in ROA:
In 2019 the figure was £4.1m/£84.0m = 4.9%, whereas in 2020 it was £3.5m/£89.4m = 3.9%. No Piotroski point because the trend is in the wrong direction and this may lead to less financial stability (but, given the high cash flows, I’m not too worried on that score).
4. Cash flow is greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’). This is the case for Highcroft so another point is scored.
Leverage, liquidity, and source of funds
Measuring changes in capital structure (debt:equity ratio) and the firm’s ability to meet future debt service obligations
5. Change in leverage over one year. Has the firm’s long-term debt reduced relative to its average total assets?
In 2019 the figure is £22.2m/£88.2m = 25%. In 2020: £27.2m/£88.2m = 31%.
The gearing level has worsened so no Piotroski point. Note however that in both years the debt relative to asset ratio was low for a property company.
6. Has the firm’s current ratio (current assets divided by current liabilities) improved over the past year?
The ratio in 2019 was £2.7m/£6.5m = 0.4..........To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
0 Comments



Leave a Reply.

    Picture

    Glen Arnold

    I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk

     investing is about making the right decisions, not many decisions.

    Categories

    All
    Berkshire Hathaway (NYSE:BRK.A)
    Caffyns
    Capital And Counties
    Character Group
    Charlie Munger
    Connect Group
    Daejan-lsedjan
    Dewhurst-lsedwhta
    Highcroft
    Investment-ideas
    Investment Philosophy
    John Templeton
    J Smart
    McCarthy And Stone
    MS International
    Orchard Funding
    Samuel Heath
    Tandem
    TClarke (LSE:CTO)
    Town Centre Securities
    Wynnstay

    Archives

    May 2023
    April 2023
    March 2023
    February 2023
    January 2023
    December 2022
    October 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020

    RSS Feed

In the short-run, the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long-run, the market is a weighing machine.  Benjamin Graham




  • About
  • Henry Spain
  • Books
    • My Books
    • Other Books
  • Blog
  • Portfolio
    • Buffett-style
    • Modified price earnings ratio
    • Net Current Asset Value
  • Resources
    • glossary of investment terms >
      • A - B
      • C
      • D - E
      • F - G
      • H - I - J - K
      • L - M - N
      • O - P
      • Q - R
      • S
      • T - U - V - W - Y - Z
    • TOP 10 TIPS FOR INVESTORS