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)
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.
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
Prof. Glen Arnold
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