Many companies showing low share prices relative to net current assets and/or earnings are financially distressed and will continue to perform badly. Thus, it is important to avoid including those displaying the biggest problems. Joseph Piotroski established some variables useful for considering the likelihood of financial distress.
I’ll conduct a Piotroski analysis on both Town Centre Securities' (LSE:TOWN) annual figures to June 2020 and the half-year numbers to December 2020. (Market capitalisation of £75.5m at a share price of 142.6p) 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.
In the half-year to end of December 2020 TOWN reported an underlying profit of £0.2m. So it gains one Piotroski point for both the annual analysis and the half-year analysis. 2. Was cash flow from operations positive? In the year to June 2020 TOWN generated £6.8m from operating activities so it gains a second Piotroski point on the annual analysis In the half year to December 2020 it had a net outflow of £1.2m when a number of tenants failed to pay, or delayed, rent. No Piotroski point. 3. Is there a positive change in return on assets employed in the business from the previous year. Annual: 2019: £6.4m/£440m = 1.45%; 2020: £2.1m/£405m = 0.5% A decrease, therefore no Piotroski point for the annual analysis Half year analysis: 2019: £4.1m/£405m = 1%; 2020: £0.2m/£395m = not much of a return No Piotroski point. 4. Is cash flow greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’). Annual analysis: Yes, so a third Piotroski point Half-year analysis: No The Leverage, liquidity, funding factors 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 total assets? Annual: 2019: £182m/£400m = 45.5%; 2020: £155m/£422m = 36.7% An improvement therefore it gains the fourth ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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Glen ArnoldI'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 [email protected] investing is about making the right decisions, not many decisions.
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