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Piotroski factors allow us to look at variables that collectively indicate whether a firm is suffering from financial distress. So, for example, if there is a combination of losses with negative cash flow, with worsening debt, with falling gross profit margin, and a rights issue, you might be inclined to think that the company is in trouble.
Indeed, Joseph Piotroski demonstrated that his nine metrics when taken in combination indicate greater or lesser distress and the potential for subsequent share out-performance for those which the market had failed sufficiently to recognise as financially strong – for a summary of the evidence see Newsletters dated 5th and 9th February.
The nine factors applied to TClarke
Is the company profitable?
In the year to December 2014 TClarke made £1.4m underlying operating profits, but if we deduct the amount lost in contract disputes which happened to be settled in 2014 (and amortisation of intangibles) it merely broke even at the operating level. After finance costs it lost money. We’ll be strict and not award a Piotroski point on the annual analysis.
In the half year to 30 June 2015 it made underlying operating profits of £1.4m and statutory profit after tax of £0.7m, with basic eps of 1.74p (2014 first half: 0.32p).
We might also consider the optimistic statements on the upturn in business that indicate TClarke is profitable.
Example of optimistic statement (from half-year report published August 2015):
“Demand for our services continues to be strong, and the strength of the order book reinforces the Board’s belief that our reputation, experience and level of resources will drive opportunities for TClarke; we continue to see our clients taking advantage by “locking in” our directly employed skilled operatives and engineering teams at a far earlier stage of the procurement process. The signs of improvement in our London markets continue to be seen and we expect to see further opportunities for margin growth next year and beyond in our wider markets across all our UK locations.”
Does the company produce positive cash flow from operations?
In both the full year to December and the latest half-year the company had positive cash flow from operating activities before movements in working capital. Thus a clear Piotroski point is scored here.
Has the return on capital employed improved?
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