Character Group – a valuation based on return on net tangible assets

PUBLISHED: 04 Nov 2019 @ 12:55 | Comments (0) |

Today we’ll look at return on net tangible assets, and approach the valuation of Character Group (LSE:CCT) from this angle. To start with there are a lot of numbers – to show my workings – but this all boils down to an exceptionally high average Return on Net Tangible Assets of 87%.

Profits, assets and liabilities

£’000s Year end 31 August	2018	2017	2016	2015
INCOME STATEMENT
Profit after tax	9,612	10,050	10,787	10,239
Amortisation charge this year for accounting goodwill following acquisitions	0	0	0	0
Exceptional items distorting profits (positive or negative)	0	0	0	0
Profit for shareholders	9,612	10,050	10,787	10,239


CURRENT ASSETS AND LIABILITIES
Inventories	10,890	8,994	10,303	8,965
Receivables	25,555	25,817	25,082	15,535
Cash needed for operations (assumed)	19,050	17,216	21,647	21,246
Other current assets	181	32	540	256
Payables	-24,666	-22,700	-25,418	-19,015
Short-term debt	-19,050	-17,216	-21,647	-21,246
Other current liabilities	-1,893	-3,137	-1,195	-2,225
Working capital for operations	10,067	9,006	9,312	3,516

Surplus cash (assumed)	15,580	11,536	6,913	4,535
Investment property (rent received)	1,715	1,780	1,845	1,911
Total surplus available for SHs	17,295	13,316	8,758	6,446
NON-CURRENT ASSETS AND LIABILITIES
Property, Plant and Equipment	3,130	3,204	3,357	3,551
Goodwill in BS	0	0	0	0
Previously written-off acquired goodwill – add back	0	0	0	0
Other acquired intangible assets in BS	0	0	0	0
Previously written-off other acquired intangibles – add	0	0	0	0
Long-term debt	0	0	0	0
Other non-current liabilities	0	0	0	0
Net non-current assets for operations	3,130	3,204	3,357	3,551

OTHER ITEMS TO CONSIDER
Defined benefit pension deficit	0	0	0	0
Internally gen. intangible assets capitalised to BS	803	698	1,117	837
Investments (in shares, bonds, etc.)	0	0	0	0
Operating lease non-cancellable	551	944	714	115
Preference share capital	0	0	0	0
Minority interests in profit	0	0	0	0
Minority interests in net assets	0	0	0	0

£’000s Year end September	2014	2013	2012	2011
INCOME STATEMENT
Profit after tax	5,945	683	5,750
Amortisation charge this year for accounting goodwill following acquisitions	0	0	0
Exceptional items distorting profits (positive or negative)	0	0	0
Profit for shareholders	5,945	683	5,750


CURRENT ASSETS AND LIABILITIES
Inventories	8,854	6,178	7,356	11,563
Receivables	23,417	18,722	17,105	17,106
Cash needed for operations (assumed)	17,702	9,242	5,908	10,859
Other current assets	160	1,203	667	355
Payables	-20,545	-16,541	-13,389	-20,529
Short-term debt	-22,217	-15,260	-13,804	-15,727
Other current liabilities	-3,787	-1,157	-975	-3,880
Working capital for operations	3,584	2,387	2,868	-253

Surplus cash (assumed)	0	0	0	0
Investment property (rent received)	1,976	2,042	2,107	2,172
Total surplus available for SHs	1,976	2,042	2,107	2,172
NON-CURRENT ASSETS AND LIABILITIES
Property, Plant and Equipment	3,623	3,678	3,870	3,845
Goodwill in BS	0	0	0	0
Previously written-off acquired goodwill – add back	0	0	0	0
Other acquired intangible assets in BS	0	0	0	0
Previously written-off other acq. intangibles – add	0	0	0	0
Long-term debt	0	0	0	0
Other non-current liabilities	0	0	0	0
Net non-current assets for operations	3,623	3,678	3,870	3,845

OTHER ITEMS TO CONSIDER
Defined benefit pension deficit	0	0	0	0
Internally gen. intangible assets capitalised to BS	238	748	1,335	1,630
Investments (in shares, bonds, etc.)	0	0	0	0
Operating lease non-cancellable	421	480	172	222
Preference share capital	0	0	0	0
Minority interests in profit	0	0	0	0
Minority interests in net assets	0	0	0	0

Return on net tangible assets, RONTA = Profit for shareholders ÷ Average net tangible assets over the year (beginning BS and end BS averaged).

Return on tangible assets, RONA = Profit for shareholders ÷ Average net assets over the year (includes internally generated intangible assets capitalised)

£’000s	2018	2017	2016	2015	2014	2013	2012
Profit for shareholders	9,612	10,050	10,787	10,239	5,945	683	5,750

WC capital for operations – averaged	9,537	9,159	6,414	3,550	2,986	2,628	1,308
Net non-current assets – averaged	3,167	3,281	3,454	3,587	3,747	3,774	3,858
Net tang. assets, NTA – averaged	12,704	12,440	9,868	7,637	6,733	6,302	5,166
RONTA	76%	81%	109%	134%	88%	11%	111%
Internally gen. intangible assets capitalised	751	908	977	538	493	1,042	1,483
Net assets – averaged	12,455	13,348	10,845	8,175	7,226	7,344	6,649
RONA	77%	75%	99%	125%	82%	9%	86%

(For 2015-18 I’ve put “cash needed for operations” equal to short term borrowings because there are certain times of the year, especially in the months leading up to Christmas when the company is borrowing to pay for inventory and receivables. Currently, this money comes from overdraft, factoring, invoice discounting and import loans. But, conceivably, the directors might decide to use some cash to reduce borrowings and thereby save on interest and lower financial risk.)

These RONTAs and RONAs are exceptional. Character Group has demonstrated, ye

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