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

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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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