Invest in the Best: Applying the principles of Warren Buffett for long-term investing success by Keith Ashworth-Lord

Author:Keith Ashworth-Lord [Ashworth-Lord, Keith]
Language: eng
Format: azw3
Publisher: Harriman House
Published: 2016-07-29T04:00:00+00:00

Earnings but no cash: the demise of Finelist Group plc

I mentioned in Chapter One the fate of many of the 1980s mini-conglomerates who elevated the manufacture of apparent earnings growth through acquisitions into an art form. Their destiny confirmed the old adage that ‘no company generating plenty of cash ever goes bust, which cannot be said for companies generating plenty of profit’. In 1998, I was able to apply what I had learned ten years earlier to a more recent exponent of acquisition accounting. The company in question was Finelist Group and, like Rentokil, the prognosis was pretty clear.

Background

Finelist was established in 1991 and made its stock market debut three years later. Thereafter it set about consolidating the UK vehicle parts aftermarket with a vengeance. This resulted in a plethora of acquisitions and a rapid expansion of turnover and profits as the new subsidiaries were digested. Between 1996 and 1998, the already frenetic pace of acquisition activity shifted up a gear.

Boosted by acquisitions, headline turnover growth had been phenomenal, averaging 89% compound per annum between 1993 and 1998. Finelist had also turned in compound annual EPS growth of 61% in this time, which underscored its perception as a growth stock.

However, when compared with cash flow, this earnings performance begged some serious questions. Operational cash flow had fallen materially short of operating profits in five of those six years. Set against aggregate reported earnings of £45.4m, Finelist generated only £12.3m of free cash, meaning that cash averaged less than 30% of profits during this period of strong growth. This free cash was barely enough to cover £11.8m of equity dividends paid and meant that acquisition financing came from either raising fresh equity or borrowing from the bank. The cash flow and debt statistics are set out in Table 6.1.

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