I first came across Finsbury Food (LON:FIF) in 2010 when they were at 16p a share, or at a market cap of under £10m. At first glance that valuation seemed ludicrous, they had decent cash flow, turnover of £170m, profits after tax of £3.29m, better still, they operated in niche areas of the cake business, all these areas to which they were, if not the market leader, one of the market leaders. That market share it must be added was growing, and though turnover and profits had marginally fallen from the previous year, considering the environment at the time, it seemed to be nothing but a blip.
However, one issue became apparent when looking at the balance sheet, they were heavily indebted, totally liabilities were actually near £78m, with current assets just £28m, which would not have been too bad, had the current liabilities contribution of that figure not been £50m, of which, £15m was debt. This again, may not have been too bad, for that £15m of bank debt could easily have been carried over, and was enough to cover the short fall of current assets over current liabilities, but the true problem arose from the other £25m of debt in non-current. This meant total debt was £40m, which created interest payments of £3m a year. When the times were good (I.e. pre-2009), cash flow easily covered this, paid down debt, paid dividends etc; however, after 2009, with fears over growth, debt of this high on a company Finsbury's size saw people rate it as if a certainty to go bust. After all, who would buy luxury foods, especially cakes, when the world was ending?
Well if today is to go by, a lot of people, for over that period Finsbury have continued to grow market share -- for example, in the total ambient cake market they have increased their share from 17.3% to 18.4% (a £909m per annum market) -- proven that the drop of turnover and profits of 2010 was but a blip -- turnover for 2011-2012 (mid year finals) was £208m, with operating profit of £9m and after tax profit of £5m -- and because of it have seen a re-rating of the share price from the 16p of 2010 to 38p now. To highlight an interesting quote on their website, they state:
Finsbury…
