Hilton Food (LON:HFG) announced its prelims today, sending the shares down slightly (1%) to 688p.
A scan through my records that I had sold my shares in HFG at £10.98 in Jan 2021, having bought on a prior occasion at £5.93. So, it turned out to be a nice little earner for me. I had mostly ignored the company since then, so I was surprised to see that the shares had come way back down since I sold.
I had written about them in 2014, although I don't know when I made my purchase. I was impressed with the ROCE and cash position. Although I haven't looked through my notes, it seemed that I got spooked out of HFG in 2021. I undoubtedly thought that the investment case had deteriorated, and that the company was getting further out on a limb. The ROCE had was getting somewhat low.
Back in September 2022, a poster on a bulletin board "of lesser quality than Stockopedia", shall we say, called HFG a "bargain of the decade". But I will dispute that. It is on a PE of 13.8, which is not high. The real problem is the debt position. On a "quick glance" test, I noticed that HFG has an Enterprise Value of £1.1b, and a mkt cap of £622m. Off-hand, that seems like a lot of debt.
If you want to be more precise about thing, rather than a squint test, Roland Head's recent article is worth reading: https://www.stockopedia.com/co... I recommend it highly for people thinking about building a quality portfolio.
One criterion he suggests is that net debt should be less than 5 times net profit. Using the stats on Stockopedia, that ratio is 327/37.1 = 8.8. Way too high! On a TTM basis, the debt has increased from £327m to £470m. This is a significant increase, especially when you consider that in 2017 it had a net cash position.
EPS has grown at a fast pace: 13.8% CAGR. Whilst "nice", one has to consider how that was achieved, and not just attach the word "growth" to the company and a generous PE ratio.
What's going on underneath is revealed by the debt and the ROCE trends. Debt has ratcheted up. ROCE has gone down. From a juicy 29% in 2017 to an uninspiring fire of around 11% in 2020-22. On a TTM basis,…
