Share Sleuth: Is this a good company?

Sitting in a meeting recently, I suddenly realised where I'd gone wrong with Camellia, a Share Sleuth portfolio holding.

In another life, I am a school governor, and we were meeting to review our impact on the education of pupils. The facilitator started off with a presentation asking two questions: "the big question", and "the even bigger question".

The big question was "Is our school a good school?" and the even bigger question was "How do we know?".

Governors should be able to answer the big question because they've visited the school, observed lessons, talked to pupils, staff and parents, reviewed policies, read the accounts and assimilated statistics on pupil performance.

Understand what you own

I shouldn't draw the analogy between my experience as a governor and my experience as a shareholder too far, because governors are more privileged.

Shareholders do not see the management accounts or internal policies of companies, or spend as much time with the executives (the "senior leadership team" in schools).

However, as shareholders, we too should be able to answer the two big questions to our own satisfaction. Understanding what you own is rule number one in investing.

Since that governors' meeting, I've been troubled by the nagging feeling that I can't answer either question well enough as far as Camellia is concerned.

Events have exposed weaknesses at Camellia that I had not recognised, or had imagined were strengths. The company's private bank and a number of its engineering companies are losing money.

Camellia's new managers have closed down one engineering company and sold another, and they're planning to turn others around along with the bank.

Banking, engineering and Camellia's most important business activity, horticulture, are all cyclical; profits are dependent on a gamut of outside forces - interest rates, oil prices and the weather.

Weakness

I had thought Camellia's diversity gave it strength, but a return on capital of 4% in 2015 and 3% in 2014 suggests weakness. It also seems to be retrenching on its strong long-term vision.

The bank, Duncan Lawrie, sailed through the 2008 credit crunch untroubled because it was financially strong, but the strict restrictions on lending that made it strong also mean it cannot make money in the low-interest aftermath of the crisis unless it relaxes those restrictions and lends more; that is its new policy.

The first place a shareholder should look for evidence that a company is a good one is the annual report.

A fully listed company must include a strategic report that, essentially, explains how it makes money, how it plans to make more (its strategy), and what could go wrong (risks).

Well-written strategic reports are useful to investors but, maybe because Camellia is listed on the Alternative Investment Market - which has less prescriptive reporting rules - and definitely because it is a conglomerate consisting of many companies, its strategic report is necessarily high-level. It contains little detail about the companies it operates.

Having read it, I couldn't tell you much more about Duncan Lawrie than I have already. I couldn't tell you how far it's relaxing its lending restrictions, or how it will differentiate itself from other banks once it has done so.

Neither could I tell you how dependent Camellia's remaining engineering businesses are on the oil industry, which is in recession.

This raises an even bigger question than the even bigger question, and that is: "Could I ever know whether Camellia is a good company?".

As governors we would visit the school and request better information, but the problem with Camellia is where to start. A company operating dozens of businesses across various industries represents quite a challenge.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.