Trifast (TRI)


Trifast's debt reduction lesson

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Tuesday's announcement that fastener manufacturer Trifast expects it has entered its new financial year with nil debt is a vindication of management's strategy and a lesson for value investors.

Share Sleuth portfolio member Trifast reports improving demand for fasteners (nuts, bolts, screws, studs and rivets) from the automotive sector and across its customer base, which also includes electronics and domestic appliances. For the year ending 31 March 2014 the company expects to report financial results have exceeded market expectations and it has reduced debt to zero when it publishes full-year results in mid-June.

Mismanagement, recession, and £15m in debt threatened the the company's existence in 2009, but there were reasons to believe it would recover. At the behest of shareholders, two former chief-executives had returned to rescue the company. They had a credible even evangelistic plan, and already the company's finances were improving.

For companies with significant, but not crippling levels of debt, the ability to repay debt from operations trumps the debt itself. The trouble is, debt is unequivocal and easy to identify, you can read it straight off the balance sheet so it's easy to shun troubled indebted companies. The ability to repay debt depends on interpreting the financial statements, which is more difficult.

In 2009, I relied on the F_Score, an aggregation of nine financial statistics, to show me the company's results were improving and it might have the ability to repay debt. Today I prefer to choose and calculate the statistics myself.

Most significant are positive cash flows from the company's operations (as opposed to asset sales or selling more shares), which can fund debt reduction.

Trifast (TRI)'s status in the portfolio is tenuous now. I halved the portfolio's holding in February because the shares are no longer obviously cheap and Trifast had grown to more than 5% of its total value. It seems a lot to expect the company to have developed into a stalwart. Its industrial markets are cyclical and hitherto profitability, while improving, has yet to reach levels that would give me confidence to hold the shares through thick and thin.


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