Four companies with (almost) unblemished financial histories

Richard picks holes in the financial histories of four companies and finds little to trouble him. Remarkably Cake Box, a company that published an annual report riddled with errors two years ago, is one of them.

As fishing expeditions go, my daily trips in the last two weeks have been particularly unfruitful. Few companies have published annual reports, and I found too much to worry about in the numbers for all but two of them.

Cohort published its annual report on 23 August, and the only strike I identified was for Return on Capital.

Cohort is a group of defence technology businesses. I own shares in the company and reckon weak ROCE in 2021 and 2022 as reported by SharePad is explained partly by the pandemic, which made it difficult to meet customers, and partly by acquisitions in each of those years.

My own Return on Capital figures exclude the cost of amortising acquired intangible assets, an accounting convention that penalises profit for costs that have already been incurred. My figures present a much more favourable impression.

The next day, Colefax published its annual report. Colefax makes posh wallpaper and fabric ranges, most famously evoking the “English Country House” style.

Growth has been pretty modest (one strike) and so too has Return on Capital (two strikes), but the popularity of the company’s designs is enduring and it has taken very few risks over the years, preferring to return capital to shareholders through dividends and buybacks.

I may circle back and take a closer look at Colefax, but today I intend to return to the list I started to work through last time, and in particular three more companies that only received one strike.

My last article is also a good place to start if you are wondering, or have forgotten, how I identify shares for investment using my 5 strikes system.

Games Workshop and James Latham

Could these companies be more different? One manufactures fantasy model soldiers and markets them to hobbyists. The other imports timber and sells it to builders, joiners, and timber merchants.

They have three things in common though.

Firstly they lead their industries (arguably Games Workshop is an industry by itself, the industry of Warhammer, the fantasy universe its models belong in. James Latham is one of the biggest importers and distributors of timber in the UK and Ireland).

Secondly, they both have only one strike against their names, and they are strikes that I do not worry much about.

Games Workshop’s executives do not own many shares in the business.

According to SharePad, chief executive Kevin Rountree has 14,600 shares and chief financial officer Rachel Tongue has 10,900. Since the shares cost over £100 each, these holdings are bigger than they might seem. Their holdings are worth over £1 million.

That is a lot to me, and it is probably a lot to you, and to be fair it is about a year’s pay for each of them, more or less.

Is a holding of that size enough to incentivise someone to run a business for the long term? I don’t think so, but there is little doubt in my mind that Games Workshop is being run for the long term, or that the two executives are committed to the company.

They have overseen a dramatic and getting-on-for-long-lived improvement in Games Workshop’s performance, and they have worked at Games Workshop in lesser roles since the late 1990’s.

James Latham’s strike is Cash Return on Capital Invested, which, except during the boom times of the pandemic, has usually been in single figures. Once or twice it even turned negative (very slightly!)

Even though CROCI is important, I do not hold this against Lathams. Its business model is capital-intensive. It has grown remorselessly over the years, and to fuel that growth it needs to buy timber, tying more capital up in stock. It needs to store that timber in depots, which it chooses to own rather than lease, tying up capital in property, and it distributes the timber in vehicles it also chooses to own.

Capital-intensive businesses in competitive industries are a millstone, but conversely, for a market leader in an industry like distribution where scale increases buying power and efficiency, the ability to outspend smaller rivals perpetuates advantages.

There is of course much more to the Lathams story, and Games Workshop’s, but the other thing these two shares have in common is that, like Cohort, I own them and hold them in the model portfolio I run for Interactive Investor.

Since my policy is to re-evaluate each holding once a year on the occasion of its annual report, I will be writing them up in full here.

ShareScope is where I toy with new ideas, and having dispensed with Cohort, Games Workshop and James Latham, somewhat improbably, Cake Box is next on the list.

Cake Box conundrum

I delivered a strike against Cake Box because it only floated five years ago in June 2018. To my mind, this is not long enough to judge how a company has performed through thick and thin. At the moment I set that benchmark at 2015, which, like all benchmarks, is arbitrary.

Cake Box is a franchise, and its franchisees operate Cake Shops that sell vegetarian egg-free cakes. Its origin story is serendipitous, the founders follow a lacto-vegetarian diet that permits milk products but not eggs. By all accounts the cakes taste just as good as cakes with eggs, and you do not have to worry if any of the kids at the birthday party are allergic to them (or indeed, are vegetarian).

Cake Box could widen its potential market even further, for example by finding an alternative to cream for people with dairy allergies, but that might actually have the opposite effect by putting off cream-lovers.

Everyone that has tried them knows that artificial creams taste horrible, so the lacto-vegetarian stance is pragmatic as well as serendipitous. Perhaps Cake Box appeals to the widest market it can, without compromising the product.

But there is a concern that falls outside of my 5 strikes framework. Memorably, Maynard drew our attention to errors in the company’s 2021 annual report and the subsequent resignation of Cake Box’s auditor.

Correcting the errors did not change the company’s profit or cash, or make any difference to the figures I use to judge whether a company is worth investigating, but it brought into question the competence of management and raised the possibility that there might be more issues yet to be discovered.

Two annual reports later, Cake Box is still run by founder Sukh Chamdal, who owns 25% of the shares. Pardip Dass, Chamdal’s cousin and co-founder, resigned as chief financial officer, though, and no longer owns a significant shareholding.

He was replaced initially by an interim chief financial officer, and the company appointed a permanent CFO, Michael Botha in April.

Cake Box has been working with external consultants to improve its financial controls, and, on the assumption that we can trust the numbers, I am thinking of taking a closer look at the franchise.


Contact Richard Beddard by email: or on Twitter: @RichardBeddard

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