Creston's results for the half-year to 30 September 2008, published this morning, confirm that trading profits have remained stable and contain no surprises. But there is one potentially weak spot, namely the extent to which its short term financial obligations (including earnout obligations) exceed its readily realisable assets like debtors and cash - what is termed its "net current liabilities".
At 30 September the net current liabilities amounted to £28 million and it could take some five years for cash generated from its trading activities to bring that deficiency down nearer to zero unless the group were to raise additional long term capital either from its banks or from the stock market.
There is no immediate cause for concern as the company is satisfied that its existing unused bank facilities will be sufficient to tide it over the near future when earnout obligations have to be satisfied.
The trigger for trouble would be a big slump in trading profit that could prompt a breach of one of the group's banking covenants and precipitate a demand for premature repayment. Certainly the coming months would not be an ideal time to reduce bank borrowings by raising new share capital, not just because potential investors are holding on to what little cash they have but also because Creston's share price has been languishing a long way below what its financial performance appears to merit (see "The Creston conundrum: why does its share price continue to slide?").
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BOB WILLOTT
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