Monday, 24 December 2012

My investment mistakes of 2012

Investing mistakes - I've had my share this year. I'm a relatively novice investor (I bought my first individual share in September last year) so I expect to have my fair share of errors as I go along, the key thing as I see it is to learn from my mistakes to prevent their repetition as far as possible. So, without further ado, here's a tally of my investing cock ups:


1) Elektron Technology - EKT

Technically this is a mistake of 2011, my only action in 2012 was to sell my remaining shares in January at 23.3p. Given the market price is now 17.3p this was arguably a successful decision! However it's worth a look at because I think the mistake I made here is an easy one to do and one I anticipate I'll inevitably make again - trusting in management who aren't operating in shareholder's best interests.

The Chairman, Keith Daley, currently owns 13% of the company, which is normally a very good sign. Management who are owners overcome the principal-agent problem and tend to act in the better interests of shareholders. Key word - tend to. The incident in question that led me to selling out here was this statement:

Wow - management awarding themselves bundles of shares - giving away almost 10% of the company in one fell stroke! Now I'm all for management being well incentivised, but this was beyond ridiculous. Such an action is effectively a big middle finger to all non-management shareholders. The business may be selling well below the intrinsic value right now but with management having shown they are in this to maximise wealth for themselves at the expense of other shareholders, who'll be the end recipient in the long run of this value? Given there's cheap companies out there which have shareholder-friendly management why take the chance?

There's plenty of ire on the ADVFN company board about the management even before the JSOP announcement. My mistake was not investigating this further before I bought at 32.3p - d'oh! One last piece of irony is that one of the board members has written a book entitled Angels, Dragons and Vultures: How to Tame Your Investors... And Not Lose Your Company. The writing really was on the wall... or rather, in the book.

2) RSM Tenon - TNO

Oh dear, oh dear, another 2011 hangover. I bought at 20.6p back in October 2011 and sold in February at 5.8p. The price is essentially the same today but is highly volatile as the equity is now essentially just a stub - the business is bordering on insolvency. There's a good number of mistakes I made here so it's good to go through them all.

a) Read the bloody cash flow statement & be skeptical of accounting profits!

TNO showed operating profits of £30m in 2011, which put the share price on a very attractive "adjusted" P/E of just over 3 at the time of purchase. I say adjusted because actual net profit was only £7.5m due to all the exceptionals, which is another warning sign. The really big warning sign here though was in the cash flow statement. Since 2008, the business was cash flow negative every year despite showing increasing "profits". Accounts receivable were building up, and up, and up...

It all came crashing down in February 2012 after the company reported a loss of £70.5m. Ouch.

b) Balance sheet strength

TNO had significant amounts of net debt, ~£65m, at the time I invested. Whilst a bit of gearing, used wisely, can be a useful way to boost ROEs in this case it meant that the downside here was huge as the equity could easily be wiped out (as I found!) which dramatically changes the risk/reward profit of the shares. I now strongly prefer strong balance sheets when investing as it means that, even if the company has a few rough years, they're able to ride it out and come through the other side if the business is one that's long term viable.

c) Relying on other investors to do the research for me

This was just pure laziness on my behalf. I actually spotted the previous two warning signs before buying the shares and bought them anyway. Why? I saw that Odey Asset Management had taken up a long position in the shares. I assumed they knew better and had done their research - Crispin Odey has a good reputation as an asset manager and is certainly a far better investor than I am. The lesson? Even experienced hedge fund managers get it wrong from time to time - DYOR.

d) Be skeptical of roll ups

I've recently read a book entitled Billion Dollar Lessons - a fantastic read by the way - which analyses corporate failures over the years to look for patterns to learn from. One of these is the high failure rate of roll ups. The story is simple, acquire loads of similar businesses to benefit from synergies. Great idea, right? Sadly, often not. I recommend reading the book to learn why - most of the lessons I think apply to RSM Tenon.

3) Playtech - PTEC

Ah, Playtech. I love the company. It's in an industry that I know well (I used to work in it) and I have a strong admiration for the market position Playtech have in it. The business will do well over time, however I'm not touching the shares. I actually made a profit on this purchase (I bought at 337p in 2011 and sold at 354p in May this year) but I still consider it a mistake, and not because the share price is now much higher at 427p. The company is arguably still very cheap even after the rise at which I sold them at a forward P/E of 10 and a near 4% dividend yield. So why did I sell?

Two words - Teddy Sagi. The founder of Playtech and owner of a large percentage of the shares. This is a man who knows how to play the capital market games in his favour very well - especially at the expense of other shareholders. He has a history of getting Playtech to buy his other companies at, shall we say, fairly generous prices. Of course, the Playtech board say they each purchase is at a fair price and their nominated advisors, Collins Stewart, are happy to put their names to it for an independent assessment but when you get an acquisition at seven times "adjusted EBITDA" you should suspect things to be a bit up. Adjusted EBITDA, as Charlie Munger would call it, translates to "bullshit earnings".

The truth came out in the final results where more details of the acquisition were revealed. The balance sheet was essentially full of nothing but intangibles (tangible book value was negative) and PTTS generated just €3.5m of profits in 2011. Given the acquisition price was €140m with an earn out of another €140m shareholders paid between 40x to 80x 2011 profits for this acquisition! No surprises also that the full earn out was paid in the end.

Let's also not forget the placing that was done at the bottom of the market, underwritten by Teddy Sagi, allowing him to increase his holding at a dirt cheap price.

Playtech will make a lot of money over time - it's very well placed in its market to do that. Sadly, I get the feeling that most of that money will end up in the pockets of Teddy Sagi and not the other shareholders. €280m is 3.6x the total profit that Playtech made in 2011 - that's many year's previous profits that the shareholders won't ever see, because they are now Teddy's profits. Oh well, at least they have a nice new business making €3.5m in annual profit...

4) French Connection - FCCN

I first bought FCCN in 2011 at 86p, then again in April 2012 at 43.4p (Ouch), then once more in August at 20p (Ouch!). So, what went wrong? Simply, FCCN was a turn-around story that didn't turn around. The company has buried within it a very profitable wholesale division but is burdened by the loss-making retail division. When I first bought, profits at the wholesale division were growing nicely and the retail side looked to be under control. Then, things just stopped getting better. The company announced sales weren't going as well as hoped and then they announced double digit sales declines as well as a whole host of 'measures' they were taking to remedy the situation - most of which looked like things they really should have been doing all along. The price crashed down to 20p.

I'm actually now only down 25% overall on FCCN ('only'!) as the price has since recovered slightly to 29p. The earnings story has disappeared for the mean time, replaced by losses, but the balance sheet is still very strong and the company is trading at 43% of tangible book value. I think the risk reward balance is in my favour at the current price, and the company sounded cautiously optimistic at the end of the most recent trading update.

So if I'm still long term positive (at least at the current price), what do I consider to be the mistake? My original investment case was built entirely on earnings - specifically, earnings growth. I had no real basis on which to place this - I have next to zero understanding of fashion and for a retailer like this tastes can change on a whim, something I didn't pay enough consideration to in my original investment case. For a company that is operationally geared this leads to disaster. The earnings history alone would have told me that unpredictability was high here and I should have been more cautious. Contrast this with my investment in Debenhams, another retailer, but one that doesn't sell one particular line of clothes for which fashion could swing wildly. The earnings history of DEB is far more stable which can give an investor far more confidence in their valuation on an earnings basis.

However, another good lesson here is to contrast this case with TNO. In TNO, balance sheet weakness lead to my error in guessing future earnings to cause a virtual wipeout of my investment. With FCCN, the investment case has simply changed to an assets-based valuation whereby I have time to wait for the company to try and fix things because of the balance sheet strength. Maybe they will, maybe they won't, but it takes a lot of losses to wipe out the remaining £65m of tangible equity. If they do manage to turn things around there's the potential for significant multi-bagging as the previous expectations of decline in to oblivion get re-assessed. Fingers crossed for next year!

5) Software Radio Technology - SRT

Ah, SRT. This is the classic share I normally avoid like the plague. Few hard assets, no proven earnings and a punchy market cap that expects a lot. The CEO, Simon Tucker, gave a presentation at a Mello event and the story seemed (and still is, kind of) incredibly compelling. Huge market, mandated purchases, little competition etc etc. However a string of missed targets now calls in to question the whole investment case. Orders have always been a bit lumpy, but it feels like every results the next big order is just around the corner. Just not this particular corner.

I allowed myself a little punt on SRT because the story seemed so compelling and so likely to happen (don't they all?) but thankfully I at least had the sense to realise that an investment here was inherently high risk and speculative so limited myself to a small percentage of my portfolio. I topped up at 20p shortly before the shares got tipped by Midas and banked a decent profit before the shares continued their decline. I still hold some shares although it's still a small position for me. I'm a patient person and I'm curious to see how this case turns out so I'll probably hold on to the remainder regardless of what happens. Currently, I think of it as paying a low price for a good lesson - stick to value investing!

P.S. It's interesting to note that, as mcturra points out, the share qualifies for James Montier's Holy Trinity of short selling. D'oh!

6) Chemring - CHG

I outlined my original thesis on CHG at TMF. Presciently, I included the one following line:

"To be honest I don't know the defense sector well at all..."

Which was largely to prove my downfall. Earnings collapsed in a way I didn't expect and the share price fell with it. Thankfully, SaintGermain stepped in and sounded a cautious note in the thread which put me off stepping up my position size. He basically hit the nail on the head with statements like these:

"Industry slowdowns always start with order delays, then cancellations, then earnings downgrades."
"Given the current environment, I think there is downside risk here."

This is a general problem I think I'll encounter a lot - I'm a novice to a great many industries and hence won't have the experience that investors like SG do (He also runs an excellent blog that is well worth following - it's taught me a lot about his investment approach). The lesson here then is to stay within my circle of competence and be fearful when trying to value companies in industries I don't really understand, especially when the valuation is based predominately on earnings.

7) The Real Good Food Company - RGD

Lots of debt. Terrible long term average ROEs. A CEO a patchy corporate history. Low quality of earnings. Why did I buy here? Well, the forecasts for the future look good. If they are achieved the company will probably be cheap. Being completely honest I only bought a small position largely because other private investors I know whose opinions I value a lot like it, so I bought in spite of my reservations from the warning signs. Because that's my main reason, it's a mistake regardless of the eventual outcome. I'm still waiting to see if the forecasts will be achieved - management seem confident they will - but I'll probably be out if the share price reflects any positive results. I don't really know why I'm in this share at all.


Wow, that took a long time to go through, but it's a really useful (if somewhat painful) exercise. It's easy to put mistakes down to bad luck or external factors (I'm a big fan of learning about behavioural psychology - there's a multitude of ways for us to achieve denial) but in reality most will stem from some underlying error of judgement rather than some black swan killing the investment case.

Amazingly, in spite of this catalog of errors I've actually had a pretty good 2012 in investing. I'll do a blog post in the near future on the investments that actually went well, then my overall portfolio results (after the last trading day of 2012) and finally my selections for 2013.

Merry Christmas!

Disclosure: I own shares in FCCN, SRT, CHG & RGD


  1. Excellent post, and thanks for sharing your insights. I'm amazed that you've only been investing for a year - I thought it was longer. I think you'll make a great investor, and far exceed my returns.

    I got stung by PTEC, too, and from what I hear, I'm not the only one. BTW, I agree with your analysis 100%.Playtech is a good platform, and I'm sure it'll be making profits for years to come. But, in the end, as you say, two words: Teddy Sagi ... and his puppet directors. Alas, management governance and integrity is so weak, that it's pretty much uninvestible. ROE keeps going down year after year after year. Very fishy. And frankly, Collins Stewart ought to be ashamed of themselves.

    I was negative on SRT, but I just wanted to put things in context. If the company can pull off the orders, then the share prices should do well. There's something weird about this company, though. We've been waiting at least a year now for these order to come in, and so far it's a big blank. Well, OK, I get the lumpiness part, but there's a distinct whiff of rat on this one. An idea for the bulls is to actually wait until orders have actually come in, and then buy, rather than buy on anticipation of orders. It's true that a bull may give up some upside, but it's beginning to look as if the bull case is increasingly suspicious. If I were a holder right now, I'd probably give them until June for the directors to prove their case, and then cut an run if they don't have significant orders.

    FCCN. Ah yes, that wrong-footed a few investors, some of them excellent ones, too. It's a very tricky one this one, I think. Just how does one tell in advance if they'll finally sort their brands out? Their net cash is weakening.

    Please do write about what went well. It's important to work out what the good things were, because, as the saying goes, do more of what works, and do less of what doesn't work.

    Keep up the good work. You'll do great! Merry xmas and a happy new year.

    1. Yeah, the thing about SRT I don't really get is precisely why the orders are delayed so much and so significantly - surely all the mandates can't have been postponed at the same time? It also fails the ADVFN test - there's like 10 posts a day on the SRT board which is usually just the same stuff regurgitated over and over again by the bulls, definitely a contrarian indicator!

      There a few posts on the FCCN board about how this particular season has much better clothing in but I'm no judge either way really - it's not a large part of my portfolio as I can't get much conviction in it but I think the balance of probabilities is in my favour.

  2. A really interesting and informative set of comments.

    I'd like to pick up on a couple of comments you make in item 7, relating to the Real Good Food Company.

    Do you really feel debt is too high for RGFC? I know I keep seeing that it's high on the AFN BB, but is it really? Interest cover at the end of 2011 was about 5.7, down from 5.9 at the end of 2010. They're careful to control their capex to a manageable level, and are growing revenues and profits pretty quickly. Back in 2008 and 2009, there was justifiable general investor focus on debt reduction, but is that still the case, and are these levels really too high to support rapid working capital growth and capital expenditure?

    When you say there are terrible long term average ROEs, what do you mean by this, and why or how does it make RGFC a poor investment?

    When buying, you purchase in the secondary market. The Goodwill on the books just sits there and is irrelevant to such a buyer. The tangible assets requiring replacement only amount to £17m. Return on tangible net assets makes sense to me as that gives some indication of the level of on-going capex, but even then the depreciation period isn't taken into account. However ROE is really not a metric that I can think how I'd find useful in establishing whether RGFC is a good investment.

    The CEO's patchy history is something again that I've seen Cockney Rebel mention on AFN, but I can't find anything in it that significantly puts me off the company or the CEO. Possibly as an investor for several years, I've met him on numerous occasions, and my directly formed view overrides any questionably relevant archive articles. He's awarded himself too large a pay rise; he's over-ambitious in setting guidance for investors; or he's too woolly on detailed financial matters are probably fair criticisms. However you need to set against these such items as personal drive; grasp of the overall business; entrepreneurial vision; clarity on margin requirements; enabling management style, etc. I wouldn't rely on old articles to form a view of an individual (or not to a significant degree) if alternatives are available.

    1. Hey Brian,

      For the debt, I appreciate it's not catastrophically high or anything but it's high enough to concern me if the business were to deteriorate. The last full year results put the March 2012 interest cover at 4.8 ( which is manageable but leaves no room for error. As I learned from TNO I strongly prefer balance sheets that put the company under no pressure in even the worst circumstances and the debt is a large part of why the share tanked so much in 2008 - the market was worried, quite understandably, that the debt would cause the company to go under. In general, I much prefer the interest cover to be over 10 and for debt to be payable by no more than 3 years net profits whereas in this case it'd take almost 8 years of 2011 level profits to pay it off. The debt is more worrying in the case of the poor quality of earnings - last full year results show negative FCF of almost £6m, not an insignificant sum and FCF was also negative to the tune of almost £6m in the half year results. Both these two cash outflows have required increased borrowing levels. It worries me that for 18 months now, the profits haven't been reflected in the cash flow. That situation really needs to revert in a big way and that's predominately what I'll be looking for at the full year results.

      As for the long term ROEs, you are right in that goodwill just sits there after acquisition and doesn't reflect on-going capex. However, what it does reflect is that at some point in the past someone paid a large amount for a number of different food related businesses only for them to earn a very poor return. Granted, this may be down to a previous managements poor acquisition strategy (actually I just looked at the website and it seems the CEO has been around in some form or another since 2003 before all these intangibles were there, so he must have presided over all these acquisitions?) but it implies something about the sector as a whole and how low the returns are due to competition. A lot of the food sector companies I look at also tend to low ROEs - FIF for example (and this is despite high levels of debt, which juice up the ROE significantly) and it just makes me wonder if this is a case of "when brilliant management encounter a business with terrible economics, it is usually the reputation of the business which stays intact". In general, when I buy earnings I look for a business which I'm confident can earn high returns on capital over the long run, compounding my investment, and I'm just not sure RGD can.

      As for the CEO I have no strong opinion (apart from if he did indeed preside over the the previous acquisitions, in which case I'm not very impressed by his capital allocation ability) but you're right I'm just going on CR's questioning. I've never met him but I always try and form my impression of management first by looking at the numbers they have created as I think I'd otherwise be far too swayed by how charismatic etc they are rather than the results they produce. In this case, the long term record of RGD since 2004 isn't particularly good although to be fair I think this is probably more down to the tough nature of the industry they are in.

      Actually thinking about this more has just made me realise how uncomfortable I am in this share and I think I'm going to sell my small stake. I hope I'm making a huge mistake by this and Mr Tiote makes me look a fool by smashing the earnings targets but the more I look at the numbers the more uncomfortable I get.

    2. ...contd.

      With regard to large intangible asset, I agree that it indicates the current management has significantly overpaid for acquisitions in the past, and therefore shouldn't be trusted to build value in that way. It is however their clearly expressed strategy not to acquire and to only build the business organically. I think their skills lie in this area, and if they can do so without issuing new equity and fund such growth out of earnings, then I'm happy. They have also stated on multiple occasions after the issue of stock to Omnicane at 60p, they do not anticipate issuing further stock, and I don't see any warning signs in this regard.

      In terms of low 'Returns on Whatever', you have to be aware that RGFC is dominated by its sugar import and distribution business. This is inherently low margin, and they target somewhere between five and six percent at the EBITDA level, which I think is pretty decent for such a high volume business, where risk is managed by matching buying and selling prices. If you compare with typical food manufacturers, then margins will of course look low. In their added value manufacturing operations like Renshaw, margins at the operating profit level are over 10%. The newly formed R&W Scott had operating margins of -9%, but the intention it to get it to similar levels. This is the process that I think the management in this company execute well with their focus on building brands. Haydens are also loss making, and seem to have been forever. Next year I expect they should be back at breakeven at the operating level. If this happens, it have a significant impact on overall margin, but of course this is just one of the pieces of speculative upside that are included in the optimistic broker forecasts of 11p.

  3. As this is probably my largest single position, it's useful to have someone argue the bear case on the stock.

    When looking at interest cover, I have divided what they term Operating Profit by the interest. For the 15 month period to March, I make this about 3.2 times, but it covers two periods of Jan-Mar. By your standards, this would be very low. I'm clearly someone with lower standards (looking to diversify away from Oil & Gas and distressed fixed income!), and am happy to tolerate such borrowing to support growth related capex and expanding working capital. My comfort comes from the belief that they will to a reasonable extent maintain margin levels in a cyclic downturn thus shrinking working capital, and slow down on capex. The debt should therefore quickly vanish in such a market. I know that might be considered optimistic thinking. A large part of the reason that I'm invested here however is because I don't expect such a downturn either in their business or in the food sector in the medium term, although they are susceptible to global sugar prices, just because lower prices equate to lower absolute margins. I don't expect debt levels to drop significantly for the next couple of years, as they expand to process the higher levels of cane sugar from Omnicane, but thereafter I expect them to drop quickly as they move to be less of a growth company, with more focus on cash flow and dividends.

    Looking more specifically at the debt and cash flow issues:

    Firstly, there is a change in year-end, so as the previous year-end was December, stocks will have been at a yearly low. The new year end is March, so stocks will be a little higher. The actual inventory figure is up substantially at £17.4m from £9.5m. As well as the change in year end, there was an increase in raw material costs, a significant 22% increase in annual revenue, and also they’ve decided to hold higher levels of sugar in stock due to supply problems the previous year. As it's quite a simple food business, I'm not really concerned about obsolescence, and believe all assets are ‘real’.

    After depreciation, property, plant and equipment was up by about £1.5m to £17m. This will mainly be due to the tail end renovation and re-equipping at Haydens, and the separation and revamp of R&W Scott. I expect the investment to continue for some time, with the new distribution centre at Immingham recently being purchased, and to be fitted out for sugar handling. They are planning to bring distribution in-house, so may be purchasing or leasing a fleet of maximum weight bulk sugar tankers. This is all in their current capex plan.

    I have looked at the cash flow reconciliation, and don't see anything that causes concern. The underlying operating cash flow is +£8.6m prior to investment in assets, interest, and taxation, all of which I'm comfortable with. If I felt the assets being purchased weren't going to 'work' for the business, or they had debt collection issues, it would be a different matter, and cash flow would be a concern. In this case, I just see a business that's expanding rapidly in a well-controlled manner, and the increase in debt seems completely reasonable to me.

    ......hit limit of 4096 characters.

    1. Brian,

      I think you are clearly far closer to the facts of the company so are probably in a better position to judge the true long term prospects here. I'm going pretty much entirely on the history of the company, which is only looking backwards and the rewards will only come from looking forwards.

      You're right in that I'm probably far more risk averse than you are (although I'd consider myself to relatively comfortable with risk, I'm pretty much entirely in equities & fairly concentrated at that!) and high debt / low interest cover tend to scare me away. I'm especially concerned about high debt that can't be paid off in a few years because of interest levels being at rock bottom. Whilst they may not rise for a few years, if there were to be a sudden rise for whatever reason it would make the company's situation even more precarious (unless they have fixed long term debt, I think it's all bank?). Basically, whilst the leverage is likely to be ok, there's a number of unlikely but still possible outcomes where I'd worry an investment would be permanently impaired which does worry me a lot.

      The other thing that really concerns me is that the industry they are in shares two factors which combine to create long-term poor returns: high levels of capital intensity and a commoditised product. Now, I know some investors see RGD as trying to differentiate their products by pushing their branded names (Renshaw icing sugar etc) but I'm eternally a skeptic in situations like this - I think meaningfully differentiating any of their products is likely to be a very tough struggle and it's the kind of thing I'd need to see it in the numbers to believe it - by which time the share price would be substantially higher!

      Re: the returns on whatever - you go on to talk about margins, which I don't mind being low. I own a number of shares that have low margins (MGNS, KENZ being good examples) but the key thing is they earn a high return on equity - both these two have average ROEs near the 20's, which is even more impressive from KENZ because it has so much excess cash on the balance sheet*. Because they don't need to maintain a lot of equity on the balance sheet to fund their growth they can pay more of it out for me to invest in other places. I have a hypothesis that the number one cause of "value traps" is businesses that earn a very low average return on equity - you can buy them at a huge discount to assets & earnings, but those assets are never that productive and the earnings get reinvested in a low-returns business and the net result is a poor long term result - think Buffett's experience with the textile mill that was Berkshire Hathaway.

      Now, it might be the case that the economics of RGD in the next ten years are materially different to the economics of the past ten, in which case it could very well be an absolute steal at this price. If the 2014 forecast is in any way achieved (and the earnings translate in to FCF) then you have a gigantic FCF yield to play with which should give way to a big re-rating. My concern here is that a) I'm not really sure I understand why the economics should be so much better and b) there's a lot of risk involved I don't feel I can get a good grasp of.

      *To be an accounting geek, this also comes back to how you "decompose" ROE using the DuPont formula ( High ROEs need a combination of 1) High profit margins 2) Operating efficiency or 3) Financial leverage. Both KENZ and MGNS have low 1 & 3 but very high 2. RGD has low 1 and 2 but a very high 3 - and the net result is still poor. Given 3 is the one management have the most control over I think 1 & 2 are the most important in determining the long term returns of the business.

  4. Mark,

    I'm not sure I'd go as far as saying that I'm closer to the facts; just that I'm quite familiar with the current story being peddled by management, whom I broadly trust by the way. I think there's a lot of good work underway to get all divisions on the right track with growing revenues, and either steady or increasing margins. Normally their presentations aren't available online (I think), but you can see their recent proactive presentation here:

    I tend to view the company as a story that started in 2009 with the start of the current re-structuring, and the sugar regime negotiations. I've only been invested since 2010, with a significant increase in holding size this year.

    Historically the goodwill was mainly acquired in 2004 with the reverse takeover of Napier Brown. It reduced a little to its current level in around 2008 with the disposal of Five Star Fish. So the legacy of the (perhaps over-priced) 2004 acquisition has lived with the business ever since as a £75m lump of goodwill on the balance sheet.

    As far as my investment in the business is concerned, it makes not a jot of difference whether that goodwill is there or not, other than being a reflection on a decision made by PT and others almost ten years ago. If we say that the board decided to write it off in 2004/5, would that then make the ROE look good? The Napier Brown acquisition may have been good or bad, but I really don't think that decision should be in any way significant to how the business is viewed today. Removing the £75m of Goodwill, leaves an equity value of £7m BTW. Obviously that's a different story in terms of ROE, but IMV, ROE is not a metric in which I think there is much value for investors, other than giving some reflection of historic performance. Investment is about finding good value, with a means to out the value. I guess there might be some connection here with your moniker!

    I think it's fair to be sceptical about product differentiation, but I know from close second hand experience how the supermarkets (and retail generally) are mad keen on innovation and strong branding. I'm quite concerned that RGD don't over-spend on their marketing and innovation, but I think it's an area in which they have a good capability, and I think PT is personally quite strong in this area. The presentation above gives a flavour of their direction within their various business units. My feeling is they're a business with a clear direction, and are spending reasonably to grow fast.

    To finish off, I'll come back and summarise my very non-accounting understanding of ROE. Company Equity comprises essentially the NAV available to ordinary shareholders. This is the total of the historic earnings, plus equity raised, minus distributions. As an investor, I might have some passing interest in how the company has performed in the past in terms of ROE, but my main reason for investing is because I view the company will provide me with a good return on MY investment. So that effectively means a good current and more important future price to earnings multiple, where the earnings is genuine and correlates to free cash flow. I really couldn’t care how much others have invested in the past, and what earnings or distributions the company has made in the past, other than helping validate the story management are telling.

    1. You're right in that returns on tangible equity are actually pretty decent (although this is largely because of the high debt levels). In the future that's probably the more important metric as it will give an impression of how well management are employing capital. I still think the low ROE is useful though because it says that the total amount of money management have been given to employ in the business hasn't generated great returns. You're right in that if you buy today you aren't committing that capital but it does show that management hasn't been successful to date in generating high returns for the capital they have used. However maybe management aren't great at acquiring but are good operators. If they can indeed achieve their growth plans the shares are very cheap - the debt & cashflow still worries me enough to stay out for now and I struggle to reconcile the poor performance since 2004 with the rosy projections for the future.