Morgan Crucible delivered record profits in 2011 -- but should its liabilities concern you?
Morgan Crucible (LSE: MGCR) is a British manufacturer with a 155-year history and operations all over the world. It's listed in the FTSE 250 and has just announced a record profit of £141.5m on record revenues of £1.1bn.
Morgan's products are not especially relevant to this article, but they are quite interesting. Morgan is a materials specialist and makes parts that are used in other industries. Examples include hard disc components, super thin insulation and armour plating.
The company has factories in Latin America and Asia and sells its wares all over the world to both developed and emerging markets.
So far, so good
Morgan's underlying earnings per shares rose from 18.7p to 29.9p, and return on capital employed improved from 25.4% to 33.7%, thanks to careful cost control. Morgan's board recommended a 20% increase in the final dividend, bringing the total dividend for the year to 9.25p, a yield of 2.8%.
So far, so good -- and Morgan's shares leapt upwards when trading started this morning. But there is a fly in the ointment.
Cause for concern
Morgan Crucible's list of liabilities has two big numbers in it that cause me concern. The first is its £287.3m of interest-bearing loans and borrowings. The second is its £135.1m pension deficit.
The company does have some cash and reported net debt is £215.4m, a reduction of £21m on last year. However, the company's pension deficit rose by £35m last year.
Net debt is always bad, but the main problem with these two figures is the effect they have on Morgan's tangible book value -- the value that could be reliably realised if Morgan went bust.
Morgan Crucible has a price-to-book value ratio of about 3.3, which is acceptable enough.
However, once Morgan's intangible assets of £283.3m are subtracted from its net assets, the tangible book value of the company falls to -£13.1m. This effectively makes it worthless in a liquidation scenario and gives it a scary price-to-tangible-book value ratio of -72.
An alternative valuation measure is the ratio of enterprise value (market cap plus net debt) to EBITDA. Morgan fares badly here, too, with a painfully high EV/EBITDA ratio of about 8.
Final Foolish thought
As a value investor, investing in Morgan Crucible would make me feel stupid.
Although it may continue to generate strong profits and pay down its debt, the lack of tangible book value means there is no limit to the downside if things go wrong, which flies against all my principles.
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