Colefax scores a perfect 9 according the F_Score. It had an exceptionally good year (to 30 April 2011). Exceptional, unfortunately, does not always have positive connotations in investing.

NB: This is the original spreadsheet, and here's a more detailed explanation of the F_Score.

The table shows the F_Score factors that together indicate a company's financial strength, and statistics from the accounts used to calculate them. All of the indications, the basic profitability measures, return on assets, and cash flow return on assets, are positive, and the other measures, which show whether the company's position has improved since the previous year are positive too. Colefax remains without long-term debt, profitability is up, the company has not needed to raise equity by issuing more shares, and, explaining the profitability ratios, profit margins are up and it's selling more wallpaper and fabric relative to the assets used to design and distribute it.

Commentators often advocate ignoring management spiel, the statements at the beginning of the annual report from the chairman, the chief executive (in Colefax's case they are the same person), and the finance director,  but I think it's important to read them. Some managers are more open than others, and sometimes the numbers need context.

In Colefax's case the crucial sentences are:

Interior decorating sales, which account for 18% of Group sales from continuing operations, increased by 32% to ''14.08 million (2010 ' ''10.63 million). This represents an exceptional performance and resulted in a profit from operations of ''2.01 million (2010 ' ''1.10 million). During the year, we completed a number of significant projects for a single client which contributed to the near doubling of profits in this division. We are unlikely to produce this level of results again and they must be seen as a one off.

Let's be conservative, and assume all of the growth in the Interior decorating division was the result of these one-off projects. What would the F_Score table look like without it?

Reduce sales by about ''3.5m to ''74.25m and gross profits (using the company's gross margin of 55%) would be just under ''41m (compared to nearly ''40m the previous year). Using last year's net profit margin of about 4.5% would give a net profit of about ''3.3m (compared to ''3.1m). Plug those highly speculative values into the spreadsheet, and you still get a perfect nine (just!).

But that's not the end of the story. In a gloomy, or perhaps refreshingly realistic statement, chairman David Green highlighted:

1. Increasing silk, linen, and cotton prices, which are reducing the company's profit margin
2. Weaker trade in the second half of the year

And most significantly because both the F_Score, and the long-term profitability chart I published last week make it look like Colefax has recovered to pre-recession levels, the man who's been running the business for decades says:

I still feel that full recovery from the recession is a long way off. The recovery in our largest market the US is slower than we would have hoped and sales are still well below pre-recession levels. The UK market recovered well last year but we are now starting to see signs of weakness. These factors combined with the Decorating Division returning to more normal levels of activity will mean that our results for the coming year are likely to be lower than this year.

I usually follow the numbers, not the management spiel, but this time I believe Green.

That doesn't make Colefax a bad investment, in fact a management you can trust to tell it like it is, is a positive sign.

As always, the investment case depends on the valuation.