Not in the business of buying broken business models

Northamber is making my brain ache because:

• After ten years in a highly competitive and declining market, wholesaling computers, components and peripherals, it's decided It can no longer survive on the very thin gruel of borderline profits until conditions improve. It's considering how best to re-invent parts of its business.

• I don't know if this is good news! The company was steadily returning cash to shareholders through the dividend and buybacks, and since the shares trade at well below Northamber's net current asset value, the portfolio's getting more cash back than it would by selling shares. The rationale for holding Northamber in the Thrifty 30 is its making the portfolio money while it liquidates inventories to pay shareholders a dividend, and there's always a chance it will turn around.
• Reinvention is risky. Northamber has resisted change so long, why should it be any good at it? On the other hand, management cautious and has the most to loose, chairman and chief executive David Phillips owns the majority of the shares. Hopefully it won't blow the company's cash on pipe dreams.

This has been a bad year for Northamber:

[Here's the spreadsheet, and here's an explanation of the F_Score. The figures are taken from the preliminary results, because Northamber has yet to publish its annual report. The number of shares in issue is taken from the last buyback announcement before the year end.]

The F_Score measures financial strength and indicates whether a company is getting into trouble or getting out of it. It works well in general, but applied to an individual company, like all statistics it requires interpretation.

An F_Score of three out of nine indicates Northamber is weaker. Sometimes a score that low predates catastrophe but the deterioration is not yet an immediate threat to Northamber's business as it has no debt, and nearly ''11m in cash.

Northamber could withstand losses like 2011's for a long time. It was a piddly, inconsequential loss, less than ''100,000, almost matching its inconsequential profit in 2010. In an accounting sense, most of the company's metrics have declined only fractionally. The difference is symbolic, in making a loss for the first time in eighteen years Northamber has crossed what feels like, but might may well not be, a rubicon.

It's the cash-flow account that reveals how tough business is. The cash loss was nearly ''2.5m, reflecting the cost of unsold inventory, and customers taking longer to pay.

Although the cash loss is far from piddly, it should reverse when business improves, the company sells off excess inventory and customers revert to paying more promptly. But Phillips can offer no reassurance that an improvement is coming, hence the necessity of re-invention.

I can only speculate on why that might be. It seems that, like anyone else, trade buyers have numerous channels through which they can purchase IT, and the position of the distributor has, therefore, become tenuous.

I'm not in the business of backing broken business models. Broken businesses that can be put back together more efficiently, yes, but broken business that need to be reassembled into something different are beyond my comprehension. The trouble is I have no idea what 're-invent' means to Mr Phillips, and therefore which category Northamber belongs in. His annual reports contain very little beyond the financial bare bones, although that may have to change now.

I'll make a decision on whether to hold Northamber for another year when this year's annual report is published, probably in October.