Two steps forward…

Johnson Service‘s results, published in the recent annual report, are a model of consistency. While sales and profits are up and debt is down, the overall effect on some key ratios that determine its financial strength have moved almost imperceptibly. Mind you, that could be a result in the current climate.

Compare this year’s profitability, leverage and liquidity with last year’s and you might assume I’d inadvertently copied and pasted 2010 into 2011.

Here’s the spreadsheet:

The company, which supplies clothing and linen to hotels and caterers, operates Britain’s biggest chain of drycleaners, and runs a smaller facilities management business, is doing OK after a calimitous few years in which it sold off one of its most profitable businesses to avoid default on its debt.

The management team charged with rescuing the company in 2007 have returned it to profitability, reduced the debt, and reinstated the dividend, so they deserve our respect, particularly John Talbot the restructuring expert brought in on interim basis who bought large quantities of shares when no-one else would, and stayed on to become executive chairman.

He seems confident in the future, having raised the dividend almost 22%, negotiated a larger borrowing facility and signalled his intention to use it to make small complimentary acquisitions by acquiring Cannon Textile Care for ''6.1m and the business, assets and some of the contracts of facilities manager Nickleby for less than ''1m.

While these acquisition are tiny, I must admit to being a bit leery of Johnson’s new-found vigour. The company is still highly leveraged.  The leverage figure in the right hand panel of the spreadsheet looks fairly benign but it compares long-term debt to total assets. By adding in one nasty, the value of its operating lease commitments, which to my mind are a kind of debt, and subtracting another from total assets, goodwill, which might not have much value at all I can get a much scarier figure: 63%.

Johnson’s increasing expenditure, while it also needs to plug the gap between the obligations of its defined benefit pension scheme and its assets, so there are plenty of calls on its cash.

I trust Talbot, and his finance director Yvonne  Monaghan, she also joined the board in 2007 but had been a relatively senior figure in Johnson Service since 1985. Not only have they righted the company, but they are intimately familiar with the circumstances that led to its fall from grace, which, predictably, involved debt, and acquisitions. But even so, I hope they tread very cautiously.