The Human Screen is downing tools for three weeks or so. Next week he’s going on holiday and before that his alter ego, me, is looking more closely at some of the companies he’s uncovered with a view to adding them to the Thrifty 30 portfolio.

First up Castings, which is already in the portfolio. Castings is, in many ways the perfect company. Relatively unsung, prosaic products, conservative finances, highly profitable.

There’s only one fly in the pie. After capital expenditure cash flows over the last seven years have seriously lagged accounting profit.

Castings’ average free cash flow over the last seven years is just ''3m, while its average post tax operating profit is ''10m. Some lag is to be expected if the company is making new investments that will increase capacity and productivity in the future, because the cash flow account will bear the full cost at the time of the investment while in the income statement the cost will be spread over many years.

The cash flow statement which shows that net capital expenditure almost reached ''20m in 2009, a year in which the company added a new foundry to the two at its Brownhills site and it only produced ''8m cash flow from operations.

The foundries are well equipped and Castings confirms it foresees no need to replace them for years to come even though one of them is fully depreciated. Capital expenditure at CNC Speedwell, which machines the castings produced at the foundries into auto components, varies with demand as the company buys new equipment mostly to meet new orders. In future, investors can expect cash flows to improve relative to accounting profit, as capital investment falls

High levels of investment seem to be paying off. The company has recovered strongly from 2009 and 2010 when production fell 40%, it was forced to operate its new foundry only three days a week, it was locked into electricity costs fixed at higher levels before the financial crisis, and it kept investing in machining equipment to meet future commitments. Twenty-twelve was a record year, not just for operating cash flow (above) and but also turnover and profit (below).

It’s earning a healthy return on tangible assets of 14%.

But a potentially worrying factor that could also explain low cash flow relative to accounting profit is the depreciation charge, which has remained relatively stable as investment has increased. The charge as a proportion of the book value of plant and equipment appears to have fallen from 20% or more pre-credit crunch to around 15% today.

It’s difficult to tell from the information in company reports but it would be surprising if Castings were depreciating assets too slowly and inflating profits. The company says the foundries go on producing well after they are fully depreciated and in every other way it’s conservatively financed. It has no debt, for example, no operating leases, and a pension surplus for example.

Meanwhile, I’m in a quandary about valuation. Based on 2012′s results the earnings yield is about 14%, which looks very cheap, but, while it’s tempting to think of Castings, which has remained profitable throughout, as a quality cyclical, the lesson of 2009 and 2010 is profits are dependent on the prices of steel scrap, pig iron, alloy, electricity, labour, and the demand for cars and commercial vehicles. In a worldwide market it essentially produces a commodity the demand for which is unpredictable and highly variable.

Safer to average profit over a suitably long period, I’ve gone back seven years, which gives a less enticing, but probably quite reasonable, earnings yield of 8%. It’s seven-year free cash flow yield, which is certainly an underestimate as it includes all investment and not just that required to maintain operations, is just 2%.

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