Temptation Foods

Temptation Foods is apparently in the business of manufacturing and distributing frozen food products.

The business has posted suspiciously large profits over the recent past and has maintains an apparently healthy debt/equity ratio of around 0.5.

It is also operating in an industry with supposedly unlimited growth potential.

That’s where the good news ends.

The company has bled a substantial amount of cash from operations in each of the past five years (minimum) and maintains absurdly high working capital levels raising questions about the saleability of inventories and recoverability of receivables. In fact, all of its profits (and much more) appear to be forever tied up in working capital.

Management have a questionable reputation – with several issues that flare warning signs to outside investors.

- - They are extremely acquisition hungry and determined to grow inorganically by, apparently, any means necessary. This carries obvious risks of over-expansion where the company stretches its resources to finance acquisitions beyond breaking point

- - They are prepared to issue shares in the company to finance acquisitions – this, at once, should be the clearest warning sign to outside investors that the shares may be overvalued. Even if it were undervalued, why would a promoter sell away a portion of the company using shares, which the market is undervaluing, to purchase any asset – rather than use cash or other means?

- - Excessive issue of preferential warrants and options – this is one of the most repulsive actions management take to gain an edge over minority shareholders. It may be used for justifiable business expansion and SEBI rules have limited management abuse to a large extent but excessive use of this method should lead shareholders to question management’s true motives.

- Management appears to be distracted by stock market activity – links to Ketan Parekh, market activity pertaining to the acquisition of Kohinoor Foods etc. gives the impression that management is more interested in the stock market rather than concentrating on its business operations. This type of management is more likely to employ financial gimmicks to boost the company's share price (presumably for acquisitions) rather than rely on the underlying fundamental quality of its business.

History is littered with the examples of financial frauds where the ‘flamboyant’ promoter is aggressive with his company’s stock market activity (check out Barry Minkow of ‘ZZZZ Best Carpet Cleaning Company’ in the US in the 1980s).

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