(left)Michael Bernard, managing director

(right)Christopher Burton, chairman

For a long time, a whiff of Carreras Limited's balance sheet has brought the sweet fragrance of profit - a lot of it.

Indeed, by almost any measure, Carreras, the cigarette distributor, has been among the top performing companies on the Jamaica Stock Exchange and the clear leader in the category of trading and retail firms.

In this category, 10 critical variables are used to assess the quality of the firms listed by the JSE, ranging from inventory turnover and accounts receivable to earnings growth and dividend payout.

Carreras, a subsidiary of Rothmans Holdings (Caricom) Limited, led in seven of them, and our analysis reaffirms what the market has known for a long time - this is the company that trumps all others in returns to shareholders.

It totalled, overall, 195 points, representing the aggregate of the scores on each variable. Carreras was seven points ahead of Goodyear Jamaica, one of the wider margins between a sector leader and runners-up.

Among the more critical measures of the performance of a trading/retail company, our analysts point out, is how it manages its inventory and collects its money once products have been sold. On both counts, Carreras outstripped its peers by far.

For example, the company's turnover/revenues, during the period of this survey, was 66 times its average receivable, and 44 times inventory levels.

Here are the comparisons: Goodyear Jamaica had a turnover to inventory ratio of 5.82, while for Hardware and Lumber it was 4.7. With regard to turn over to receivables for these two companies, the ratios were 5.08 and 15.72, respectively.

With this level of operational/management efficiency, it was not surprising that Carreras, during the review period was able to book 37 per cent of its revenue as profit, almost triple the industry average of 13 per cent.

Significant also, is the tremendous value the company created for shareholders with a return on equity of 73 per cent, against 11 per cent for Hardware and Lumber, and a share price that is 9.44 times its book value.

At the review period its price was up six per cent. And perhaps best of all from an investor's standpoint is the fact that Carreras had a dividend and capital distribution of 174 per cent.

The question is whether the Carreras good times train will continue to roll, at least in the fashion to which it stockholders have become accustomed.

Carreras has paid capital and dividend of $11.30 per share year to date. In 2007, total dividend amounted to $6.30 for the year.

During the past financial year, up to the end of March 2008, the company - which earlier this decade transformed itself from a conglomerate to a cigarette manufacturer and distributor, and then solely distributor - increased its profit by 45 per cent, to $4 billion on revenue of $9 billion. During the period the company rationalised its portfolio of products, dropping cigarette brands that were not performing well and introducing new ones.

In the quarter to June, though, the company reported profit of $760 million, a 28 per cent decline on the period a year earlier. Decline in cigarette sales volume, following a doubling by the government of the special consumption tax on the products, was held partly responsible for the fall.

Inflation that constrained spending power also meant that some smokers were lighting up less.

In his report to shareholders for the financial year, Carreras' chairman, Christopher Burton acknowledged "the very challenging macro-economic environment" and "relatively high levels of inflation" impacted cigarette consumption. But he seemed optimistic that the brand rationalisation, including the introduction of Rothman's global brands, would help stabilise the market.

"We continue to believe in the ability of our premium brand Dunhill to bolster our portfolio and provide choice to our consumers," Burton said.

But, the potential pressures on cigarette sales apart, there are a few other factors, which are likely to impact Carreras' bottom line and effect investors' good times: a decline of its cash mountain that used to bolster the bottom line with investment income.

In June the company made a capital distribution of $8.30 per share, representing almost all of the $3.5 billion it had set aside to pay as penalty on a tax assessment case, but only a fraction of which the Supreme Court held should be paid.

That decision means that the company will have less cash on which it can earn income.

Of interest is the fact that in the quarter to June, Carreras' investment income fell 51 per cent to $181 million. This was due in part, to the disposal of its interest in a company during the prior period.

A year ago June, Carreras' investment portfolio was valued at just under $5 billion; in June 2008, it was down to $2.1 billion.

On the other side of the equation is the fact that like all firms in Jamaica, Carreras will face inflationary pressures that will increase administrative and marketing costs and challenge revenues at a time when there consumers have far less discretionary income.

Sector Analysis - Trading and Retail

For 2007, real GDP for the distributive trade sector grew by 2.6 per cent, 1.2 percentage points higher than the prior year and the largest growth recorded since 1995.

For the first half of 2008, the sector grew another 0.8 per cent, driven primarily by increased demand for food, clothing and motor vehicles.

The sector accounts for over one-fifth of GDP and employs about 15 per cent of the total labour force.

The distributive trade sector benefited significantly from an expansion of distribution chains, increased gross sales particularly from food and hardware items, a buoyant construction and installation sector and increased imports.

Also, the sector benefited from increased credit to companies and to consumers, as well as robust remittance inflows, which is a source of disposable income for some Jamaican households.

Growth