H Paulin (PAP.A) trades at a discount to its net current asset value, meaning its current assets minus all its liabilities equal more than its market cap. This was a favourite screening tool for Ben Graham, long considered the father of value investing, and serves as a good starting point for finding value stocks.
But it’s never a good idea to invest simply on this basis. As we’ve seen before, a company can even trade at a discount to its cash, but if it’s burning through that cash, it’s not likely to make for a worthy investment. As it turns out, H Paulin lost 22 cents per share in 2008, meaning its balance sheet position has deteriorated. But a closer examination of the company reveals that it holds the potential to be a terrific value investment.
The company has two main segments: manufacturing and distribution. The manufacturing segment lost $6.7 million in 2008, while the distribution segment had operating profits of $6.2 million! Paulin is basically made up of two companies, one on the verge of collapse, and one exhibiting strong revenue and market share growth!
The key to look out for in this type of situation is whether management is throwing good money after bad: is the manufacturing segment going to continue to hamper this company going forward, or will investors start to reap the benefits from the distribution business? 
Looking at the numbers, the answer appears to be the latter. The company has stated its intention to reduce its exposure to its manufacturing segment, and it has backed up its words with actions: manufacturing capex in the last two years has been just $1.2 million, compared to depreciation of $5.3 million. Also included in the loss for 2008 are charges (all to the manufacturing division) of $3 million for severance, inventory obsolescence, and asset impairments, suggesting exposure to this segment has been drastically reduced going forward.
Value investing is all about finding hidden gems. While the headline numbers of this unfollowed small-cap result in market disinterest, those willing to take a closer look may reap the rewards over the long term.
Disclosure: Author has a long position in PAP.A