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Blyth (BTH) calls itself a ?home expressions company?. Most people call it a candle company. Neither description is entirely accurate.

Blyth can rightly be called the world?s largest scented candle company, because larger competitors like S.C. Johnson and Sara Lee (SLE) are primarily engaged in other businesses. Like its smaller rival The Yankee Candle Company (YCC), Blyth is primarily a scented candle company. However, unlike the Yankee Candle Company, Blyth has substantial non-candle related operations ? hence the ?home expressions? designation.

I?m not sure what a home expression is; but I?m pretty sure coffee doesn?t qualify. From that fact alone we can safely say Blyth isn?t really a home expressions company (last year, Blyth acquired Boca Java, an online retailer of coffee, tea, and hot chocolate). Blyth may not be a pure play scented candle company or a pure play ?home expressions? company; but, that doesn?t mean it?s merely a hodgepodge of unrelated businesses.

There is a method to Blyth?s madness. From the manufacturer?s perspective, candles, ceramics, frames, vases, coffee, and gourmet food are very different products. But, from the customer?s perspective, they serve a similar purpose. Essentially, Blyth sells personal indulgences to women at affordable prices. That?s a big business in the U.S., Canada, and Europe. It also happens to be a good business.

Profitability

Since 1998, Blyth has had an average return on assets of 10.33% and an average return on equity of 18.55%. One of the best ways to measure the inherent profitability of a business (independent of its current capitalization structure) is to use the pre-tax return on non-cash assets (PTRONCA). Over the past decade, Blyth has had a PTRONCA of about 19.21%, which is very good ? although far from great.

To put that 19.21% PTRONCA into perspective, think of it this way: independent of its capitalization structure, Blyth generated a little over nineteen cents for every dollar invested in the business (before taxes).

Essentially, this means that if Blyth hadn?t utilized any debt whatsoever it would have had a return on equity of roughly 12% (after taxes). Although a 12% return on equity doesn?t sound all that impressive, achieving a 12% ROE without using any debt would actually represent a solid performance for most public companies under most economic conditions.

Of course, over the last decade Blyth actually averaged a much higher return on equity (18.55%). During this period, Blyth utilized a material (but far from egregious) amount of debt. As a result, the company surpassed its own stated goal of achieving a 15% annual return on equity.

Based on Blyth?s past ROA and PTRONCA, it appears to be a good business. If we put aside GAAP accounting for a moment and look at the economic earnings of the business, we?ll see that Blyth has actually performed a bit better than its reported net income figures suggest.

Cash Flow

Blyth?s free cash flow margin was excellent in each of the last several years. For the past five years, the company?s FCF margin has ranged from 5% to 12%. Many businesses would be satisfied with a 5% free cash flow margin. So, even when Blyth was at the bottom of this range, it was generating plenty of free cash flow.

Blyth?s free cash flow has been very high relative to its reported net income. Over the past ten years, Blyth had an average reported net income of $70.2 million versus an average free cash flow of $79.5 million.

Unfortunately, this gap would be entirely erased if free cash flow was reduced by the amount Blyth has spent on acquisitions. From a shareholder?s perspective, such a reduction is appropriate. Acquisitions eat up cash in exactly the same way an investment in a new plant does.

However, it?s worth considering the two lines separately, because it?s much easier to match cash outflows with specific acquisitions than it is to match cash outflows with specific investments in an existing business. This is especially true when looking at a company like Blyth, because some of the acquisitions are in different businesses (and different geographic locations).

Blyth has been able to consistently generate quite a bit of free cash flow. Over the past ten years, cash flow from operations (CFFO) has averaged $93.65 million. The latter half of the past decade has been even better as a result of sales growth. During the past five years, Blyth?s CFFO has averaged $142.64 million.

During that same period, free cash flow averaged $125.18 million before acquisitions but only $60.52 million after acquisitions ? which is even less than the company?s average reported net income of $72.16 million during the same period.

What does all this mean? For one, it means Blyth?s free cash flow has grown far more than its net income over the past ten years. This isn?t surprising, considering Blyth invested much more heavily in cap-ex from 1997-2001 than it did from 2002-2006. That?s normally a good sign, but there are a few problems here.

Slowing Sales

Blyth?s sales growth has slowed considerably during the last five years. Before 2001, the company had been growing sales at 20% or more a year ? without a lot of spending on acquisitions. After 2001, sales growth slowed to the mid single digits, despite an increase in the amount of cash being used for acquisitions. Slowing sales growth is clearly a concern. However, it may not be entirely specific to Blyth.

During the early and mid 1990s, the growth in scented candles within the United States was tremendous. By 2000, more than 75% of all candles sold in the U.S. were scented. At that time, Blyth estimated that only 5% of all candles sold in Europe were scented. So, a very large part of the growth in scented candles within the U.S. was simply a one-time migration from non-scented candles to scented candles.

In an August 1999 interview with The Wall Street Transcript, Blyth?s Chairman