LEARNING SERIES: PROFIT FROM RED FLAGS – #6

As mentioned in the previous article, in conjunction with the National Day, I am please to share that Investwhizz has decided to open up our stock analysis tool (beta testing) for free! Click here to check it out (I have used OV8 – Sheng Siong counter as an example).

Note: You need to join with Facebook to use it for free. Feel free to share with your friends and use it to search for any stocks that are listed in Singapore!

 

Link for the earlier post: https://www.investwhizz.com/2018/08/09/learning-series-profit-from-red-flags-5/

 

 

Eight

Red Flag #3

Major part of the Profit is

Non Cash

In the below scenario, we are seeing company’s core business Revenue decreasing from 20 Mil to 5Mil over 2 years. However Other income have increased from 50 Mil to 100 Mil in the same period. This gives an impression that company is doing well as total revenue is increasing over the years.

  2018 2017 2016
Revenue 5 Mil 10 Mil 20 Mil
Other income 100 Mil 80 Mil 50 Mil
       
Total Revenue 105 Mil 90 Mil 70Mil
% Increase in Revenue 17% 29%  
       
Cash Flow from Operations (10 Mil) (5 Mil) 10Mil

 

Red Flag: Revenue increased rapidly over the past few years but >90% of the revenue is non cash. We would question the ability of the company to realise its assets.

How can this happen:

Company booked substantial non-cash gains such as

  1. Unrealised gains from investments including options & futures
  2. Fair valuation gains on assets such as Investment properties or assets held for trading
  3. Gain on sale of fixed assets
  4. Equity accounting in associate companies
  5. Revenue are on long credit terms (cash will not be receive after a long time)

 

Analysis:

The company is running a very high risk on the ability to recycle the money to continue its normal day to day running of the business.

Without adequate cash received from its Sales, the company would have no choice but to borrow money to fund its expenses.

In the long run, this company would face rising interest cost and it would definitely affect the overall performance of the company.

In extreme cases, the company might not remain solvent and would be faced with a credit crunch.

 

Bonus: Do list the stock that you are interested for me to do a Red Flag review for FREE. I will the stock with most like in next week’s article!

 

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