Comments on: How to Analyze Receivables & Inventory

By: Nick

Nick — Fri, 10 Sep 2010 14:22:59 +0000

Hi Jae, a bit late I know, but I have a very small query for you please.

I see that you have include a EV/FCF ratio. Why?

The way that you calculate FCF doesn’t seem to me to be a cash flow to both equity and debt holders; if it was, surely you would have included tax-deductible interest?

By: Jae Jun

Jae Jun — Thu, 25 Feb 2010 21:44:47 +0000

Thanks Emiliano

By: Emiliano

Emiliano — Wed, 24 Feb 2010 01:47:46 +0000

very nice and instructive post Jae, thanks for sharing

By: Jae Jun

Jae Jun — Tue, 16 Feb 2010 04:28:04 +0000

The trouble that I am pointing out is that the rise in AR is ginormous. The company didn’t increase it by 20-30%. Over the past 2 years, it has increased by more than 100% each time. This clearly shows that the company is trying to sell to anyone or the conditions clearly put them at a disadvantage. Looking at the above numbers, I’m pretty sure that their days in receivables numbers is horrific. A company needs cash to continue business, not an IOU. If this gets out of hand, they will have to take on debt to increase their cash position, which is exactly what CONN did.

By: Ziv

Ziv — Sun, 14 Feb 2010 07:20:06 +0000

Hey Jae,
Although I’m still trying to figure everything out,
Something is a bit weird for me at the moment.
can’t the rise in AR be the result of two bad years? (for the economy, not particulary for the company) after all AR is just money that debtors owe the company, although the number has risen, it still means money will get to the company, just not now, right (maybe the company changed the way it credits payments)?
I tend to take the rise in inventories differently (the company accumulated more than it can sell) and so that number means more to me.
Am I getting anything wrong?
Thanks a lot, to anyone that tries to help.
Ziv.

By: dacian

dacian — Fri, 12 Feb 2010 21:33:30 +0000

I read your DiVX analysis; very good one. The question I have is, what’s your target sell price? thanks

By: Jae Jun

Jae Jun — Fri, 12 Feb 2010 18:01:15 +0000

@ rupneu1,
Exactly. None of my ideas are original. All from books and other good sources of info.

In this example, I only needed to look at the 3rd quarter comparables to know that something was wrong so I didn’t go further.

The quarterly reports also give a better view when analyzing inventory and receivables.

@ Jason 2,
Thanks for the thought but even if it was an accounting change, I don’t see how it would increase AR by over 100% in 2 consecutive years. The increase in payables also tells the same story and accounting changes wouldn’t be made to that.

By: Jason

Jason — Fri, 12 Feb 2010 13:33:33 +0000

I also looked at CONN but decided not to jump in. While I don’t disagree with your analysis, I believe that some of the AR jump was due to accounting changes, where the AR used to be sold through securitization and held off-balance sheet (however, I can remember if they sold the credit risk or not). If I remember correctly, this could explain the trend you are seeing here.

By: rupneu1

rupneu1 — Thu, 11 Feb 2010 16:31:38 +0000

Nice analysis. I was looking at CONN a while ago and decided not to buy for the same reasons. This is exactly what Quality of Earning book tells us. Only question I had was why do you compare only the same quarter for each year and not annual data for previous years plus the quarterly report since the last fiscal year and compare quarter to quarter?

By: Jason

Jason — Thu, 11 Feb 2010 15:12:01 +0000

Nice analysis Jae