ratan,
Tell me what's wrong with my thinking.
My pleasure. :)
All numbers should be taken without regard to the type of business.
I understand your point and to a certain extent I agree. But your comment didn't leave any room for qualifications and nothing about business or investing is so black and white that anything, including the numbers, can be taken completely out of context.
Industries that have high cash flows and low A/R would mean that there is less risk in that industry than in another.
I disagree. It only means there is less risk insofar as cash management is concerned. As an example, in Maryland it is a state law that all purchases of alcohol made for the purpose of reselling it has to be paid within a really short period of time, I think one week. Liquor licenses are taken away for lack of payment. However, the distributors that sell the alcohol work on razor-thin margins. An ever-so-slight drop in their sales or increase in their overhead without a comensurate increase in sales is the difference between a profit and a loss. In my mind, that's a risky business compared to others I want to invest in whose invoices aren't paid nearly so quickly.
Since SEBL has increased A/P that me ans their execution has to be near perfect else they will not receive those funds. Meanwhile their expenses continue in expectation of receiving those funds.
My response assumes you meant to write A/R, not A/P.
There's no question that management needs to stay on top of the daily operations including the collection of funds, but to say that their execution needs to be nearly perfect is a stretch for me. Especially in light of their profit margins (not huge but not small either), there is plenty of margin for error so long as the error doesn't continue over long periods of time.
Besides, I don't have the time to look it up but if I remember correctly the DSO decreased in the most recent quarter. As a point of fact, I hope Siebel's A/R continues to go up because A/R is directly correlated to revenue. It's the relative amount of time required to collect the receivables that's important, not that they are increasing.
Conversely, the cost of entry into that field goes up since the new co. has to spend huge sums of money up front for development and then carry A/P for longer periods of time.
That is why you will never catch the mafia entering any business other cash. And we all know how profitable that business is.
Again, I assume you meant A/R, not A/P. Regardless, the main reason the mafia enters cash businesses is because it helps them avoid taxes and thus have higher profits, though illegal. Remember that Al Capone went to jail but not because they got him on any charges such as murder, conspiracy, or anti-trust violations. Instead, the only thing they were able to pin on him was tax evasion.
--Mike Buckley |
