Dave, thank you for taking the time to make those links. Your time is appreciated.
Again, if anyone want to see the quality of my posts on other boards, go to : www.techstocks.com. It will show that I post many, many detailed analysis of companies that I am either asked to look at, or that I'm curious about.
I am both curious about ECGOF (I owned it a couple times), and I've been asked to look at it.
Following are some of my thoughts:
Current assets are about $ 83 mil. Current assets are often an indicator of how much money the company can generate, without borrowing/diluting, to pay its bills in the next year. Inventory is included with the current assets. Some analysts would subtract the inventory from current assets, especially if the inventory could not be expected to readily be changed into cash (via reves or outright selling it). With ECGOF, it might be more
appropritate to subtract the $ 10 mil in inventory from the $ 83 mil in current assets.
That leaves $ 73 mil or at most $ 83 mil in current assets
Current liabilities, what they will have to pay in the next year (if not more), is $ 76 mil. These figures are as of May 31, 1997.
From those numbers it is apparent that the company does not have much cash to fund its operations. This is probably why on June 2, 1997, the company borrowed $ 6 million dollars and issued 300,000 warrants in conjunction with that borrowing. The warrants will convert into 480,000 shares (more dilution) @ a cost of $ 7.27 per share. They expire June 2, 2002.
Even with the additonal money borrowed, and the corresponding dilution, the companies ability to pay its bills without more dilution/borrowing is marginial. Usually the ratio between current assets and current liabilities ( also known as the current ratio) is expected to be is expected to be about 2:1 for a nice margin of safety. ECGOF's ratio is about 1:1- or very poor.
During the May 31, 1997, quarter, the reves were about $ 56.3 mil., and the income (with zero taxes) was about $ 4.4 mil. Of that 4.4 mil $ 525,000 was from an extraordinary gain from the SRS settlement (which is contested. hearing is sept 97). That means the company more accurately earned $ 3.9 mil. Earnings were based on 14.4 mil shares so the earnins would have been reduced by 3.5 cents per share alone, if that were subtracted out.
Another balance sheet item that stuck out to me was the decrease in accounts payable from last quarter of $ 6 mil. Usually the company want accounts payables to be high and receivables low. The decrease in accounts payable was noteworthy, I thought. Especially since the receivables decreased by about $ 4 mil. Since the company borrowed millions of dollars early this year, I will assume that they thought it best, for some reason, to pay off
the payables. However, I'd keep an eye on that. If vendors know the company is having cash problems, they will often not extend as liberal credit to their customers. In light of ECGOF's poor current ratio, that seems plausible, but certainly not definite.
This past quarter the company earned .30 (not fully diluted), and if you take out the litigation settlement, they earned .27. However, by the fourth quarter they will be fully taxed. Now they are not paying tax at all. To get a more "true" PE, one should subtract the normal 40% taxes (approximately) at they will be paying soon. That means this past quarters earnings, based on today's weighted average shares (not taking into consideration
that convertibles that will convert into stock), AND FULLY TAXED was about 16 cents (27 - 40%).
The percent net profit margin should also be considered when looking at a company. If a company is making a lot of money after being taxed, then that company is considered more safe. Why? Because for every dollar in revenue, they will be making more money than a company with a low % net profit margin. Companies with a low % net profit margin have less room for error.
Since Reves for the Q ended May 31, 1997, were about $ 56 mil and net income was about 2.3 mil (without the $ 525,000 extra income from the lit settlement, and fully taxed @ 40%).
That means the % net profit margin for the last Q was about 4%. In my mind that was not bad. In fact, it was better than I expected. I happy with that number (of course some companies have 25% and that is even better !). A % net profit margin of 0-2% usually gives me the most concern. However, even with a 4% profit margin, it could be slow to get out of ECGOF's cash problem discussed earlier (under current ratio: current assets/current
liabilites).
Equity is $ 76 million (that is assests less liablities, or your net worth, so-to-speak).
Based on the 14.4 mil shares, that means equity per share is about $ 5.27 cents per share. That is good.
Return on equity (the percent of "interest" the company is making on it "net-worth"):
Based on the fully taxed, clean earnings estimate I gave a 16 cents for the quarter ended May 31, 1997, return on equity per share for the quarter was 3% (.16 x 14.4 mil shares/76 mil in revs x 100). That is a low ROE. A really good ROE would be 20. Many of the best companies like Coke (50% ROE), and Dell (100% ROE), have returns on equity much higher.
A company with a high ROE is making a higher percent on each dollar the company invests in itself (doesn't ditribute to you in dividends). At a 3% ROE, you'd be better off with the money in a money market account. Hopefully, ECGOF will correct that.
Another problem with ECGOF's equity is that a lot of it is accounted for by Goodwill. This is an assets that may or may not be worth something. McDonald's Goodwill would be worth soemthing, what is ECGOF's really worth (what they paid for a name, for instance, above what the company's assets are worth).
|
