The Fool (Gardner), besides overlooking the debt, also overlooked the terms of the debt. Yes, it's technically long-term, but how likely is it that the debt will remain outstanding for the full term? Given the prepayment incentives, unless they plan on burning an awful lot of cash the next 12-18 months, they should never have borrowed the money. If the analysts expect them to lose $1.35 or so this year, that's only about $32mm. Why do they need cash to carry them through 3-4 years of such losses? Do they know something about 1999-2001 that the analysts don't?
Rimpinths is incorrect in his analysis of current liabilities though. He says that expenses were understated by the "excess" $9.1mm of C/L over what might have been expected based on revenue growth. Actually, expenses are not effected either way by a change in C/L (unless there was a growing deferred revenue account). OTOH, cash flow this Q will be effected, assuming they return to the previous DPO (days payables outstanding).
The Fools also missed the issue of deferred charges and prepaid expenses, the booking of which definitely reduces reported expenses.
If the Fool is really interested in understanding financial strength by studying the balance sheet, looking at non-cash C/A to C/L and preferring the lowest ratio seems Silly rather than simply Foolish. If they have to borrow from banks to pay off trade creditors in what is essentially a cash business, they are digging themselves into a deeper hole. If they are simply borrowing and running up payables at year or quarter end to boost cash balances, that is obvious window dressing to create the appearance of improving liquidity.
Bob |
