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Technology Stocks : THQ,Inc. (THQI) -- Ignore unavailable to you. Want to Upgrade?

To: AreWeThereYet who wrote (7195)	7/24/1998 1:15:00 AM
From: Todd D. Wiener	Read Replies (2) \| Respond to of 14266

Andy- DSO (days sales outstanding) of 45 is pretty good. That means that the average time between THQ's shipment and receipt of payment is 45 days. Let's say you own a Citibank Visa card, and you charge $500 to it. You may not owe the money for 30 days. If you pay your bill 30 days after charging, you have resolved your accounts payable in 30 days, and Citibank Visa had 30 days sales outstanding on your bill. If companies give extended payment terms to customers (i.e., buy now, pay me in 6 months), the DSO is generally much higher (180 days in my example for 6 months). Another reason for the high DSO is difficulty in collecting payment from customers. Right now, a lot of companies are having trouble with certain Asian customers (especially chip makers) who can't pay their bills. In these cases, the supplier of the unpaid-for equipment/products will show a rapidly rising accounts receivable. This can be observed by looking at the balance sheet or by looking at the operating cash flow statement. As I said yesterday, rising receivables correspond with declining cash flow, all things equal. After all, if the company is recording sales (shipping its products), but receiving only I.O.U.'s from customers, cash flow will suffer greatly, even though net income may look great. This is a major red flag that tends to precede big writeoffs and dropping stock prices. An easy way to calculate DSO is to divide accounts receivable at the end of the quarter by the sales for the quarter. Multiply this number by 90 (approximate days in a quarter). THQI had $14.7 in receivables and $29.3 in sales. 14.7/29.3=0.50. Half of 90 is 45, which is the DSO. It's good to see a decline in DSO from quarter to quarter, because it means the company is getting paid. Inventory turns is the number of times that a company goes through its inventory, as measured by sales. The lower the inventory being carried, the higher the rate of turns, usually. 43 turns is incredible inventory management. It's almost like a just-in-time business that doesn't need to hold much inventory. Sales divided by inventory equals the number of turns. In Q2, THQ's sales were 29.3, inventory was 2.6, so inventory turns in the quarter were a bit over 11. This is excellent use of capital. Another way to see this is that THQ sold through its average inventory EVERY WEEK. That's very quick turnover. A good way to measure cost of capital is to calculate how much of every sales dollar goes into receivables and inventory. Add up these two figures and divide them by the annualized sales per year. For example, if we double first half sales to $155, and we take the Q2 inventory and receivables figures, we have $17.3. 17.3/155= 11%. That means that it costs THQ only 11› to maintain its business of earning $1 in sales. In other words, THQ doesn't have a lot of cash tied up in unpaid bills and inventory. This makes for a very liquid, low-risk business model that has significant financial flexibility. See how THQ compares with its peers. I'd say that it is either the best or second best in this category. And this reason, combined with the very high sales/employee figure, is much of why THQ is very profitable. Todd