Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Receivables Growth



Yesterday, John posted a mailbag on receivables growth. Here is my take on receivable growth. Analyzing receivable growth on the surface may produce a lot false positives.

Here is an example of CVS's receivable growth, which was growing at a rate faster than sales for awhile. Is it a bad sign? On the surface I'd say yes, however, that has not been the case. CVS has two categories of products: front end (which are bottled water, cigarettes, etc..) - basic consumables and back end - legal drugs. Payers for the majority of consumables are customers which either pay cash, check or credit/debt card. It takes 1-3 days to collect on the payment made at the front end. However, on the back end the story is different, as insurance companies are the (most of the time) payers for pharmaceuticals. It takes substantially longer for insurance companies to pay pharmacies - 30 plus days.

As pharmacy (back end) sales were growing at a faster pace, they became a larger portion of the company's sales, thus driving up the accounts receivable days (accounts receivables were growing at a faster rate than sales). So in the case of CVS accounts receivables growth is not an issue.

You are raising a very interesting point, and you are right in principal that when revenue growth outpaces sales growth that could be a sign of trouble. As I remember DELL doesn't issue credit to consumers (I'm pretty sure I am right about it, but please check), thus even if you receive credit to buy a computer on DELL's website a finance company like (GE, MBNA (KRB), CapitalOne (COF), etc...) are usually generating the loan and taking a credit risk.

Also, often above average growth in receivables in one quarter is followed by below average growth in the following quarter as calendar timing often distorts things in the short run. I'd definitely yellow flag DELL's accounts receivables and try to get to the bottom of the issue, but don't assume right away that there is a problem. In the case of DELL I'd check if customer mix has changed, as it usually takes longer for business customers to pay their bills then consumers.

I always feel uneasy when a company finances its customers, as incentives become misplaced and the company may end up making bad loans to please Wall Street. Lucent (LU) was a major offender of financing not financially viable dot-coms to make its numbers - we know how it ended.

On the surface Home Depot (HD) numbers looks very suspicious, especially as HD's account receivable days exceeds Lowe's (LOW) by a large margin. I'd definitely check into that one.

< Previous
  • 1
Next >
position in cvs, krb

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos