Money Matters - Simplified

Does This Mean Lincare Holdings Will Bomb Next Quarter?

There's no foolproof way to know the future for Lincare Holdings (Nasdaq: LNCR) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

 

 A cloudy crystal ball

I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. It's an important step in separating the pretenders fromthe market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- days worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Lincare Holdings do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Lincare Holdings sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

 

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.

Company

LFQ Revenue

DSO

 Lincare Holdings $419 44
 PharMerica (NYSE: PMC) $443 41
 Kinetic Concepts (NYSE: KCI) $507 70
 Hill-Rom Holdings (NYSE: HRC) $397 79

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully-reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will Lincare Holdings miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Lincare Holdings's year-over-year revenue grew 6.6%, and its AR grew 13.9%. That looks OK, although it's not ideal. End-of-quarter DSO increased 6.8% over the prior-year quarter. It was down 4.5% versus the prior quarter. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

© 2010 UCLICK L.L.C.