There’s no foolproof way to know the future for Mindray Medical International Ltd (ADR) (NYSE:MR) or any other company. However, certain clues may help you see potential stumbles before they happen — and before your stock craters as a result.
In this series, we use accounts receivable and days sales outstanding to judge a company’s current health and future prospects. It’s an important step in separating the pretenders from the market’s best stocks. Alone, AR — the amount of money owed the company — and DSO — the number of 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, at times, 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 Mindray Medical International Ltd (ADR) (NYSE:MR) 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 Mindray Medical International Ltd (ADR) (NYSE:MR) sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:
Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.
The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter 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 indicates a trend worth worrying about. Mindray Medical International Ltd (ADR) (NYSE:MR)’s latest average DSO stands at 52.9 days, and the end-of-quarter figure is 54.0 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let’s get back to our original question: Based on DSO and sales, does Mindray Medical International Ltd (ADR) (NYSE:MR) look like it might miss its numbers in the next quarter or two?
I don’t think so. AR and DSO look healthy. For the last fully reported fiscal quarter, Mindray Medical International Ltd (ADR) (NYSE:MR)’s year-over-year revenue grew 19.7%, and its AR dropped 7.4%. That looks OK. End-of-quarter DSO decreased 22.6% from the prior-year quarter. It was down 15.2% 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.
The article Mindray Medical International Passes This Key Test originally appeared on Fool.com.
Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has no position in any of the stocks mentioned.
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