The Receivables Issue, MaeMode, Mems And Megan

Comments from the posting MaeMode And Its Receivables Again!

• solomon said...
  With receivables 1.5x of shareholder equities and the company's RM300 million loans, I think this company financial is very very weak.
  
  From the company cashflow statement, interest paid per quarter is RM7million x 4 quarters = RM30mil annually. The cash balance of RM31mil is only managed to pay off the one year interest.
  
  Brother Moolah, "pi po pi po" I think this company need a financial doctor ASAP.///If the bankers pull the brake, could it be the next LCL? Please advise me.

I actually feel that it's difficult to predict if any company would be the next company 'like' LCL. Nothing in life is ever truly certain and in the corporate anything that might happen could happen. And the unexpected could certainly happen too.

So would MaeMode turn into a LCL?

The issue of trade receivables is so simple for me. Company makes sales, company should collect them sales. All of it. A sale is never a sale until ALL the money is collected.

Which is why when I look at a company's balance sheet, I would not like to see high receivables increasing.

Obviously this would suggest to me that 'most likely' the management is either lousy because the company is not able to collect the money due to them. (yes, I would not complicate things here by suggesting fake sales - so for simplicity sake, let's assume all sales and receivables are legit).

And to make matters even illogical is when I see the company's debts increasing at the same time too.

It just does not make sense.

Why borrow more from the bankers when there are already so much money owed to the company?

Why can't the company collect these money instead of borrowing more?

And from a business point of view, if one is offered to be a co-owner of such a business, would such a business proposition appeal? Won't the logical answer be NO? Why would one want to be a co-owner in a business which requires more and more funding when it cannot collect the money owed to them?

And since I equate investing to owning a business, I would always, always shy away from such business opportunity. No matter what future prospect the company says it could achieve because in the long run, for me, without collection, such a business would most likely go no where.

Of course, having said that, I understand I could miss out on one or two opportunities! Such mindset is never 100% fool proof because because sometimes the wheel of fortune could really turn for such a company but this is something I would not want to bet on it because I am merely speculating that changes out of the blue could happen. I would rather forgo such an opportunity and invest in a company which has no such risks.

And sometimes, being safe, does work. Ok, I am not bringing out the goats from the farmville and let them gloat all over this posting but let me show an incident where investing using such a mindset did work out. It did prevent the investor from losing their money.

Here's my most famous example written way back on Oct 2005, Megan

• And then their trade receivables increased by some 17 million to an unbelievable 270 million! Holy moo-moo cow! What kind of business is Megan running? Selling without collection?

Yup, the classical selling without collection and debts increased soared too. Rest were history as Megan turned into one massive accounting fraud!

Or how about Mems technology. Yet another deeply troubled company too. From the posting Mems Tech Directors Charged!!

• A couple of months later, I wrote A Brief Look at Mems Latest Quarterly Earnings
  
  It was astonishing! All the warnings signs were lit. Trade receivables were insanely high when compared to its sales revenue. Cash depleted to a mere 3.191 million and loans increased by 7.441 million to 50.796 million!

Now coincidentally Mems reported its earnings last night.

It lost an incredible 21.1 million!

And the main culprit? A 20.9 million provision for doubtful debts!!!

Yup, as mentioned in yesterday's posting MaeMode And Its Receivables Again!

• And I wonder, since it's the receivables are in MaeModes books for so long, what if these receivables are scrutinised and review in depth? What if a huge portion needs to be reclassified as doubtful debts??? And when this happens, due to size of the receivables, won't MaeMode get hit by huge loss provision for these doubtful debts??

Again this is a possibility yes?

Maemode's receivables is at a totally unreal 355 million!

It's simply way too much!

And for the long term investor the risk has got to be what if these debts needs to be reclassified as doubtful debts??? Won't MaeMode get hit by huge loss provision for these debts???