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Submitted by: Prince Damin
There’s no foolproof way to know the future for Simpson Manufacturing (NYSE: SSD) 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.
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 from the 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 Simpson Manufacturing 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. 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 from the 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. Is Simpson Manufacturing 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. 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.
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 Simpson Manufacturing 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, Simpson Manufacturing’s year-over-year revenue shrank 2.4%, and its AR dropped 13.3%. That looks OK. End-of-quarter DSO decreased 11.2% from the prior-year quarter. It was up 1.5% 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.
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