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, Barel Karsan (431 clicks)
Long only, deep value, contrarian
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HQ Sustainable Maritime (HQS) cultivates tilapia and other marine life using aqua-farms. It then sells these fish as part of health and food products throughout Asia, Europe and North America. While the company trades for just $73 million, it reports net current assets of $92 million, and profits (in the latest fiscal year) of $8 million. But upon further examination of the company's financial statements, the actual value of the company's net current assets and profits comes into question.

In the last fiscal quarter, sales were up over 30% from the year-ago period. Sounds good, right? Until one notices that the "accounts receivable" balance is up almost 140% over this period! This suggests the company has been giving its product to anyone who will take it and counting those transactions as sales (which then flow through to profits) without regard for accepting payment. In fact, from the current numbers, it seems as though it takes a full year for the company to collect cash after a sale.

No big deal, one might say. So what if the company finances its customers a little bit, it's still a good deal right? It may indeed still be a good investment, but it does introduce new risks which mitigate its appeal. Only after understanding these risks can the investor make an informed decision as to whether to go ahead with this potential investment.

From an asset point of view, this situation increases the loss to the company should one or more of its customers default. There is some concentration of customers for this company (the top 5 customers account for 37.5% of sales), so without knowing more about the finances of these customers, there is a potential risk here. Receivables represent much more than half of the company's net current assets, so if the investor thinks he is buying assets, he should know there is some larger than normal downside risk attached to them.

From an earnings point of view, the high receivables suggest sales levels aren't actually elevated from year-ago levels. The company is potentially telling customers to take delivery on the product now (to be counted as a sale for the company) without having to pay any time soon. As such, customers are willing to take large deliveries, which pumps up the company's sales and profits without any real basis. Had the company's credit policy been the same as it was last year, the company might even be operating in the red for all we know!

A cursory look at a company's financials can tell an investor whether a company holds promise as a potential value investment. However, the analysis cannot end there. Further scrutiny should be applied to determine if the company's numbers may be overstated. In so doing, the investor can make the investment decision armed with a full knowledge of the risks a company is facing.

Disclosure: None

Source: HQ Sustainable Maritime: Are Those Really Sales?