The accounts receivable warning siren isn’t a new one. In fact, just last year this measure foretold a massive 86% drop in one particular Chinese stock.
China Finance Online (NASD: JRJC) is a financial service company in China (I know, not the most creative name, huh!) that did quite well before the global meltdown of 2008. Even after the global crash, China Finance Online was rebuilding and gaining back market value.
That is, until late 2010 when the company’s accounts receivables showed a massive spike higher. Here’s a quick chart I’ve put together, showing both Accounts Receivable and Total Revenue for JRJC.
In the second quarter of 2010, China Finance Online was owed a little more than $17 million. One quarter later, that value spiked over 340% to $76 million.
This would have been fine if total revenue had also spiked by an equivalent amount. But it didn’t. Total revenue at China Finance Online steadily declined after peaking in the second quarter.
This divergence – flat revenue and spiking receivables – was a clear warning signal that something was wrong. Sure enough, JRJC has gone on to lose some 86% of its market value since peaking in late 2010. Take a look…
A company’s accounts receivable can increase for a number of reasons. Some companies simply mismanage receivables, giving their client too much slack. Sometimes, this is even intentional.
Public companies, in the effort to meet analysts’ quarterly revenue targets, can be tempted into offering loose payment terms to win new orders toward the end of a quarter. Basically, they care more about the revenue being tallied in their GAAP-approved books than actually collecting the money.
This may be the case with individual companies, but it’s unlikely this is happening all over China. Instead, Chinese companies may be caught in the painful shift of slowing global demand. Some of their clients will pay. But many will not.
If you haven’t done so already read the Survive & Prosper issue on “China’s Growth Rate Bears Out Global Slowdown”
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