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Are There Even More Problems on the Horizon for Genting Singapore PLC?

Anyone calling Genting Singapore PLC (SGX: G13) a troubled share now wouldn’t be too far off the mark.

Since the start of 2014, shares of the owner and operator of Resorts World Sentosa have fallen by 31% in price to its current level of just above S$1.00. In comparison, the broader market, as represented by the SPDR STI ETF (SGX: ES3), is actually up 3.4%; the exchange-traded fund is a proxy for Singapore’s share market bellwether, the Straits Times Index (SGX: ^STI).

Although a falling share price could make for a potentially sweet bargain if the underlying business is growing fast, that’s not really the case with Genting Singapore. In the company’s recent third quarter earnings release, there was a 17% year-on-year decline in quarterly revenue which consequently led to a 50% slash in profit.

And as if that wasn’t bad enough, there are signs with the company’s financials which point toward more potential trouble ahead.

What’s the point of making sales you can’t collect?

When it comes to detecting if a company might face difficulties in the future, we can scrutinise its accounts receivables. The accounts receivable line item is found in the balance sheet and it can be simply understood as sales which have been booked but not yet collected.

It’s normal for any business to have accounts receivables, but there’s a problem when the line item starts growing much faster than sales. As investor and author Thornton O’glove wrote in his book Quality of Earnings:

“Whatever the cause, major increases in accounts receivables is a danger sign.”

That’s because large spikes in accounts receivables which aren’t accompanied by a commensurate increase in revenues can be a symptom of some serious underlying issues with a company’s business.

For instance, the company might have been forced to extend loose credit terms to customers in order to keep its business going. In another instance, the company might be facing rogue customers who are taking too long to pay or in the worst case scenario, never pay. These are just some of the scenarios which can be plaguing companies that have accounts receivables which are growing much faster than sales.

Genting Singapore’s problem

With all the above in mind, let’s take a look at the chart below.

Genting Singapore's revenue and accounts receivable growth

Source: S&P Capital IQ

As you can see, Genting Singapore’s accounts receivables have been growing at a significantly faster pace than its revenue over the past few quarters. This is not meant to say that the company will definitely be in trouble sometime down the road, but it’s still an important issue which investors need to keep an eye on.

A Fool’s take

Genting Singapore’s facing some serious headwinds in its business now, as the following comment from management in the company’s third quarter earnings show:

“The Asian gaming and tourism industry is experiencing significant challenges in the face of economic slowdown in our major visitor markets and other environmental factors.”

With such an outlook, falling revenues in the future would hardly be surprising. But, if Genting Singapore also has trouble collecting past sales (which is a plausible scenario for the company given the disproportionate growth in its accounts receivable in relation to revenue) and converting it into cash, it would really exacerbate the company’s problems.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.