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Investors Beware! More Problems May Be Ahead For Cosco Corporation (Singapore) Limited

Shipbuilding outfit Cosco Corporation (Singapore) Limited (SGX: F83) has had a tough time over the past three months with its shares falling by nearly 30% to S$0.375.

It’s no real surprise though, if we dig through some of the firm’s recent filings. In April and May, its customers had started asking for delays in the deliveries of their orders.

Then, in mid-July, Cosco had released a profit guidance, announcing that it will likely clock losses for the second-quarter of 2015. This turned out to be right, with the firm suffering a S$10.3 million loss for the quarter and a 26% year-on-year slump in revenue to S$853.5 million.

These developments have likely acted as anchors on Cosco’s share price. Will things turn for the better anytime soon? Unfortunately, there are signs that more trouble may be ahead.

A yellow flag

One good way to detect for potential problems in the future with a company would be to scrutinise its accounts receivables. The accounts receivables line item is found in the balance sheet and it’s simply sales which have been booked but are not collected yet.

It’s entirely acceptable for any business to have accounts receivables. But, it may be a problem when the line item starts growing at a much faster rate than sales. “Whatever the cause, major increases in accounts receivables is a danger sign,” wrote investor and author Thornton O’glove in his book Quality of Earnings.

Large spikes in accounts receivables that are not accompanied by commensurate growth in revenue can be a symptom of big problems with a company’s business that are lurking beneath the surface.

As an example, the company may be dealing with rogue customers who are taking too long to pay, or who would never pay. In another instance, the firm may have been forced to extend loose credit terms to its customers in order to keep their business.

Cosco’s problem

With the above in mind, here’s a chart showing the year-on-year growth rates for Cosco’s quarterly revenue and accounts receivables over its past eight quarters:

Cosco's year-on-year growth rate in revenue and accounts receivable

Source: S&P Capital IQ

I trust it’s obvious to see that Cosco’s accounts receivables have been increasing at much faster rates than its revenue over its past four fiscal quarters. Now, this is not meant to say that the firm will definitely have to face even more serious problems in the foreseeable future. But, the issue with the ballooning accounts receivables is still something investors need to keep an eye on.

A Fool’s take

Cosco’s currently suspended from trading. That’s due to the pending release of an announcement dealing with a possible “significant transaction” that involves its parent company, the Chinese state-owned enterprise China Ocean Shipping (Group) Company.

At its current share price of S$0.375, Cosco’s valued at a very low price-to-book (PB) ratio of just 0.61. For some perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking Singapore’s market barometer, the Straits Times Index  (SGX: ^STI) – has a PB ratio of 1.3 at the moment. When Cosco resumes trading of its shares, bargain hunters who are attracted to the firm by virtue of its low PB ratio might want to be aware of the risks involved.

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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 doesn't own shares in any companies mentioned.