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Is There More Pain Ahead For Keppel Corporation Limited?

The past 12 months have been a horrible time for Keppel Corporation Limited (SGX: BN4). Over that time period, the conglomerate’s stock price has lost nearly a quarter of its value and its earnings have basically stayed unchanged.

Can Keppel Corp finally put a poor year behind it and look forward to brighter days ahead? Unfortunately, there are signs with the company which point to the potential for more trouble ahead.

There are sales… and then there are uncollectable sales

The accounts receivable line item, which is found in a balance sheet, can be used to help us detect if a company may face problems with its business in the future. The number can be understood as the sales which a company has booked but which have yet to be collected.

Accounts receivables are a normal thing to have for every company, so its presence alone does not mean anything. It’s an issue only when the accounts receivable line item starts growing much faster than sales. In his book Quality of Earnings, investor and author Thornton O’Glove describes the problem as such:

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

Sharp increases in accounts receivables that are not accompanied by strong growth in revenue may be a symptom of diseases that are afflicting a company’s business.

One way in which sales-growth can lag that of accounts receivable’s is when a company’s forced to extend looser credit terms to customers in order to keep its business going. Another instance is when a company’s dealing with rogue customers who are delaying payment, or worse, refusing to pay. There are more.

Keppel Corp’s headache

Keeping all the above in mind, here’s the picture we have of Keppel Corp’s accounts receivable and revenue:

Keppel Corp's year-on-year growth rate for quarterly revenue and accounts receivable

Source: S&P Capital IQ; author’s calculation

As you can tell, Keppel Corp’s accounts receivables have been growing at a much faster pace than its revenue over the past few quarters. To exacerbate the problem, the rig builder’s balance sheet has also steadily deteriorated over the same time frame as you can see in the chart below (note the growing net-debt position):

Keppel Corp's net debt position (2)

Source: S&P Capital IQ; author’s calculation

Ballooning accounts receivables may result in cash flow issues, which, when combined with growing leverage, have the potential to be a combustible mix.

A Fool’s take

None of all the above should be taken as a sign that Keppel Corp will certainly be in trouble going forward. Instead, they are just sources of risk that investors may want to think through when looking at the company.

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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.