Could There Be More Trouble Ahead For Noble Group Limited?

Noble Group Limited (SGX: N21) released its third-quarter earnings report yesterday evening and the numbers were ugly.

The commodities trader’s revenue and profit attributable to shareholders for the quarter were down year-on-year by 20% and 84%, respectively. Meanwhile, Noble’s operating cash flow had worsened from US$331.7 million a year ago to US$317.7 million. The market didn’t like the figures and Noble’s stock has fallen by 9% to S$0.46 as of the time of writing (4:15 pm).

Will the company be able to turn its business around soon? Thing is, even if Noble is able to do so, there may be more pain ahead before the clouds clear.

A hint of trouble

A company’s accounts receivable line item, which is found on the balance sheet, can be useful in detecting potential trouble ahead.

The line item, which can be simply understood as sales which are booked but which have yet to be collected, is a normal thing to have for nearly every company. As such, its presence alone shouldn’t cause alarm.

But, investors may want to sit up and take notice when a company’s accounts receivable starts growing at a much faster pace than revenue. In his book Quality of Earnings, investor and author Thornton O’Glove warned:

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

When spikes in accounts receivables happen without similar growth in sales, it may be a symptom of problems that are plaguing a company. For instance, the firm may have been forced to extend looser credit terms to customers in order to keep its business going. In another scenario, the firm may have customers who are unable and/or unwilling to pay. There can be more headaches.

Noble Group’s pain

Keeping all the above in mind, here’s how Noble Group’s growth in accounts receivables and revenue over the past few quarters have looked like:

Chart 1 - Noble's year-on-year growth rate for quarterly revenue and accounts receivable

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

As you can see, Noble’s revenue has seen year-on-year declines starting from the first-quarter of 2015. And yet, its accounts receivables have climbed.

Chart 2 - Noble's net debt position

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

Growing receivables may result in cash-flow issues. When that is coupled with a highly-geared balance sheet – like what Noble has (note in Chart 2 how Noble’s net-debt has clocked in at more than US$2.0 billion over the same timeframe as Chart 1) – ugly scenarios could develop. Noble’s last-reported total equity figure was US$5.08 billion, so a net-debt position of more than US$4 billion now is not trivial.

A Fool’s take

All that you’ve seen above is not meant to be a warning that Noble is bound to run into even deeper trouble in the future. They are just some risks that investors may want to note 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.