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Why Keppel Corporation Limited May Be In For More Pain Ahead

2015 has been a horrible year for the conglomerate Keppel Corporation Limited (SGX: BN4). Not only has its stock fallen by 27% in that year, but its business has suffered too, with revenue and net profit plunging by 22.5% and 19.1%, respectively.

Will things improve for Keppel Corp anytime soon? Unfortunately, there are some signs which point to potential problems ahead, at least over the short-term.

The yellow flags

These signs can be an important element of financial statement analysis, and they deal with how Keppel Corp’s growth in inventory and accounts receivable have far outpaced sales-growth in recent quarters. Before I go into the specifics, let me spend some time on inventory, accounts receivable, and revenue (or sales) in a general sense.

Now, inventory resides in the assets portion of a company’s balance sheet. It can be simply understood as things a company expects to sell in the future. But, when inventory starts growing faster than sales, it could be a sign that a company’s products are fast-becoming obsolete or that demand from customers have grown weaker. Both are quite clearly not good things to happen to a company.

As for accounts receivable, it too lives in the assets portion of a company’s balance sheet. When a company sells its product to a customer, payment need not necessarily have been received by the company yet, even if the product is already in the hands of the customer. The promise by a customer to pay for the product is what forms accounts receivable.

When a company’s accounts receivable starts to climb at a higher clip than revenue, it may be a sign that the firm is having trouble collecting payments from customers or that it has been forced to extend looser credit terms to customers in order to keep its business going. There can be more issues, but the previous two are some good examples.

A sinking ship…?

Coming back to specifics with Keppel Corp, take a look at the chart below, which plots the year-on-year growth in the rig-builder and property developer’s quarterly revenue, inventory, and accounts receivable over the past few quarters:

Keppel Corp's year-on-year growth rate for quarterly revenue, inventory, and accounts receivable (2)
Source: S&P Capital IQ (click chart for larger image)

We can see that for the whole of 2015, the firm’s inventory and accounts receivable have grown at a much faster pace than revenue. In the most recent quarter – the fourth-quarter of 2015 – revenue had declined by 37% year-on-year and yet accounts receivable had spiked by 47% while inventory had stayed flat.

At this point, investors should note that the financial analysis we’ve seen with Keppel Corp here shouldn’t be taken as a sign that the firm will definitely be in business-pain in its upcoming quarters. But, it still highlights important risks that current and prospective investors of the company may want to note.

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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.