What Investors Should Know About Challenger Technologies Limited’s Big Decline In Cash Flow In 2015

The movement of cash into and out of a company is important to track. After all, cash is the lifeblood of a business. If a company does not have cash to run its daily operations, it may have to rely heavily on borrowings or the issuance of new shares to run its business – both bring risks to investors.

It’s with this in mind that I took a look at the cash flow statements of Challenger Technologies Limited (SGX: 573) from 2011 to 2015. As a brief background on the company, Challenger Technologies is primarily a retailer of IT products with 48 stores around Singapore. It also has tiny businesses providing call centre and electronic signage services.

The following chart shows Challenger Technologies’ operating cash flow and free cash flow for the aforementioned five year timeframe:

Challenger Technologies cash flow chart - Wilson
Source: Challenger Technologies’ annual reports

You may have noticed that the chart also illustrates Challenger Technologies’ net income. In general, there can be disconnects between a company’s operating cash flow and net income because a company may be booking revenue even before the actual cash from a sale flows into its coffers. This is another reason why it’s important for investors to keep an eye on the flow of cash in a company.

As you can see from the chart above, Challenger Technologies’ operating cash flow had been improving from 2011 to 2014, but plunged in 2015 to just S$5 million. This happened even though net income actually increased from S$15.1 million in 2014 to S$17.7 million.

Challenger Technologies paid off a larger sum of money to its suppliers (in the cash flow statement, this is known as changes to the company’s trade and other payables) in 2015, resulting in the lower operating cash flow. Investors may want to watch how changes in the company’s trade payables look like over the next few years.

Free cash flow is derived by deducting capital expenditure (often known as ‘Purchase of plant and equipment’) from operating cash flow. Capital expenditure is the cash used by Challenger Technologies to invest in or upgrade its assets to maintain its business.

Having positive free cash flow is important because it allows a company to invest for growth, pay dividends, or pare down debt. Without free cash flow, a company will have to tap into the capital markets by borrowing from banks, undertaking private placements, or issuing rights to shareholders.

Challenger Technologies’ free cash flow fell hard in 2015, along with its operating cash flow. But, the company still has strong cash resources – it ended 2015 with S$41.7 million in cash and equivalents and no debt.

A Fool’s take

To sum up, Challenger Technologies has seen its operating cash flow and free cash flow fall hard in 2015. Investors might want to observe if the two cash flow numbers can improve in the coming years. Challenger Technologies has already seen improvement in the first-half of 2016 – operating cash flow came in at S$7.4 million, up significantly from the negative S$8.6 million seen in the first-half of 2015.

In any case, it should be noted that more work needs to be done beyond this cash flow analysis before any firm investing conclusion can be made on Challenger Technologies. This look at the company’s cash flows should only be seen as a useful starting point for further research.

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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 contributor Wilson Ong doesn’t own shares in any companies mentioned.