2 Useful Ways To Detect Companies That Could Run Into Problems In The Future

A little over two years ago on 4 November 2014, I wrote an article pointing out troubling trends I saw in the business of three companies, Pacific Andes Resources Development Ltd (SGX: P11), Challenger Technologies Limited (SGX: 573), and Maxi-Cash Financial Services Corp Ltd (SGX: 5UF).

The troubling trends were growth in the three companies’ inventories and accounts receivables that outpaced their revenues. I thought it’d be interesting to see how the stories of the trio have changed since I first wrote the article.

So, here’s a table showing their share price changes:

Source: S&P Global Market Intelligence and Yahoo Finance

As you can tell, PARD, Challenger Technologies, and Maxi-Cash have not been good investments for their shareholders at all in the past two-plus years (PARD had in fact, filed for bankruptcy protection earlier this year, thus decimating its shareholders’ capital). But, that’s not where our attention should be trained on.

Billionaire investor Warren Buffett once wrote, “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.” So, let’s look at how the three companies’ revenue and profit have changed since 4 November 2014.

Source: S&P Global Market Intelligence

Putting aside the developments in PARD given that it is now a bankrupt company, it turns out that Challenger Technologies has not produced much growth in its business for the period under study. It is only Maxi-Cash that has seen its revenue and profit climb substantially.

The Foolish bottom-line

A company that has seen its inventory and accounts receivable grow much faster than its revenue may not necessarily see its business run into problems in the future.

But as demonstrated by the experience of PARD, Challenger Technologies, and Maxi-Cash, when such trends appear in a company, it could pay for the investor to take a good hard look at the company in question.

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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.