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The Good And Bad That Investors Should Know About Dutech Holdings Ltd’s Latest Earnings

Dutech Holdings Ltd (SGX: CZ4) is in the business of making safes, with a focus on ATM and banking safes. It is the largest manufacturer of high security products in Asia.

In early March, the company reported its 2017 full year earnings update. There are both positive and negative takeaways that investors may want to learn about.

The positives

Firstly, Dutech’s revenue in 2017 grew by 19.2% to RMB 1.66 billion. This was mainly driven by the company’s Business Solution segment, which saw higher revenue due to organic growth as well as acquisitions.

Next, Dutech ended 2017 with a strong balance sheet. As of 31 December 2017, Dutech’s debt stood at RMB 216.6 million while its cash and bank balances was RMB 298.2 million, giving it a high net cash position of RMB 81.6 million.

The negatives

Firstly, although Dutech’s revenue experienced a healthy increase in 2017, its costs grew significantly faster than revenue, resulting in a 49% decline in net profit during the year to RMB 64.26 million. Dutech suffered from higher raw material prices and acquisition-related expenses.

Secondly, Dutech’s inventory grew by 36.2% from RMB 274.3 million at end-2016 to RMB 373.7 million at end-2017, despite the company’s revenue in the fourth quarter of 2017 increasing by only 4.4% per year. The presence of inventory growth that significantly exceeds that of revenue in a company for a sustained period of time can be risky for investors. Dutech said that its inventory increased mainly due to a stock up in order to mitigate the impact of steel price increases and to meet the needs of sales growth at its German subsidiaries.

Thirdly, the company’s operating cash flow in 2017 declined significantly from RMB 95.1 million in 2016 to just RMB 13.0 million.

Lastly, although Dutech’s balance sheet ended 2017 with a high net cash position at the end of 2017 as mentioned earlier, the company’s balance sheet actually weakened compared to a year ago. At the end of 2016, Dutech’s net cash position was RMB 171.3 million.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.