Pre 8 a.m. comments

Good morning! It looks as if small cap Directors spent the weekend enjoying the sunshine, as there are very few results or trading announcements from them today.

Synectics (LON:SNX) announce a major contract win with Stagecoach. Although I'm wondering whether they have got the balance right in announcing frequent contract wins, when in this case £5m over three years doesn't sound material to their results?

 

Although it's now a mid-cap, I cannot hold back on commenting on results from Quindell Portfolio (LON:QPP).

On the surface they look amazing - turnover has risen from £13.7m to £137.6m. The profit margin looks incredibly high, as in not credible. However, the biggest red flag by far is that Debtors has risen from £31.7m to £202.3m! That's not a typo. The increase in Debtors is higher than the entire year's turnover! So that surely means that all the sales & profits booked for the year have not actually resulted in a single penny in cash being collected from those sales?

I'm almost blinded by the red flags jumping out at me from both the figures & the commentary. It reminds me very much of one of my worst investing mistakes a few years ago, Accident Exchange - which operated in the same area as Quindell, supplying replacement vehicles to people who have had accidents & then trying to reclaim the money from their insurance company.

They load up the pricing, which generates huge paper profits, and then haggle with insurance companies over payment, which results in a debtor book just getting longer & longer, before eventually there are huge discounted settlements, a large chunk of debtors is written off, the shares collapse, and a rescue refinancing is needed.

Quindell might be different, but the key figure to watch is debtors, and as I expected, this has ballooned to a clearly excessive level with QPP, so the big warning sign from similar companies in this sector whose shares eventually collapsed to virtually zero, is there - loud & clear.

I will never again invest in any company which cannot keep a tight control on its debtors. A large & growing debtor book is almost always a precursor to serious problems. That's the same reason I never invest in any Chinese companies, as they don't…

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