Fundamental Analysis Part II16 Nov 2017 16:29
Trade Receivables
While much has been documented about the increase in trade receivables and its impact on cash flow, I would put forward that this is in fact an extremely positive development.
Until this half year, ZOO have had to rely on the use of invoice financing to fund their operational cash flow. I wont go into the detail of invoice financing (some specifics relevant to ZOO can be found in last years annual report on page 52), however in addition to it being a cost based means of cash flow management, it does not carry great credibility amongst clients.
The fact that ZOO are in a position to carry such a higher trade receivables number, is testimony to the company�s �new found standing� with its lenders given far greater fluidity in revenue receipts.
For those questioning the validity of the above it is backed up by both a deeper analysis of debt interest, and endorsed by Finncap in their recent note.
Finncap stated, �Importantly, we understand that ZOO�s working capital cycle and cash position is no longer affecting operations, as the company is using short-term debt when necessary�. In essence a short term overdraft facility.
As mentioned, this is further endorsed when looking at debt interest.
- Over the FY�s 2016/17 and 2017/18 ZOO have paid debt interest on the following; CLN�s, Insider Loans (Sara Green), Invoice Financing and Lease Financing
- The Sara Green Loan and one of the CLN�s were repaid through equity in May 2017.
- Zoo reported total debt interest of $221,000 for H1 2017 / 18 and $291,000 for H1 2016 / 17.
- The CLN / Loan interest for H1 2017 / 18 was circa $138,000 (including a May 2017 cost of $12,700 for the closed loan and CLN) and $189,000 in H1 2016 / 17.
- Stripping the above out of the reported interest for each year would give a remaining interest figure of $83,000 for 2017 / 18 and $102,000 for 2016 / 17. These remaining interest figures comprise lease interest and any remaining working capital interest payments.
- It is my understanding that lease interest payments are increasing, however notwithstanding this it is fundamentally clear that ZOO�s interest payments on operational cash flow requirements have substantially reduced, and quite possibly by a dramatic amount (and all at a time where work in progress has increased by 60% over the corresponding period). The extent of the decrease will only really be shown in the full year report.
This clearly backs up the theory, and Finncap�s note, suggesting ZOO now have the financial muscle and liquidity with the banks to operate on short-term overdraft facilities, as opposed to the high interest-bearing route of invoice financing. Continued in a third post.
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