MiniScribe
Attached herewith is my analysis of MiniScribe Corporation. Rumors in the financial market abound that said company is currently experiencing cash flow and inventory problems, which warranted a need for reevaluation of our present “BUY” rating.
Analysis of their financials and other pertinent information show that the rumors indeed have a basis. Cash is declining. Receivables continue to increase and take considerably more time to be collected. Management’s commitment to focus on innovation thru research and development and investments in their production facilities place further pressure on cash. The average age of payables (almost twice as long as the industry average) confirms their struggle in meeting their short term obligations.
Liquidity is further compromised as the company ties more resources in stocking more inventory. This is not a good move as declines in value due to intense price competition in the industry are expected by early next year. I foresee huge writedowns in MiniScribe’s books in the coming quarters.
While their profits and related ratios are improving, the operating cash flows move in the opposite direction, suggesting the deterioration of the quality of their earnings. Leverage is also higher than industry average which exposes the company to greater swings in earnings.
I believe these all stemmed from their profit-centric evaluation measures as solution to sustain their revenue and profit growth streak. Divisions are motivated to generate more sales as their incentives and bonuses are only tied to their bottom line, without heed to its cash flow implications.
In my opinion, there are two ways to turn all these around: find new markets for its existing product lines or develop an innovative product that will be a hit in the market. With these recommendations far from realization, I'm recommending a rating downgrade from "BUY" to
Analysis of their financials and other pertinent information show that the rumors indeed have a basis. Cash is declining. Receivables continue to increase and take considerably more time to be collected. Management’s commitment to focus on innovation thru research and development and investments in their production facilities place further pressure on cash. The average age of payables (almost twice as long as the industry average) confirms their struggle in meeting their short term obligations.
Liquidity is further compromised as the company ties more resources in stocking more inventory. This is not a good move as declines in value due to intense price competition in the industry are expected by early next year. I foresee huge writedowns in MiniScribe’s books in the coming quarters.
While their profits and related ratios are improving, the operating cash flows move in the opposite direction, suggesting the deterioration of the quality of their earnings. Leverage is also higher than industry average which exposes the company to greater swings in earnings.
I believe these all stemmed from their profit-centric evaluation measures as solution to sustain their revenue and profit growth streak. Divisions are motivated to generate more sales as their incentives and bonuses are only tied to their bottom line, without heed to its cash flow implications.
In my opinion, there are two ways to turn all these around: find new markets for its existing product lines or develop an innovative product that will be a hit in the market. With these recommendations far from realization, I'm recommending a rating downgrade from "BUY" to