"I think you may be underselling it a bit here. The main concern 18 months ago was the thesis by Jimmy C that WIP was not converting to cashflow fast enough, the WIP on the balance sheet was grossly overstated and the business wasn't growing"
There is a bit of a cognitive pitfall that investors and Shine executives may fall into with the "covert to cash narrative" - which is the (incorrect) view that it's always good for the numbers on the income statement to match the numbers on the cashflow statement.
At best that's over simplification and much depends on the type of work being performed. Of course all things being equal the types of work that instantly convert to cash are superior because there is lower risk and a move to diversify into that type of work is good.However if we are trying to assess Shine's past vs present performance in the same types work (e.g. PI part of the business now vs in the past) we need to be a bit careful.
We need to remember that for types of work that take more than a year to covert to cash, revenue on the income statement is a LEADING indicator.
Hypothetically if the business was entirely PI (it isn't but bare with me) and the adjusted income statement matched the Operating cashflow then this would mean that the business had stopped growing.
Take a look at this graph i previously posted in another thread. As you can see the Income per share and Operating cashflow per share are converging. This means a few things both good and bad:
- divergence between these numbers indicated overstatement of WIP / fraud - so does convergence mean overstatement / fraud is less likely?
Overstatement was probably happening prior to 2015 hence the writedowns - however the convergence does not mean this problem has been completely eliminated.... this issue can hide behind other factors.
- there's a move towards work that pays out sooner
This is good and bad.... types of work that systemically pay as the work is done is good. However for other types of cases if there is pressure to end cases prematurely (just to collect revenue with consequence of giveing inferior service to the customer) this is bad long term. Ideally we should not be doing the latter, but perhaps both of these things are happening.
- there may be a slow down in growth
We know this is the case. Slowing down on acquisition is actually a good thing under the circumstances for reasons i have discussed in past threads. As a rule of thumb the business should wait until after the Share price recovers (and is above intrinsic value) before going back to expanding via acquisition. However there should be a move to maximize organic growth and we should be worried if this stalls. As investors we should perform some analysis to identify if organic growth is occurring - to the extent this can be done with information publicly available.
The real danger of this narrative is that it may push SHJ executive to short term thinking which damages the business in the long term. Let's hope they avoid this trap.
