Ann: Appendix 4E, Annual Accounts & Performance Guidance, page-5

Excellent post Gralynchett. You have shone the spotlight on SNL and appropriately asked why cashflow is so weak and debt growing yet at the same time profits are rising. These are key points you make. It made me look closer at the last three year's sets of accounts to do some more analysing.

To see if truly the company is generating more cash each year, we can look at cash receipts and examine how they compare with revenue from the last 3 Financial Years (FY12, FY13, FY14).
Revenue   + 33%   (2012 - 2014)
Cash Receipts + 32% (2012 - 2014)
This is a good sign as the two measures are in sync, so revenue is being received appropriately.

Another back-up check is to see what is happening with Accounts Receivable. They have grown by 14.5% over the same period. ie. Half the rate of the growth in revenue, this is also a positive signal as SNL has no difficulty in collecting dues.

So we know that adequate cash is coming in, but why is there such little free cashflow? As Graylynchett pointed out, free cashflow is only $3.56m in total in the last 5 years while NPAT is $14.5m!

The company management have made the following observations of why free cashflow is low:
1. Accelerated growth of the store network (more stores and stock needed).
2. Wider range of products (more stock needed)
3. Weaker $A (more expensive to purchase stock)

*We do know there are new stores (Dunedin, Toowoomba) and recently opened stores that have been growing quickly requiring extra stock.
*We also know that the company has made a concerted push in the truck parts business by offering a wider range of products.
*We know the $A has fallen.
*And to further corroborate what the company is saying, we can look at the inventory levels. The inventory balance has risen by $9.9m in the last 3 years, or 55%. This is a significant rise. If we add this $9.9m to free cash flow over the last 3 years we get a much more respectable figure of $13.46m of free cashflow before inventory changes.

I think analysis shows that much of the cash generated is going into inventory as part of the expansion of the company. This is not to say that we shouldn't watch the situation closely, it always pays to be vigilant. It will be important to watch the cash position in future periods particularly with outlays of $2.0m for the new Pemulwuy facility in FY2016. Also it is worth checking to see if the cost of the more expensive stock can be passed on to customers in future periods. (Companies can do this if they have a strong market position / offering and will this will test SNL's competitive positioning).

In terms of debt, one could argue it has been used to finance the increase in inventory (as most companies do with Trade Payables) as opposed to financing the dividend. Irrespective, with about 10% of total assets financed by debt, IMO debt is very manageable at the moment. Again, we should watch closely how the Balance Sheet changes in the year's ahead as the strategy of expansion takes its course.