Hey lordsmasher I agree that NTC's Cash Balance needs to be...

Hey lordsmasher

I agree that NTC's Cash Balance needs to be analyzed carefully. Attention needs to be paid to both capital expenditure and changes in working capital.

Your previous posts show that you have looked at receivables, but you quickly dismissed any concerns due to payables - sort of - balancing out the receivables.

However, it might be worth fleshing out the issue of working capital requirements a bit.

NTC is essentially a manufacturer of telecommunications hardware on the cusp of winning/delivering on multi-hundred million dollar worth of contracts.

That is a GREAT opportunity, but also represents GREAT risk.

NTC will need to order parts for hundreds and thousands of devices, make sure the parts received are up to spec and arrive in a timely manner, assemble and test the end product and then deliver them to the customer and finally, ensure that NTC gets paid. The scope for stuff-ups/risk clearly exists. How well NTC manages this process, will determine its future share price.

It might therefore be worth keeping an eye on Working Capital/Turnover. Given the rapid ramp-up in revenue, I am currently only comparing 1H'18 to FY'17.

For FY'17:
Revenue: $107.6

Receivables: $22.7m
Inventory: $17.2m
-Payables: -$33.6m
Working Capital: $6.3m

So WC/TO = 6.3/107.6 = 5.9%

For 1H'18:
Revenue = $88.6m (i.e. annualised = $177.2m)

Receivables: $32.3m
Inventory: $17.7m
-Payables: -$29.3m
Working Capital: $20.7m

So WC/TO = 20.7/177.2 = 11.7%

So we have 5.9% and 11.7% figures for WC/TO - that is quite a variation! Also, if we assume a doubling in revenue to say $354.4m, at the 11.7% WC/TO rate, NTC's Working Capital requirement would be for an additional $20.7m.

Two data points are not sufficient to either take an average or delineate a trend. I also do not see any benefit in going back further in time to collect more data points due to the rapidly changing revenue profile of NTC.

What it does tell me though, is that one should expect significant volatility in WC requirement as revenue ramps up. Add to that some uncertainty with regard to future capex requirements, and it quickly becomes clear that prudent cashflow management will be of critical importance to NTC.