SGH (in accordance with the standard) charge both interest and tax to the operating part of the cash flow statement.
Normally if a company has been stable, you can take the net profit after tax (not EBIT), add back non-cash expenses (eg depn and amort), and any movement in receivables and similar (eg WIP), and the figure should be roughly in the ball park of the operating cash flow.
But there are other things to take into account. e.g. a net WIP increase won't normally form part of taxable revenue, so SGH allowed $30.7M for income tax expense in 2015 ($12.9M current, $18.9M deferred), whereas they only recorded a cash payment of $6M for income tax in the cash flow. Then the analyst also has to try and work out what went on with consolidating all the purchases etc.
Overall I think the more moderate analysts had a point - conversion rate of NPAT (not EBIT) to cash was something that needed to be watched. Having said that, I reckon SHJ's conversion rate in their half year report a few days ago is worse.
SGH, because its a listed company with access to external capital, can self fund long and expensive litigation for clients, where all the fees come in at the end, that other law firms without external capital, can't do on their own.
But in that situation you should have a hard bitten, cash flow orientated CFO at the top directing what can be undertaken.
On Monday, we may find that the NIHL cases are using up more cash than should have been allowed.
SGH Price at posting:
83.0¢ Sentiment: Hold Disclosure: Not Held
