Is RF Micro Devices Growing or Slowing?

There's no foolproof way to know the future for RF Micro Devices (Nasdaq: RFMD  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

A cloudy crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- days worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Or it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding company like RF Micro Devices do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is RF Micro Devices sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: Capital IQ, a division of Standard & Poor's. Data is current as of latest fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.

Company

LFQ Revenue

DSO

 RF Micro Devices $286 42
 Broadcom (Nasdaq: BRCM  ) $1,754 39
 Cree (Nasdaq: CREE  ) $268 41
 Marvell Technology Group (Nasdaq: MRVL  ) $959 45

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of latest fully reported fiscal quarter. LFQ = latest fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will RF Micro Devices miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the latest fully reported fiscal quarter, RF Micro Devices' year-over-year revenue grew 12.2%, and its AR grew 33.6%. That's a yellow flag. End-of-quarter DSO increased 10.6% over the prior-year quarter. It was down 0.6% versus the prior quarter. That demands a good explanation. Still, I'm no fortune-teller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Fool owns shares of Marvell Technology Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 30, 2010, at 5:23 AM, monrio1 wrote:

    Seems logical AR would go up if sales are on the rise. DSO shows control of AR.

    The upper hump of the green line explains the revenue recovery of a year ago or so and that rate is not sustainable.

    This boilerplate article has been applied to a half dozen stocks I watch.

    I guess what Motley is saying is know the source of Rfmd revenues and whether they're likely to continue. The rest of the AR/Revenue comparison is basic to any growing company.

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