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Will Nordic American Tankers Whiff on Revenues Next Quarter?

There's no foolproof way to know the future for Nordic American Tankers (NYSE: NAT  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding 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 -- the number of 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. Alternately, 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 firm like Nordic American Tankers 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 Nordic American Tankers sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last 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 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 indicates a trend worth worrying about. Nordic American Tankers' latest average DSO stands at 102.5 days, and the end-of-quarter figure is 117.3 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does Nordic American Tankers look like it might miss it numbers in the next quarter or two?

Investors should watch the top line carefully during the next quarter or two. For the last fully reported fiscal quarter, Nordic American Tankers' year-over-year revenue shrank 56%, and its AR grew 9.8%. That's a yellow flag. End-of-quarter DSO increased 149.3% over the prior-year quarter. It was up 186.6% versus the prior quarter. That demands a good explanation. Still, I'm no fortuneteller, 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. 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.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 04, 2012, at 2:01 PM, TankedUp wrote:

    Spot market rates were very soft until the end of November. They have strengthened since, but are highly unpredictable. If rates hold or continue to strengthen through this month, NAT's next reporting period may show remarkable resilience.

  • Report this Comment On January 04, 2012, at 2:41 PM, psl8er wrote:

    NAT will continue to post declining revenues through 2012 and will have to borrow to pay any dividendsThere is no outlook that changes this picture as all tanker companies in the crude markets face the same problem of a GROWING oversupply of ships and flat demand shrinking slowly.

  • Report this Comment On January 10, 2012, at 1:26 AM, Bulkbeefjerky wrote:

    NAT has cleverly written press releases that make it sound like it will deliver a dividend. Day rights are growing stronger in the oil segment, and I believe NAT will beat their numbers. This would make it the 53rd consecutive dividend. (I think*)

    -Seth- Great insight into looking at some of the business metrics. 102 days to 117 days isn't that alarming to me .. 2 weeks delay in payment.. it could be a trend or a major account that delayed for some reason.

    They also put 5 new ships into the fleet this year, growing their revenue potential.

    I'm kicking myself for not buying the Jan 21st $12.00 call, but my instinct was right.

    What are you thoughts on RAM- ? If a company has market cap of $200m* and has an financing infusion of $550m how should I come up with a target price?

    Also- if you want some beef jerky - come visit my site and I'll get you out a sample pack.

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