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Is Zoltek Companies Going to Burn You?

There's no foolproof way to know the future for Zoltek Companies (Nasdaq: ZOLT  ) 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 Zoltek Companies 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 Zoltek Companies 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. Zoltek Companies's latest average DSO stands at 69.8 days, and the end-of-quarter figure is 71.6 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 Zoltek Companies look like it might miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Zoltek Companies's year-over-year revenue grew 24.6%, and its AR grew 31.5%. That looks OK. End-of-quarter DSO increased 5.6% over the prior-year quarter. It was up 2.9% versus the prior quarter. 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. The Motley Fool has no positions in the stocks mentioned above. 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 September 10, 2012, at 2:11 PM, Abigsoxfan wrote:

    Appreciate the financial analytics on this company and it's receivables. But if you want to know what will make or break this company over the next several years, it will not be found by looking at the past and past financials, it will be the future of commercializing the use of carbon fibers. Right now the big user of CF (at least for Zoltek) is the wind industry in the construction of the blades on their wind turbines. That market is big and looks to get bigger. But the big game changer (should it come) will be in the transportation and infrastructure businesses. In the future cars are supposed to get 30, 40, 50 MPG according to government regulations. Efficiency of engines (although may being able to get marginal improvements) are about as good as they can get. That leaves two ways to get more MPG. 1) Less powerful engines or 2) lighter cars. I don't see a large segment of the populace wanting to give up horsepower, speed, performance so don't see them buying vehicles with less powerful engines. But the performance which could be gained by reducing the weight of cars 20%, 30% or 40% could be immense. And the main way to significantly decrease the weight of vehicles today is the use of composites such as CF. Trucks, trailers, rail cars, ships, etc. can also benefit from being much lighter and saving on the use of fuel. And as society continues to build structures in more dangerous places, along shorelines or in quake zones etc, reinforcement of such structures with composites such as CF may become more widespread. Such uses can see an increase in the use of CF by a magnitude of 5 to 10 times. It is that adoption of use (or lack thereof) which will determine if Zoltek becomes a winner or not. And I don't know when or if this will happen. But I do know that looking at receivables will not answer that question.

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