Note: The original version of this article contained estimates that were inaccurate. They have been updated with the most recent estimates provided by the company. The author apologizes for these inaccuracies.
Late last night, Navarre
Whenever I read something like this, my first instinct is to look deeper, especially when the stock price falls by almost 10% in a day. There's always something juicy to learn from these situations, and sometimes you might find a bargain or two. After being a Business Week poster child for growth in 2004, Navarre has not had a particularly good 2005. The stock price is down by just over 60% from its 52-week high near $20. Sweet . more fuel for my fire.
As a distributor and producer of multimedia content -- CDs, DVDs from Lions Gate
To understand the growth in working capital vs. the growth in sales, I wanted to make an estimate about where sales might fall at the end of the year. In a nutshell, working-capital requirements have gone up in 2005 and appear to have increased faster than sales.
This is evident in the cash-flow statement, too. As of the third quarter, Navarre had blown through $29 million in operating cash even though earnings had more than tripled to $19.9 million. (Remember that net income sits at the top of cash from operations.) On the balance sheet, there's only $5,000 (yes, thousand) in the bank, and $12 million of additional credit has been used. All of this, coupled with the recent spending on acquisitions, is evidence that Navarre is consuming cash despite the fantastic earnings growth. I think the big reason for the sell-off in 2005 is that shareholders wonder whether these numbers will generate enough returns.
So if you were thinking of using the stock-price drop as a way to pick up some shares on the cheap, I urge you to think twice. Navarre has to prove that it can create cash for its shareholders, not just burn through it. If FY 2005 comes in as planned, then Navarre's cash flow from operations should be positive, but less than net income. Fools should take this situation as yet another reminder of why earnings can be misleading, and why understanding where the cash flow goes is critical to understanding a business's economics.
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