Theres no foolproof way to know the future for Hershey (NYS: HSY) 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 companys current health and future prospects. Its an important step in separating the pretenders from the markets best stocks. Alone, AR — the amount of money owed the company — and DSO — the number of days worth of sales owed to the company — dont 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 thats 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 Hershey do this? For the same reason any other company might: to make the numbers. Investors dont like revenue shortfalls, and employees dont like reporting them to their superiors.
Is Hershey sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO: