Each quarter, ASX-listed companies have to submit quarterly cash flow statements, usually on the last days of January, April, July, and October — this is what to look for.  

In addition to half-year and full-year statements, quarterlies give investors and analysts the opportunity to scrutinise the company more regularly.

But what should you be looking for during quarterly season — and is a bad quarter the sign of a bad company?

So you’re bleeding cash.

It goes without saying if there is less cash coming in than out, there will be an outflow. Sometimes there may be literally no cash coming in at all — as is common for early-stage companies such as mining exploration companies.

Small cap mining explorers live off capital raises until they are large enough to have a fully operational mine with minerals directly sold to its customers — and there’s nothing wrong with that, because this is balanced with the prospect of a big payday down the line..

Even if there is cash coming in there may be more in than out.

Also look for the estimated cash outflows for the next quarter. It may be the case that there will be little to no cash left after that.

This will often lead to an ASX query which will remind the company of that outlook and ask them if they expect to raise capital and continue. Usually, such a query will only be posted when the company has made a response.

Don’t worry about it…

Companies, predictably, try to shrug off these warnings by saying everything is fine.

But in most cases, it’s better for the company to be upfront and say that it’s looking to raise capital rather than make excuses like ‘this quarter was unusual’.

It indicates the company doesn’t have a handle on its cash flow.

Investors should also be on the lookout for unexplained expenses — capital raising will be under ‘financing activities’ while purchasing of long-term assets will appear under ‘investing activities’.

But beyond that?

Even if the company can explain the expense now, the ASX will want to know why it didn’t disclose the expense earlier under continuous disclosure laws.

Yes, there are exemptions to disclosure requirements, such as if the information is a matter of supposition, it its about an incomplete deal or its ‘generated for the internal management purposes of the entity’.

Just like a court of law it is rarely what the rules say that is up for debate, it is rather what they mean in this situation.  

But what if you’re making money?

Even if the company is making money, you should still keep an eye on its revenue and expenses.

Just because a company is profitable in one quarter, it does not mean it will not be forever.

If it turns from a profit to a loss that could be a concern or perhaps if the company still records a profit but it is substantially lower than forecast.

One recent example of a turnaround was dental stock Smiles Inclusive (ASX: SIL) who forecasted a $2 million profit for FY 2019 but that turned into a $1 million loss in February and then a $4 million loss in April.

The company blamed unexpected costs incurred since its November forecast.

What if you don’t submit a quarterly?

To put it simply, you get suspended from the ASX until you do submit it.

Because of the embarrassment, some companies may forewarn investors that it will be delayed for a reason, perhaps auditors.

Yet many of the companies on the “name and shame list” that gets published, have already been suspended for some other reason.

The same will apply if a company fails to submit a half yearly or an annual report. Although of course companies can be suspended for other reasons.

The bottom line? If you’re invested in an ASX stock you should pay attention to ASX releases made by your company but particularly quarterlies. They tell you the company is making enough money, or if it is making money at all.

 

This content does not constitute financial product or legal advice. You should consider obtaining independent advice before making any financial or legal decisions.