Been running the ruler over Oakon, an IT services company based in Victoria. Share price has been pretty flat over the last two years. Wondering why that is when most other IT Services companies have been going great guns.
Looking over the 2012 Annual report I noticed that the cash balance had improved dramatically over the year, yet profits were down and no new debt/equity had been accessed (in fact there seemed to be capital reduction with debt extinguished and a share buy back implemented) So I did some digging.
It seems the big increase occurred as a result of a massive reduction in Receivables, specifically an entry called "Other debtors and Security Deposits". This entry had $17 million in it in 2011, but in 2012, it went down to $3.7 million, a reduction of $14 million in a year. When this 14 million is likely to have gone straight into cash (and cash balance increased by $8.3 million overall) surely it is a pretty significant disclosure. Yet no mention in the Annual report.
It's also not sustainable as there is only $3.7 million left in this particular kitty. In fact, if you remove this cash injection, Oakton would appear to be losing cash year on year from its operations, investments and financing.
Another red flag for me is the fact that directors long term incentives are based on Absolute Diluted Earnings per share, rather than a relative measure. The conspiracy theorist within would be saying that this is why they are actioning their buyback, rather than the inability to use shareholders funds to add value, especially when the cash position isn't quite as good as it appears to be.
Note: Not a recommendation to invest/not invest in Oakton. Please talk to financial advisor.
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