143 Dufu — High Accrual Ratios

Dufu — High Accrual Ratios

Dufu (7233) was in my portfolio, until it gave out bonus issue. I bought it because it fit Magic Formula criteria (it still is actually). I sold it because I don't quite like activities that increase shares outstanding that will dilute EPS.

Then, I read a blogger in i3investor commenting about Dufu. One of the point is about booking receivable as profit. I read the article and comments from others, all the points make sense to me. My problem is, in accrual accounting, companies will record a sales even though the payment will only be received in a later date. Anyway, since i have sold the shares, I didn't checked further.

Recently, I re-read the article. Refer back to Dufu Q3 report, both revenue and receivable increased by roughly 30%. It is also true the increased in profit is almost the same as in receivable. In Dufu Q4 report, further see inventories increased by whopping 60%. But both reports are showing positive free cash flow (FCF).

When I check in Morningstar or WSJ, I can't find any ratio that gives out alert signs. Dufu seems very healthy.

To know whether Dufu is still worth investing, I put the Q4 data into my spreadsheet.



Now I see the Sloan Accrual Ratio, Balance Sheet Accruals Ratio, and Cash Flow Aggregate Accruals Ratio all spiked up. Sloan Ratio further shows it is in Warning zone. Higher receivable or sudden spike in receivable make me uncomfortable. The level and sudden spike of inventory also bothers me. So I will lay my hands off Dufu.

This is my first time seeing a warning in Sloan ratio. I do not know whether this will eventually turn into a big problem. Only time will tell me. Let's see what will unfold in the future.

This article is not to criticise anybody or any company. I just want to note down so that I can refer in the future (before I forget).