Paramount Trading’s past profit performance was adequate for the Junior Market company to be ranked as an IC Insider Buy Rated stock in 2012. However, after two quarters in a row with outsized receivables, we downgraded the stock to the market watch category. Our concerns still stand as we see potential dangers with receivables that are nearly three months sales when the norm would be 30 days and no more than 45 days.

In the company’s latest quarterly report to shareholders at the end of August, total receivables was at $152 million and in May it stood at $146 million but last year August the amount was only $85 million when revenues was $152 million. Inventory at $187 million is also an area of concern. However, since the rate of exchange for the Jamaican dollar is slipping, the higher inventory level can provide an edge in setting prices and margin. The company had cash on hand of $42 million.

Paramount disclosed increased profits for the 3 months to August amounting to $19 million before tax compared to $10.7 million in 2012, up 78 percent. In the previous year 2012, after tax profit reached to $8 million and sales climbed 11 percent from $152 million to $169 million in the quarter. Helping with the increased profit was an improvement in gross profit margin which rose from 29.6 percent to 31.3 percent in the latest quarter versus last year’s and the holding of administrative and other cost to only a 7 percent increase. Other revenues also increase to $3.9 million compared to just $700,000 in 2012. Finance cost climbed from $5.1 million to $5.85 million as borrowing declined from $107.5 million to $74.5 million.

The company’s management stated that during the quarter they pursued growth opportunities. Production of formulated products for contract manufacturing commenced and the Oxyterge formulated product was launched. They also completed a significant engineering solutions project, representing a value-added service that should result in increased revenues in the future. The company also indicated that they made key management movements and recruited externally to strengthen their leadership capability.

Profits are up in the latest quarter but sales are not likely to make a big surge, which suggest that investors should pay attention as this implies that profit increase after this year may be slow. Hopefully, the changes in management  will address these weaknesses and restore normality to them and reduce the risk.

IC Insider projects earnings for the year of 70 cents per share on the basis that the receivables and inventory are of good quality and will not result in large amounts being written off in later quarters.

Related post | Higher cost flattens Paramount’s profit