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

Direct expenses rose 7.55 percent for the year to May but sales only increased 4.7 percent to reach $642 million highlighted by a 14 percent increase in administrative, sales and distribution cost. Staff cost rose by 18 percent to $50.5 million, plus an $11 million devaluation loss only made matters worse.

In the end, while Paramount Trading showed an improvement in net profit for the year, it was a reduction in tax payable of $10 million versus $30.75 million in 2012 and gains from acquisition of a subsidiary amounting to $21 million that helped pushed profits for the year above that of 2012, as pre-tax profit hit $83.5 million and after tax $73.3 million compared to pre-tax profit of $84 million in 2012 and $53.4 million after tax.

Problems | Concerns arise about amount due from debtors which rose sharply even as revenues have not. While amounts due up to 60 days accounts for the bulk of the increase or $28 million, amounts more than 90 days is up at $15 million, up from $5.5 million in 2012. Amounts owing for 31 to 60 days is up to $37.7 million, an increase of $11 million. Provision against the debts amount to only $6 million. The company seems exposed to potential doubtful debt problems with what appears to be a tighter economy. The increase is also robbing the company of cash that could be used to pay down expensive borrowings.

While sales grew by less than 5 percent, segment results show an interesting picture with chemicals sales growing 9 percent but gross profit declining from 32 percent to 29 percent. Construction and adhesives sales fell by 22 percent but the margin increased from 36 percent to 52 percent and the manufacturing margin improved from 38 percent to 43 percent as sales fell by 19 percent. Overall margins increased from 41 percent in the first nine months of the year to the 44 percent by the end of the financial year 2013, but it’s down from 48 percent for 2012. The margin for February was just 36.6 percent, which helped to drag down the margin for the year. Margin for the final quarter results was restored to 48 percent.

Forecast | Earnings per share for 2013 amounted to 54 cents for the year based on the average number of shares in issue for the year. In December last year the public purchased 30.85 million shares bringing the total to 154.247 million units.

IC Insider’s forecast for the current year is for earnings per share of 74 cents and 88 cents for 2015 fiscal year. The forecast is based on a restoration of profit margin, removal of taxation on profits and reduction in interest cost as loans are reduced.

Balance sheet | Receivables have climbed to $146 million from $99 million in 2012, inventories fell to $172.5 million from $186 million. Receivables represent nearly 3 months of sales and inventories and 5 months of cost of sales, both these items appear to be out of line and is costly. Cash helped by the proceeds from the public share issue is up to $60 million after repaying $39 million of loans. Current assets exceeds current liabilities by more than 2.6 to 1 and borrowings have decrease to $71 million from $110 million. Equity climbed to $273 million helped by the inflow of new capital last year and profit for the year to May.

Stock Outlook | The stock which last traded at $3.30 is recommended as a cautious buy at this stage.