Company in the news: Quindell

Insurance claims handler Quindell (LSE: QPP) is a controversial business. On Monday it revealed another six-month period of stellar profit growth and its shares soared. But these profits may be too good to be true, and Gotham City Research, an American hedge fund, has bet heavily on the share price collapsing.

Gotham doesn’t like the way Quindell accounts for its sales – recognising them when a claim is processed rather than when cash is received.

Gotham points out that Quindell is very good at reporting big profits, yet cash continues to drain from the business. Eventually profits and cash flow should match up and it’s not surprising or unreasonable that people should question why they do not in Quindell’s case.

For the first six months of this year, profit before tax was £154m, yet there was a trading cash outflow of £51m – a difference of £205m. For the year to March 2014, Quindell had revenues of £380m, but had receivables (cash that had not been paid) of £327.8m, or 86% of sales – a high number.

The lack of cash flow combined with lots of acquisitions and very fast profits growth – perhaps too good – are classic warning signs that investors need to look into. Quindell also raised £200m from shareholders last year and has already burned through a lot of this, raising fears that it might ask for more in the future.

That said, Quindell’s shares trade on just 3.9 times forecast earnings – if you believe this number – meaning that concerns could already be priced in.

On the other hand, the company is burning cash at an alarming rate. You might make a lot of money from this share, but we’d stay well clear.

Verdict: avoid

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