Dainichi Redux

I last talked about Dainichi here on May 6th when I evaluated the margin of safety and how I felt that cash from operations wasn't keeping up with earnings and could be destroying the value of the company.

What I didn't know at the time was that they would be reporting their full year results on May 8th two days after I did my post, and after reviewing the 2010 full year statements my view on them has changed.  If you remember I was hung up on two things, the quality of earnings as flagged by my accruals worksheet, and the lack of positive cash flow.

The first thing I wanted to take a look at is how the accruals have changed now that we have more data. The result is that accruals have gone negative which means that the company's accrued expenses have been dropping, both on the balance sheet and in earnings.  This is a good sign, the reason for the spike on my last look at them could have been a seasonality issue but I'm not sure.


While accruals have dropped and make me feel a lot better about the quality of earnings and the quality of the balance sheet I still care about cash flow, and free cash flow.  The following is a picture of their full year cash generation.
What a difference a quarter makes!  Instead of being a net consumer of cash Dainichi was a net generator of cash over the full year 2010.  Free cash flow clocked in at 2111 or ¥117 per share giving Dainichi a price to cash flow of 5.21 or a free cash flow yield of 19%.

The latest financial statements changed my mind on Dainichi, while I liked the company before I was worried that my margin of safety might be destroyed, seeing that this wasn't the case once the fourth quarter statements came out I went ahead and bought a few shares.


Disclosure: Long Dainichi

1 comment:

  1. Good analysis. Net-net's that are also profitablie are very very rare.

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