Are Shorts Watching This Number at Hercules Offshore

There is no foolproof way to know the future for Hercules Offshore (Nasdaq HERO) or any other company. However, certain clues may help you see potential stumbles before they happen and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

A cloudy crystal ball
I often use accounts receivable AR and days sales outstanding (DSO) to judge a company's current health and future prospects. It is an important step in separating the pretenders from the market's best stocks. Alone, AR the amount of money owed the company and DSO days worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Hercules Offshore do this? For the same reason any other company might to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Hercules Offshore sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.

Watching the trends
When that red line AR growth crosses above the green line revenue growth, I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.