EnviroStar distributes industrial laundry and dry-cleaning equipment, some of which requires long lead times. Intuitively, it's not easy to tell whether the recession (in the form of reduced equipment orders by customers, which belong to several industries) would hit EnviroStar early, late or somewhere in between.
But by looking at the company's receipts of customer deposits (which are essentially down payments on future purchases), investors can get a sense of how revenues are trending. Consider EnviroStar's customer deposits over the last few quarters:
As can be seen from the chart, deposits have been down for several quarters until recently rebounding, suggesting revenue may be on the rise. Seeing as how the company managed through the worst part of the recession without losing much money at all suggests this is a safe investment, particularly considering the company's cash balance.
Investors must, however, be careful not to rely too much on such data. For one thing, just because the trend is up for now does not mean it can't go back down. Furthermore, such data is susceptible to random (quarter-end) timing, particularly as customer deposits represent only a portion of one quarter's revenues. Finally, it should be noted that EnviroStar has been using its cash assets in order to finance some customer purchases; this may be serving to increase sales in the short-term at the expense of taking on higher risk.
Disclosure: Author has a long position in shares of EVI
About the author:
Amit Chokshi is the founder and owner of Kinnaras and affiliated companies and is responsible for security analysis, selection, portfolio management, and Firm operations. Prior to founding Kinnaras, he worked as an associate at the Royal Bank of Scotland ("RBS") in the firm's Corporate Advisory Services group, which provided corporate finance and mergers and acquisition ("M&A") services to the firm's clients with a particular emphasis on private equity firms. Amit also worked at Morgan Stanley and received a B.S. in Finance from Bryant University and an MBA from Emory University. In addition to passing the NASD Series 7, 63, and 65 exams, Amit is also a CFA Charterholder and on the Board of the Stamford CFA Society. Amit has appeared on Bloomberg Radio and has also been quoted in various publications regarding Firm-specific holdings.