World Fuel Services (INT)

The initial discovery of INT came as a company whose stock had taken off on explosive earnings gains, but it never seemed to have any cash flow. The reason was that growth meant a giant increase in working capital that was often 4 times greater than earnings. INT continually saw receivables rise faster than payables and exacerbate this cash drain. Thus, even small changes in a huge balance sheet more than offset a very small income statement – it was the tail wagging the dog. Looking further, we found a company with some aggressive earnings policies to help income growth such as slashing bad debt reserves, not carrying business insurance, posting collateral for payables but not requiring the same for receivables, and had a history of poor derivative accounting and joint venture consolidation. Only in periods of rapid oil price collapses did INT post positive cash flow. The entire design of the company was such that earnings would seldom produce cash.

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