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Re: IMF - IMF (Australia)

I looked at this a while back and whilst the basic ratios all looked good, and the company itself has had solid profit growth for the past few years, I had too many reservations. I liked the idea that they wouldn't take on a case unless it made them $3 for every dollar that they spend on it.

The thing that turned me off whilst looking at its fundamentals was the fact that I cannot gaurantee how many cases they will win. They obviously cannot either. They can mitigate the risk by being very selective, but there is still judgment risk.

Look at the cash flow, for instance, you can see that profit is determined by how much of their case expenses they capitalise vs how many they put to P & L. Will they win the cases that they have capitalised? How do we know? It seems somehow easily to maniplulate profit in the near-term in the hope that case results are successful.

They also seem to be increasing their borrowing / debt levels (for expansion, I take it). The US market is massive by the way, big risk, big reward play. Interesting to see how they go. By their own words they have sucked all possible growth out of the Australian market. So this has to work for profit growth to continue.

They've only lost six (off the top of my head, sorry if not exact) in a decade, but what happens if this streak turns bad? It's all too hard to factor this in from a valuation perspective. It is a business heavily reliant on key personnel and the human factor (arguable for most businesses of course, but I think it is even more relevant in a company like this).

Low capital intensity is a big tick, but earnings have the potential to be very lumpy and hard to predict going forward. The CEO mentioned something about the "lack of gaurantee on contracts streaming to the company" in previous reports. This is a little worrying; no real problems thus far... but the future isn't always governed by the past.I think that this stock is a lot riskier than it seems on the surface.