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Bridgepoint Education, Inc. (BPI) Message Board

  • wizzitincky wizzitincky Sep 18, 2010 5:39 AM Flag

    Article on re: Receivables Red Flags

    There is an interesting article here about companies that see a stunning growth in account receivables, which usually is a bad sign.

    BPI is one of them. I was rather surprised. So I've done the math... A ratio I like to watch is net receivables-to-revenues, because the more you sell, the more account receivables you should have. Here is what I got:

    2007 - 17.1%
    2008 - 14.5%
    2009 - 10.4%
    Last 4 quarters - 14.4%

    Far from a huge red flag, obviously.

    Now, even more interestingly, account receivables are seasonal in the education market, whereas revenues are recognized more linearly. And this is the period of the year where account receivables are the highest. If you take the last quarter x4 / net receivables, you get 12.2%. Again, pretty good in a tough environment. And still, again, when you look at cash (the true measure of receivables quality), it seems very fine, too.

    At least this article asked the right question... But as far as I'm concerned, I find the answer rather reassuring.

    Oh by the way, I believe a big chunk of these net receivables are usually IOU from... the US Government (student loans). But I might be wrong. Anyone whishes to comment on that? It seems to me that as long as we pay taxes, we can expect those net receivables to be paid at some point. :-)

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    • Wizz, the 10K indicates that the AC certainly contains a chunk from the government, because it says that when the receivables are paid, they're either directly from the student or directly from his/her financial source, i.e. Title IV. But it doesn't break down the total AC into components, so we really don't know how big that is.
      But I think your analysis would be better if you use gross instead of net AC.

      But anyway, I do think that BPI's AC account presents a red flag, not in terms of the AC figures itself or the bad debt provision, but the actual deduction of bad debt. This figure went from 0.6Mil to 1.2 Mil to 25.2Mil (2007-2009). Granted, 25.2Mil isn't much more than its provision of the year (23Mil). But the trend of going from 1.2 to 25.2 is quite uncomfortable. The key is that BPI's provision for 2008 is much larger than the actual deduction, so if you look at the provision alone, the trend seems to be smooth, but it actually isn't. There can still be a lot of reason why this is all right, but it's something worthy to probe further.

      • 1 Reply to cgst001
      • You've raised an excellent point. So, to summarize...

        --- Account receivables = what students owe to BPI. Should be proportional to revenues, somehow (knowing revenues are recognized at different points than receivables).

        --- Account receivables, net = Account receivables - doubtful account receivables. If the latter is correctly estimated, this is what the company should be able to collect.

        --- Doubtful account receivables, which is a provision = provision from last year + new provision (charged to expense) - actual deductions (bad debt recognized).

        --- Deductions = "accounts written off, net of recoveries or reversals of the allowance for deferred tax assets"

        Now, you're correct, the "true" metric is deductions, and that went from $1.2M in 2008 to $25.3M in 2009. There are several potential reasons:

        1. Fewer opportunities to deduct bad debt through tax allowance (which, for a more and more profitable company, is to be expected)

        2. More agressive recognition of bad debt (accounting).

        3. Deteriorating situation, with students having a hard time to pay back. Because of the economic situation and the type of students targeted, we know that's part of the story, but we need to know how much.

        I'll raise that question with investor relations, let's see what they'll answer...

    • That is reassuring. I put on a big position Friday and really didn't expect to see negative news. What do you think of BPI possibly being bought by a antoher in order get the acquirers ratios under gov't guidelines?

      • 2 Replies to daveparker0808
      • I think it's a very unlikely scenario at this stage.

        First, there is still some uncertainty about what the hill will do, and that uncertainty should be resolved within the next two months or so, so a buyout in the very short term is unlikely.

        Second, the suggested government guidelines, if they are voted (which is far from certain given some Democrats' opposition and the outlook of mid-term elections) apply to each program individually. So, if you own "program A" which happens to be below guideline, the fact that you also own "program B" which is above doesn't change much. "A" would still be in trouble.

        Current under-valuation and organic growth is more likely to drive price up than a potential buyout. Actually, to be honest, at these prices, I hope it will stay on the market for at least one more year...

      • I hadn't thought of that. Not a bad idea at all.

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