To OTC Journal Members:
 

Envoy 1st Quarter Financial Results (NASDAQ: ECGI)

Those who read last weekend's edition of the OTC Journal which featured Envoy Communications should have noted we felt the stock was headed for $5 in the short term.

The stock closed at $3.53 last Friday, and has since seen a high of $4.44.  As a result of today's 1st quarter earnings release, we now feel $5 is inevitable in the very short term, and $6 or $7 might be on the horizon if the momentum can continue.

Below find a table with Envoy's 1st quarter results. The numbers are outstanding. Of particular note is their profit margin. While sales were up 71%, profits were up 114%. This means margins are increasing. Their profit margins are 20% which is at the very high end of the range in their industry group.

How to Interpret These Numbers

If you are not an accountant with a full understanding of technical accounting terminology these numbers require some explanation.

The EBITDA earnings number of $4.43 million in profits is the true measure of the company's performance. EBITDA stands for "Earnings Before Income Taxes, Depreciation, and Amortization".  This number is the amount of money the company made off its business.

In our new global environment most analyst are comparing companies based on their EBITDA numbers because different countries use different accounting standards to reduce profits after EBITDA is computed. Therefore, unless you compare International companies on the basis of EBITDA, you are not comparing apples to apples.

After EBITDA, profits are reduced by the amount paid in taxes and non-cash expenses. This is the reason for the next line "Earnings Before Goodwill After Taxes". Companies are choosing to present their numbers this way because you now have an after tax number, which is the amount of profit they keep. For Envoy this number was $1.815 million this quarter, a double from the same quarter the year before.

As a Canadian company, Envoy is forced to take a much higher Goodwill non-cash write down than it would if it were a US company. Canadian accounting standards do not allow for the "Pooling of Interest" when companies merge as they do in the US, which forces Canadian companies to take much higher non-cash losses if they have completed acquisitions.

Newly proposed accounting standards which will probably be adopted world wide are being reviewed by the SEC right now. Once adopted, all accounting methods will conform, and comparisons will be easier to make.

Conclusion

As someone once pointed out, "Earnings are an Accounting Opinion, Cash Flow is a Fact". 

Envoy has excellent cash flow. Sales are up dramatically, and earnings are up even more dramatically. 1st Quarter numbers have come in better than anyone expected, and if Envoy can keep its momentum this stock can continue to appreciate despite a fairly negative market environment. 

If Envoy continues accelerating there is no telling where the stock could end up when the market turns back up. Stay tuned for more developments in the near future.

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