Forgive me for being dumb, but what is the risk here? Is it that it creates a cashflow problem in the future?

I think it's just that you can boost cashflow and cash balance over a specific period by delaying the payment of your bills. Not suggesting anything nefarious, probably just a timing issue, but ideally you want to see cashflow/balance growing as a result of increasing sales and margins, not just a reduction in working capital.

OTOH, there's a lot to be said for the business that can build a moat around low gross margins and negative WC. Don't make me get out the DuPont analysis.

Good point @UlladullaDave! Just so long as the reduction in working capital is sustainable

@Strawman and @UlladullaDave as $SGI grows its network and store sales, the big WC driver will be inventory, as is the case with all distribution business. This will grow.

While there will be pluses and minuses from year to year, particularly drive by any acquisitions they make, we should see working capital scale with revenue. However, if they grow an efficient network, then inventory should not grow linearly. In fact the growth exponenent should be closer to 0.5 (assuming a constant product range). This is one of the ways that scale benefits manifest in distributors, in addition to the usual Opex leverage we would hope to continue to see.

I agree with @LifeCapital we should on average expect the positive working capital benefit of the increased payables relative to inventory and receivables to unwind at some point. When and to what extent is I think anyone's guess.

Good points as always Mike. I think it is clear and in agreement that SGI's positive cashflow was mainly as a result of delayed payments to suppliers. In a previous life I was a Supply Chain Manager for a very fast grow FMCG business. We negotiated 90-120 day payment terms with our suppliers, which essentially funded the businesses growth. This business today has a turnover of around a three quarters of a billion dollars. Cash flow will be a huge consideration for Stealth going forward and I wonder if they have possibly increased their payment terms with their suppliers to fund their huge growth targets. If they have its a good thing for sure.

I hold SGI in RL and on SM

Yes, good points, don't disagree with you @LifeCapital or @mikebrisy

They had this to say in the FY earnings call...

Going on to balance sheet, and probably there's 2 key call outs in this area. One is around cash with working capital management. Again, we've increased, as we touched on the cash flow, our cash is up $3 million. But importantly, our net working capital as a percentage of revenue fell to 9.6% compared to 11.5%. So as we grow, we've been disciplined in terms of what and how we've invested in the gross receivables, inventory and through our payables. And even more inventory has fallen 90 basis points as a percentage of revenue. Again, reducing the product lines as Mike sort of alluded to, is an automation analysis and just being that smarter and care about how we hold and manage our inventory. And again, we're seeing those sort of benefits.

I would expect WC to improve on a revenue basis going forward. That is a pretty important part of scaling a low margin business and what will drive incremental ROIC, imo. As to where period to period cashflow lands I have NFI, although obviously $900k NPAT and >$6.8m OCF isn't the sort of thing to expect every HY/FY.