At first glance, Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) released astonishing first half earnings today, with nearly as much in gross sales as it had during all of 2013 and an adjusted EBITDA margin that increased from 32% in 1H13 to 43% in 1H14. But a huge cash burn and an increase in accrued income has raised doubts about those numbers, pushing its stock price down 10.41% to close at 188.37p.

Quindell q2 highlights 0814

Accrued income grew faster than total sales

Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) stock price first took a big dive at the end of April when Gotham City Research issued its short thesis, alleging that its profits were materially incorrect. Since then the stock has been volatile with news driving large price swings in both directions.

The value proposition on Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) has two basic pieces, legal claims related to auto accidents and, increasingly, industrial deafness, and a joint venture with RAC called Connected Car Solutions that seems to be on hold and at this point is probably being treated as an option by the market.

With the legal claims side of the business growing so rapidly that would probably be fine, but that growth seems to be almost entirely in accrued income – money the company is owed for services rendered but hasn’t actually received yet. Accrued income for Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) legal services alone went up £211 million year-on-year, slightly outpacing the £196.9 company-wide increase in gross sales over the same period. Add in the fact that accrued income increased in every business unit (though not to the same degree), and the trend is worrisome.

Quindell current assets q2  0814

Quindell needs to deliver on cash flow targets

Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) says that it’s cash flow will start turning around from now, and there’s no reason why all those accruals can’t turn into actual cash, but investors who might otherwise support the company seem to be holding back. The accrued income growth could be a sign of rapid growth, but if that’s true it should start to turn into cash in short order. If Quindell doesn’t hit its cash flow targets for the next couple of quarters you can expect the market to really punish the stock, and even if shorts like Gotham City had the wrong angle, their short positions may work out all the same.