NQ Mobile Inc stock has tumbled more than 66% year-to-date. So, its valuation suggests low amount of downward risk. But its earnings quality, balance sheet and operating efficiency remain weak, says Jefferson Research. The research firm says that NQ Mobile “deserves a Sell rating.” Just a few days ago, the controversial mobile Internet services provider announced that its chairman and co-CEO Henry Lin was leaving the company for “personal reasons.”

NQ Mobile

NQ Mobile has a good cash flow

After a long delay, NQ Mobile recently filed its revised annual report. Short sellers including Muddy Waters have accused the company of accounting fraud. After reviewing its revised annual report, Jefferson Research said that investors use earnings quality as a measure of the fundamental quality and future prospects of a company.

Companies could add certain items to increase their reported earnings. The research firm adjusted these items to more accurately reflect NQ Mobile’s fundamentals. They found that earnings quality for the company remains weakest. The adjusted net income was negative $3.0 million in the last quarter, higher than the reported figure.

However, the Chinese company’s cash flow remains strong. To assess NQ Mobile’s cash flow quality, Jefferson eliminated items that were not the result of actual operations or part of recurring cash flow. These adjustments provided a clearer measure of cash flow. The company’s cash flow quality rating improved from weakest to strong. However, with a reported figure of $24 million, the annual operating cash flow quality has worsened.

NQ Mobile’s operating efficiency is the weakest, says Jefferson Research. That’s largely due to the deterioration of gross margin, net margin and return on incremental investment capital. Operating efficiency takes into account several factors such as return on invested capital, asset turnover, EBIT margin, gross margin, staff, and equity turnover.

NQ Mobile’s balance sheet quality weak

What’s more, the company’s balance sheet quality remains weak. The balance sheet quality offers clues to aggressive accounting because reported earnings that don’t generate cash flow end up on the balance sheet. Current ratio and the number of days inventory is held before sale to customers have deteriorated over the previous quarter.