Why the Electro Optic Systems (ASX:EOS) share price is jumping 15% today

The Electro Optic Systems Hldg Ltd (ASX:EOS) share price is on the move on Wednesday following the release of an update…

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The Electro Optic Systems Hldg Ltd (ASX: EOS) share price is on the move on Wednesday.

At the time of writing, the communications, defence, and space company’s shares are up 15% to $4.60.

Why is the Electro Optic Systems share price rising?

Investors have been buying Electro Optic Systems shares this morning following the release of a trading update.

According to the release, the company has achieved a significant cash inflow as its investment in inventory converts to cash.

The release explains that from March 2020 to March 2021, Electro Optic Systems increased its investment in its inventory of finished goods to a total $138 million. This was to allow production to continue against a firm export order while delivery and payment processes were restored from COVID-19 disruption.

Positively, this investment preserved the Electro Optic Systems supply chain and maintained its own production processes.

As a result, on 30 April 2021, Electro Optic Systems was able to report that all deliveries were “proceeding normally”.

Current cash balance

At the end of March, the company’s cash balance stood at $41.5 million.

Since then, cash in-flows have been $43 million, of which $30 million has come from the export contract that had been disrupted by COVID-19 for 12 months. The funds that were paid to Electro Optic Systems were drawn under an international letter of credit which fully covers this entire contract, through a major Australian bank.

Pleasingly, Electro Optic Systems continues to produce and deliver against this contract.

After the recent payment of $30 million, the company still has over $100 million in value of completed goods positioned at the customer’s location ready for handover. And with delivery and acceptance processes now operating normally, management anticipates further cash receipts of over $100 million from this business during the fourth quarter of 2021.

Prior to today, the Electro Optic Systems share price was down 33% since the start of the year. So, today’s gain will no doubt be a big relief for shareholders.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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