[Portfolio]: Added Capitaland & Yanlord Land on weakness, stop out of Emperor Capital

The recent Dow sell off had sent shockwaves around the world. The sell off has triggered the 10% stop loss for Emperor Capital. Also, the sell off created many major opportunities for us to pick up undervalued stocks, mainly, Capitaland & Yanlord Land.

Capitaland have been on our watchlist for a long long time. It’s a strong blue chip stock in the property development industry which we believe will benefit from the recovery in property prices this year. Furthermore, Capitaland is grossly undervalued for a blue chip company. With a PE of 9.75 and NAV of $4.38, it gives us a huge margin of safety at our entry price of $3.60.

As we can see from Capitaland’s chart, it has hit a high of $3.87 in January 2018 in speculation that the property sector in Singapore will rebound. The trend is similar across many developers like City Developments, UOL and many more. The Dow panic caused it to drop all the way down from the peak to the support level at $3.45. Recovery in prices and frequent share buybacks by the Capitaland’s management up to $3.67 per share prompted us to enter this stock with it’s juicy margin of safety and potential rerating of the stock.

As for Yanlord Land, it was a case of insider buying and the perfect Dow crash that prompted us to look at it. Yanlord Land is also a property developer listed in the SGX, however most of their businesses are in mainland China. As it is an S-Chip, we were especially careful when researching and limited our risk by allocating a smaller portion to it.

The CEO bought back the shares aggressively from $1.58 all the way to $1.886 spending more than $5 million on Yanlord shares. That prompted us to dig deeper into the company. We realised that their 9M2017 results were actually fantastic and we were speculating that the FY result will be even better considering the CEO major buying of the shares.

Also with a PE of 5.7 and a NAV of $2.252, it presents us a juicy margin of safety as well. Knowing that the CEO bought so many shares, we entered Yanlord at $1.60. True enough, the FY results was good and they declared a higher dividend for the year. What we are speculating for Yanlord is that the CEO could be trying to privatise the company given the good business and how undervalued his company is right now. Only time will tell if this is true.

In conclusion,

having a watchlist of stocks and to capitalise on the stock market panic have gave us a favourable entry into these 2 stocks. As the saying goes, buy when others are fearful and sell when others are greedy. In actual fact it is never easy to do so. It was actually the clear margin of safety that gave us the conviction to enter the market when it is still suffering from the sell off.

[Portfolio]: Added Nordic Group

Hi all, recently I have started a portfolio where my friends and I will screen for opportunities and enter them together. We have decided to add Nordic Group into From Ground Zero’s Portfolio. Nordic Group have long been in my watchlist and we entered at the price of $0.530.

Nordic Group is a global systems integration solutions provider serving mainly the marine, offshore and oil & gas industries. Their business segments include 1) system integration, 2) maintenance, repair, overhaul and trading, 3) precision engineering, 4) scaffolding services 5) Insulation services. Most of their businesses are in the O&G sector but they also do serve the aerospace and medical industries.

Their revenue and net profit have been increasing for the past 5 years with little debt used.

Furthermore, Nordic CEO have been owns a lion share in the company (55.38%) and also recently bought Nordic’s shares at $0.50.

Catalysts ahead

With oil prices heading upwards, we could see more O&G companies spending more on capital expenditure to upgrade their existing systems or even to build new ones. This should help Nordic gather more contracts from their O&G clients going forward.

Besides the possible positive industry tailwind, Nordic have about $96.9 million worth of order book as at 31 Sept 2017. This is a good record to have especially operating in a tough industry.

Also, their new acquisition Ensure Engineering have been doing very well for Nordic. The Group’s Maintenance Services business segment jumped by 83% from S$5.7 million in 3Q2016 to S$10.4 million in 3Q2017 mainly attributed to revenue contribution from Ensure.

In conclusion,

I would have to say that the management have been very shrewd and made many good decision for the company. All their acquisitions have been turning in good results for the company’s top line. Looking forward, the management have hinted at more acquisitions to diversify away from the O&G sector and to grow their maintenance services. By doing so, their revenue can be more recurring in nature compared to the main bulk coming from project services now. This is a positive development which should see the company growing even more in the next 1-2 year.

With the CEO’s putting his money where his mouth is, and being able to achieve such impressive record even in a downturn in the industry, I believe the future is bright for this company. We are LONG on Nordic Group.

[Eye Candy]: What has happen to Tiong Seng so far?

It’s been about 6 months since my last post on Tiong Seng. What has happen so far? In this post I will share some catalysts that have happen and whether there are any more upcoming catalysts we can look forward to.

1) Share buyback continues…

As we can see share buybacks have dominated most of the company announcements. The last time the company bought back their own shares was at 23 Oct 2017, at $0.37 – $0.375 per share.

2) Interesting acquisitions

Tiong Seng have made 3 acquisitions to increase their land bank way before the recent enbloc fever. The 3 acquisitions are:

1. Sloane Court Hotel at 17 Balmoral Road at $80 million
2. Two freehold sites in Jervois Road at $21 million

All 3 sites are to be redeveloped into residential properties.

With the recent positive developments in the private residential market, it seems like Tiong Seng’s move to acquire these sites came at the right time. Give it another 2-3 years of development, property prices may have recovered and Tiong Seng could market the buildings at a profitable price.

Also all 3 of these sites are situated in District 10 area which is highly attractive. Their current property development project Goodwood Grand also had rather good response in the District 10 area.

3) Risks

– Dwindling order book –

After their recent Q2 financial results, it seems that their order book have dwindled to about $700 million. Each quarter recognises about $100-300 million so if Tiong Seng is unable to win anymore construction tenders, it will affect its revenue going forward.

Of course with the government pushing forward with more construction projects, hopefully it will only be a matter of time that Tiong Seng will grab some of these projects given their strong record in using technology for construction.

4) Catalysts ahead

– TOP of Goodwood Grand –

One of Tiong Seng’s property development project have achieved TOP in June 2017. With only 7 units left in the 73 units for sale, these seems to be a rather popular project. Tiong Seng owns 30% of the project. So far there have not been any revenue recognition from these project.

Maiden contributions from this project should give a boost to the upcoming Q3 and Q4 results.

– Expect fantastic results this FY-

This FY will be the best results that Tiong Seng have posted for the past 5 years!

Its 1H2017 results are already very close to that of their FY2016’s results. With 2 quarters left to go, Tiong Seng is on track to crush their previous FY’s results.

– Positive industry outlook –

The construction sector is deem to pick up with the government introducing more projects to save this dying industry. Also, recent rebound of private property prices, coupled with the enbloc fever could see more private construction demands in the years ahead. This should benefit Tiong Seng positively given their strong record as I mentioned above.

In conclusion,

some may be wondering if there is still value in entering Tiong Seng now after the recent run up in their prices. Like I mentioned in my previous post on the construction sector, the pick up in construction demand is almost certain, what is not certain is whether Tiong Seng can clinch any of these projects.

In my opinion, Tiong Seng’s ability to achieve such magnificent financial results in Q2 is partially because it was able to clinch a slew of contracts back in the earlier years. They have been able to keep their order book at around $1 billion dollars almost every year. Whether Tiong Seng can be a justifiable buy at this price really depends on whether they can ride the positive industry wind going forward in the form of more contract wins.

Tiong Seng have always been a share buyback play. Their aggressive buybacks have cause some investors to buy and ride on the buybacks. As of now, one thing for sure is that the management still feel that the current share price is undervalued, as they have bought back their shares on the date of this post, at $0.37 – $0.375 per share. Before the most recent buyback, there have been a massive buy up with more than usual volume, could this be a signal that smart money has entered and today’s buyback acts as a support for the current price? If that’s the case, it seems that more upside is likely. Thank you and always dyodd! 🙂

 

[Eye Candy]: Signs of possible recovery in the construction sector?

Some posts ago, I remember talking about how I was fishing for stocks that are out of favour and one place I looked into was the construction sector. This is because construction have been contracting QoQ due to a slow down in construction demand  especially in the private property segment. Hence, many construction stocks were trading below valuation and I thought that might be a good place to look for some gems if any. You can read about my post here. So after doing some research I decided to put money into Tiong Seng as a share buyback and undervalued play as company have be aggressively buying back shares and top management pretty much owned about 50% of the entire company.

Recently, due to a slew of positive developments like the enbloc fever, first upturn in private property prices, government’s pledge to bring forward construction projects etc. Property developers and construction stocks have seem to be quietly on the move. Even Tiong Seng a construction company stock that do not usually have much liquidity other than their own management buying back their own shares on certain occasions have started to move.

Tiong Seng’s chart

Especially in the month of October, most company that engage in property development and construction have been quietly creeping up.

Could this be a signal that smart money is coming into this sector in light of an improved outlook on this sector? Do bear in mind that in 2017, the main sector that led the way was the semiconductor industry and this is what happened to them.

Many companies in the semiconductor industry reported great earnings which led to an upward surge in their stock prices. Could this be an indication that the same is about to come for the property development and construction sector? After all, they say that the stock market cycle is always ahead of the economic cycle. Some of these companies have been announcing more tender wins from the government and some of them are snapping up land sites for development.

In conclusion,

I think we will have to take a closer look in the months ahead to see if these companies start to garner even more contract wins and property development projects which should boost earnings. At the end of the day, it is strong and improved earnings that usually sustain the upward surge in their stock price. A lousy company that cannot translate positive industry sentiments into improved earnings will not benefit much anyway. This is just my own humble observations. 🙂

[Eye Candy]: Raffles Medical Group’s growth story continues…

There’s only one word to describe Raffles Medical Group (RMG)’s share price in 2017 which is DOWN.

Which is what interests me. One man’s trash is another man’s treasure. The continued decline of the share price prompted me to look deeper into RMG. RMG was once the star of the healthcare scene in Singapore and my analysis today will highlight that it will continue to be in the years to come.

RMG have a long listing history since 1997, it has since grown from strength to strength from a network of clinics in Singapore to owning a hospital, network of clinics overseas and even a mall in Holland V. It owns many clinics in Singapore and abroad, 1 hospital in Singapore and 1 mall in Holland V. In recent years, growth have been slowly tapered down compared to its high growth days in the past. RMG’s growth throughout the years hinged on opening of new clinics, hospital either in Singapore or abroad.

1) Fundamentals

— Balance Sheet —

RMG always have kept a very strong balance sheet over the past few years.

Assets easily covers all the liabilities they have and cash in RMG is around $100 million which easily covers its debt obligations.

— Cash Flow —

RMG’s cash flow have also been very healthy throughout the years.

It has managed to record positive cash flow from ops for the past 5 years. In certain years, cash flow from investing is high as they spent quite a bit on building new hospitals in China and the Holland V mall which I will go into more details later. But overall this seems to be a rather good set of cash flow with their current operations bringing in a healthy amount of cash every year.

— Income Statement —

RMG’s income statement have also been rather impressive. I have taken figures from their Annual Report from 2008 to 2016.

Revenue and EPS steadily increasing from 2008 to 2012

From 2012 to 2016, revenue continues to increase while you can see there is growth rate for EPS have been slowing down and in 2016 fell marginally below 2015. These shows that RMG’s growth have been slowing down and the group requires further growth catalysts in place to continue growing the top line.

2) Prospects

Management in RMG understood the slowing growth rate and did put in place plans for expansion as early as 2014. Below are some prospects which I feel will drive growth for the group in the future.

— Two new hospitals in China —

RMG have announced that it is venturing into China by setting up 2 hospitals, 1 in Shanghai and the other in ChongQing. These 2 hospitals are modeled closely to the one in Singapore which was open in 2001. Raffles Hospital in Singapore have been a strong growth driver for RMG since its inception.

Hospital Services segment of RMG growth rate:

• 2003: 10%
• 2004: 23.5%
• 2005: 50%
• 2006: 22.4%
• …
• 2014: 8.4%
• 2015: 7.0%
• 2016: 6.3%

So we can see that RMG have been rather strong in managing the hospital in Singapore which saw it to grow continuously for 15 years despite the slower rate of growth recently. Thus, these 2 hospitals will be the one to watch which should play a significant role in propelling RMG’s next phase of growth.

— Raffles Hospital Extension to open in Q4 2017 —

Locally, plans to expand the current Raffles Hospital was drafted as early in 2014. The completion of it should see an increase in capacity that Raffles Hospital can take in. This should also play a role in driving growth as Raffles Hospital’s growth rate have tapered down since its inception.

— Raffles Holland V —

RMG’s first ever investment property open just last year in 2016. It houses a Raffles Medical clinic on top level and the other places are rented out to different companies. The investment property have already broke even within 7 months and looks set to provide a steady stream of rental income in the future.

With ageing population an emerging trend throughout the world, the need for healthcare is definitely a necessity. Capacity expansion for RMG will definitely drive RMG’s next phase of growth.

3) Risks

— Higher cost —

When RMG started the Raffles Hospital project in 2001, it recorded a loss for that year because of higher staffing cost and operating expenses incurred in getting the hospital up to shape. This time round with 2 hospitals and 1 extension to be fulfilled in 2019, 2018 and 2017 respectively, a surge in operating costs is a given. However, its worthy to note that RMG’s cashflow from ops have been rather healthy from its current operations. $70 to $90 million of cash flow is generated from its existing operations which should help it to pay off some of these costs.

— Execution risk —

Having 2 new hospitals in China at around the same time will be a challenge for the management in attracting talents and ensure quality service at the same time. However the management have also had many years of experience under their belt in running healthcare services in Singapore which should be valuable.

In conclusion,

RMG’s growth story hinges on the upcoming hospitals to be opened. However, RMG’s financial performance could stagnate or even drop during this period when the hospitals are getting prepared due to higher costs needed to start the hospital. With RMG’s strong ability shown by their execution of the Raffles Hospital in Singapore, the other 2 hospital projects should similarly fuel RMG’s next phase of growth.

The drop in RMG’s share price this year could have priced in the coming tougher years ahead in managing costs of these new projects and could provide a good opportunity to enter for long term investors. Executive Chairman and Co-Founder Dr Loo owns 51% of RMG which have his interests aligned with shareholders. Aberdeen Asset Management Fund also bought shares of RMG at $1.21. Hence, there should be some value if the share price are below those levels. Regardless, like I always say please DYODD! 🙂

[Building Blocks]: The ‘Catalyst’ in catalyst investing

Hi everyone, first and foremost a Happy National Day to all of my readers! Today I am going further in depth into catalyst investing. I have mentioned quite heavily about how I like to look for catalysts in the company that will boost the share price. Generally, a stock catalyst is an event that will cause the price of the security to move and sometimes quite significantly. This can come in the form of a superb earnings release, a potential takeover offer, special dividend release etc.

The simple rule of thumb is that all catalysts should lead to an increase in either:

1. Revenue and profits

2. Shareholders’ value

It is purely because of events that lead to higher revenues/profits or enhanced shareholders’ value that will eventually cause investors to bid a higher price for a stock. Hence leading to an increase in share price. And depending on the impact of this catalyst, the magnitude of the share price movement varies.

1) Types of catalysts

When I look at catalysts, I tend to divide them into 2 types of catalysts, “Company-specific” and “Sector-specific”.

A company-specific catalyst is one that tend to be applied only to the company and is independent of other companies in the same sector or not. Examples of this includes, a potential takeover offer by another company, disposal of an asset of the company for a sum of money, spinning off of a subsidiary of the company, a new product that is disrupting an industry etc. All these catalysts are specific to the company and tend to either increase revenue for the company or enhance the value of the shareholders.

A sector-specific catalyst is one that tend to apply to an entire industry. This could come in the form of an increase demand of a particular industry like how the semiconductor boom this year have provided a favourable tailwind for many semiconductor companies. Those in this sector experience higher earnings QoQ which led to higher stock prices. Also events like lifting of regulations on a certain industry can also lead to higher stock prices as earnings is speculated to improve.

2) Real life examples

I will give you some real life examples of what catalysts can do to a stock price.

— Company specific —

1) Takeover offer

Some of you may know that Global Logistics Properties one of the largest logistics provider in Asia recently received a buy out offer of $3.38 per share from a Chinese consortium. However, this catalyst was not new. GLP had announced that it is undergoing strategic review early this year which eventually culminated in a buyout offer. If you had bought in when the strategic review was announced at $2.60, you are already sitting on a 30% return due to the buyout offer of $3.38.

2) Disposal of asset + special dividend

Neratel announced that they are in talks to dispose off their payment solutions subsidiary on April 29 2016 and are intending to pay out the divestment gains to investors.

This led to a gain of 18.4% if you had bought when the announcement is released in April at $0.49 to a peak of $0.58. Neratel eventually did dispose off the subsidiary and gave out a special dividend of $0.15 per share.

3) Earnings accretive business venture and acquisitions

Acquisitions that are earnings accretive or entering into a new business with huge upside to earnings are also potential catalysts.

I did a post on GSS before here, which talks about their foray into the oil and gas industry (new venture) which many thought was an earnings accretive venture. This caused the stock price to rocket up. Buying at the top of the green circle at $0.28 also gave you about 30% return at the peak of $0.375.

Another example would be MM2 Asia, an entertainment company in Singapore. They produce films like Ah Boys to Men. Since 2016, they have been on several acquisitions, they include buying over cinemas, buying over a concert production company Unusual Entertainment and subsequently spinning off Unusual Entertainment. All these acquisitions have improved MM2’s results tremendously and by spinning off Unusual, it also unlocks value for existing shareholders.

If you had held from the first catalyst announcement in Jan 2016 at $0.20 to the peak at $0.630, this would have been a 315% returns!!

— Industry specific —

Industry specific catalysts generally come in the form of improved sentiments in the industry. Some of yall may know how badly hit the O&G sector was hit due to the drastic drop in oil prices. On the contrary, an improved in sentiments can also bring up the entire industry. For instance, earlier this year MAS announced the relaxation of a regulation governing the financing of SMEs.

This led to all 3 smaller banks listed in Singapore, Hong Leong Finance, Sing Inv & Finance, Singapura Finance to all rise in tandem as investors believe that it will benefit from the new regulations.

 

If you are following up till now, you will realise that industry specific catalysts are usually more unpredictable compared to a company specific catalysts. However, its also good to choose a company with a good mixture of both. Depending on industry-specific catalysts alone is too risky.

3) Some tell-tale signs to improve accuracy

As you can see from all the examples given above, catalysts are definitely a great booster to a stock’s price. However, one must understand that buying on catalysts is like betting on the future which as investors we should avoid. This is because catalysts depend on many factors to allow it to come to fruition. Just like a company announcement signalling their intention to acquire a new business, it will not become a good investment if the new business do not lead to higher revenue and profits for the company. In this case, it is definitely a catalyst but it has not led to the ultimate end goal.

Thus, it is important to understand how to improve our accuracy when picking catalysts stocks.

— Management —

The management must be capable in order to successfully allow the catalysts to manifest. Thus it is important that the management have a large enough stake in the company (Insider Ownership), so that their interests is aligned with the shareholders. Have the management live up to their promises? A quick run through their Annual Reports should shed some light on the managements’ aspirations for the company. Comparing that with actual results, should shed light to their capability.

 

Always look out for:

1. Insider buying more shares
2. Share buyback by the company

These moves are usually an indication of better things coming that will positively benefit the company.

— Timing your entry —

To maximise your returns, one should always look to enter before the catalysts are made known to the general public. This will give you sufficient margin of safety and allow you to lock in the gains when the public come to hear of the catalysts. Doing that is hard because you will not know when it will happen.

Usually, you will hear of news that this certain catalyst is going to happen to this company but there’s no confirmed date. The best thing you can do is to look for a consolidation phase in the chart and buy on the first breakout.

As you can see from the GLP chart. The first breakout in the first week of Jan 2017 is a good time to enter. This is in conjunction with the news released on 5 Jan 2017.

Hence, buying on a strong breakout with high volume is also another way to enter at a better timing as strong volume usually indicates a strong uptrend as buyers are usually funds and big buyers.

In conclusion,

I hope you have learnt a bit more about my own experience on catalyst investing. Buying on catalysts alone is not recommended and this should be mixed with fundamentals analysis of the company including its PE, debts level etc etc. A good stock with strong fundamentals plus good catalysts and a perfect entry timing will be a much safer way to invest on catalysts!

[Building Blocks]: 3 ways to tell if a company’s debt is good or bad

In today’s blog post, I would like to talk more about debt. Many a times, debts are always cast with a negative light as we are used to the narratives told to us like how one can go bankrupt due to mounting debt. There are definitely some truth to that but debts can be good as well. Generally if debts are used to purchase income generating assets that can yield more than the interest rate of the debt then it is good debt. On the other hand, many people tend to get into debt spiral because their purchase are often liabilities than an asset. For instance, swiping your credit card for a new bag or a new gadget etc.

The general rule of thumb is that:

Total assets’ yield  > Interest rate of debt

for it to be a good debt.

Likewise for a company, the understanding of debt is the same. For whatever reason that the company decides to take on debt, the things that the debt is use for should generate a yield that is more than the interest rate of the debt. I will show you 3 ways to tell if the company’s debt is good or bad in a company.

1) Look at the revenue and profit

For a company to take up debt, it’s foremost objective is to grow the business. If taking on the debt does not lead to higher revenue and profit growth, then there is reason to believe that the debt the company take on is not really good.

2) Is there cash flow into the business?

Another important way to tell if the company’s debt is good or not is based on whether the business can generate cash flow to pay off the debt. If the business can bring in monthly cash that are more than the debt payment then the debt is good. Likewise if the company is consistently registering negative cash flow it is likely that the company may take on more debt to pay off current debt which is not good.

3) Is there cash to pay off interests?

Having back up cash is important for emergency uses. In order for the company to be able to operate smoothly it should be able to pay off its interests with some of the back up cash it have. This ensures that the company don’t run into a situation whereby they are unable to meet debt obligation because there are some bad months in the business.

---

Case Study

We shall take a look at two different company and their use of debt to try to understand good and bad debts.

Company A:

Total Debt for Company A = USD $ 4,042,853,000

Company B:

Company B total debt = USD $ 68,678,591

 

— Revenue and Profit —

Company A:

Declining revenue and loss making company.

Company B:

High revenue growth and profit making.

 

— Cash Flow —

Company A:

Cash not coming into the company from their existing business.

Company B:

Cash into company from existing business is positive.

 

— Sufficiency of cash to meet debt obligations —

Company A:

Interest expense is about USD $ 200 million every year, but Company A have only USD$ 300 million left in 2016. Will they be able to tide through another year?

Company B:

Company B’s yearly payment is about US$ 6 million which is easily covered by the amount of cash and cash equivalents they have.

---

In conclusion,

hopefully the above case study is able to show you in real life the difference between good and bad debt in a company. For those who are curious, Company A is Noble Group and Company B is Geo Energy Resources. All the 3 ways describe above should be look in totality with a company’s business model to understand if the debt are sustainable. For instance, in a cyclical industry, company’s earnings can be very high in a bullish up cycle, this can mask out some of the red flags of their debts. Hence it’s good to use these 3 ways and compare it across a few years to understand if they have been able to manage their debts well.

[Building Blocks]: 5 good to know investment ratios for better investment analysis

Looking at a company financial statements and not knowing what to look out for can be a headache for investors, which is why certain investment ratios have been widely used to explain certain important aspects of a company’s financial statement in a more simplified manner. For those who have some investment knowledge would have heard of terms like PE ratio, Debt to Equity ratio etc. These ratios make use of certain elements of the financial statement to give investors an easy understanding of certain strengths or weaknesses of the company. In this post, I shall try to explain some of the key ratios that investors normally use and what it means.

These are the 5 common investment ratios that I will explain below:

1. Price to Earnings (PE) ratio
2. Price to Book (PB) ratio
3. Return on Equity (ROE) ratio
4. Quick Ratio
5. Debt to Equity Ratio

1) Price to Earnings ratio

Just as the name suggests, PE ratio simply means:

 

PE ratio is widely use by a lot of value investor to see if the stock is undervalued or not. Generally a low PE ratio of less than 10 is considered to be undervalued. Whereas a high PE stock usually are found in high growth stock. For instance the FANGs stocks, Facebook, Amazon, Netflix, and Google, most of their PE are above average PE ratio in the US. This is because investors believe that these tech stocks will continue to grow their Earnings per share (EPS) rapidly hence at present times they are willing to bid up its present stock price to a high level ==> Thus a high PE ratio.

In other words, it represents the amount one is willing to pay for each dollar worth of earnings of the company.

2) Price to Book ratio

Price to Book ratio (PB) is also another widely used indicator by value investors to determine if the stock is overpriced or not.

 

In this case the book value of a company is the value of the assets of the company on the balance sheet =>  since Total Asset – Total Liabilities = Total Equity 

Thus, PB ratio is simply at what price are you paying for the value of the underlying assets in the company. A low PB ratio means that you are paying a low price for the value of assets in the company, the opposite is true for high PB stocks.

However one have to understand that PB ratio has it own shortcomings, for instance, it is more accurate for company that are capital intensive or company with a lot of assets.

3) Return on Equity (ROE)

ROE is a measure of how many dollars can a company generate on every dollar of equity.

 

Many termed the ROE as a measure of efficiency as it measures how well the management deploy the shareholder’s capital. Being able to get more dollars of profit out of lesser dollar of equity is a good thing to look out for (High ROE). Thus, usually company with high ROE is preferred over one with low ROE.

However also note that ROE can be artificially affected if the total equity portion is changed. For instance share buyback decreases total equity and hence boost the ROE.

4) Quick ratio **

Although not used by many, I feel quick ratio is a rather important measure of the company ability to manage their debt obligations.

 

Quick ratio provides an understanding of whether a company can meet its short term debt obligations. In this case, the short term investment refers to any securities the company hold that can be liquidated in a year.

A high quick ratio of more than 1 would mean that the company are able to pay off their debt in a year and hence the company would not run into any issues with the debtor within the financial year.

A low quick ratio of less than 1 would show that the company may have troubles meeting the near term debt obligations and could run into financing issues which as investors we would not want. This can prompt management to take on more long term debt to finance their short term obligations or raise funds through rights issues which we usually try to avoid.

5) Debt to Equity ratio **

Debt to Equity ratio is another way to understand about the company’s debt status.

 

Debt to Equity calculates the amount of financial leverage the company has.

High debt to equity ratio (usually more than 1.5x, in my opinion) mean that the company is highly leverage and can be rather risky. If the company cannot generate enough cash to pay off the debt that could spell trouble for the company.

Whereas an extremely low debt to equity ratio can mean that the company are too conservative and may be missing out on the extra growth benefits that taking on some debt can bring.

 

** For both of the ratios used to determine the debt status of a company. It is important to distinguish the nature of the debt. Is it being use to expand operations, or is it used to pay off loans that are going to expire? Choosing a company that uses debt well to expand operations that lead to higher profits and growth is good. Whereas a company that consistently borrow to pay off bad debts is definitely bad.

Another indicator would be to examine their cash flow to see if they are earning enough from their operations to cover the amount of debt they incur. Hence, one should never fear away from company that takes on debt, but instead study them closely.

 

In conclusion,

no one ratio can tell you the full story of any company. You would need to actively look at a few ratios, compare across the industry, look at their growth prospects before you can derive at a fuller picture. Hopefully, you have learnt more about certain ratios that are widely used by investors. If you are looking to learn more about how to read annual reports you can click here (for part 1) & here (for part 2) which should greatly aid in helping you make better use of the ratios you have learnt here!

[Building Blocks]: Understanding your FIRST step to financial freedom!

Hi all!! It’s been a while since I did a [Building Blocks] post. Haha if you were an avid reader of my blog, you will realise that I have been posting quite a bit in [Eye Candy], the segment where I do some analysis on stocks I am researching. Yup I have been rather busy digging through the stock market for gems that I could put my money into. As you can see from the title of the blog post, today I will be trying to help you understand your FIRST step to financial freedom. This FIRST step is essential as it lays a foundation for you to work your money. In other words, in order to INVEST your money you need to embark on this FIRST step.

So what is this FIRST step that is soooo important??

The answer is: SAVING!!

All of you might go “Duh” but how many of us are actually able to really save up your salary or money? We often have the goal to save up this amount but most of the time we give in to certain pleasures and decide to spend almost all our salary away. I know this because I myself is guilty as charged haha!

When I entered the army, its the first time whereby I was drawing a constant stream of income (unlike those adhoc jobs I did last time). With sudden inflow of money every month, I did not have a concrete saving plan and hence my expenses were very high at the start. In some months, I may be broke without the month coming to an end. I also know of friends who are like that too! I only started taking charge of my savings when I started investing as I  realise how meagre my savings are.

So I started reading up and created a system to force me to save, but before that let’s look at

1) The importance of saving

Saving is an important first step to your financial freedom because without savings, you will not be able to use that money to work for you. Imagine yourself spending every dime of your monthly salary, how will you be able to put any money into investing in stocks, property and so on. So if we ourselves do not understand the importance of saving it’s hard for us to grasp the power of investing and compounding!

2) Saving can be automatic!

Yes it can be. Nowadays with the advent of technology, most of us definitely have an ibanking account with any of the banks in Singapore. And it’s super easy to automate the entire process of saving. Let me show you how.

First, you will first need to set up 2 bank accounts

Yes, create 2 separate bank accounts, one for purely savings, the other for expenses only.

Secondly, credit your salary into your savings account. After doing that, calculate a rough percentage of your monthly expenses. For me, I save about 75% of my salary and spend the other 25%.

Finally, set up an automatic transfer between the two accounts. Transfer the percentage for your expenses from your savings account to your expenses account.

Yes the end result should look something like the flow chart above.

3) Don’t touch your nest egg for fun!

Yes! You read it right! Don’t touch your nest egg (savings) for fun (entertainment). Put it another way, don’t spend your savings!! For me, I practise that by not bringing out the ATM card that belongs to my savings account. That way I will not be tempted to dip my hands into my savings.

Of course with that said, what if its an emergency and you need the money? If it’s an emergency, then I guess there will be no choice but to tap on your savings. However, if possible try to reduce your expenses in the subsequent months to repay the amount you took from your savings.

One point to note is that you should always ensure you plan a right amount to be set for your expenses. I tried to save 90% of my salary before, but it’s just too tight on me and I tend to keep tapping onto my savings because I ran out of money. So plan the amount carefully so that it does not give you ANY temptations to tap into your savings!!

In conclusion,

you might say that as a young person, saving is very insignificant to you since you probably can only save a few hundred a month. But take that few hundred and multiply it by 12 or 24 months you are looking at a few thousands already. Think BIG! And that’s not all, use your nest egg to work for you through INVESTING! Slowly but surely, this small amount will grow and compound.

I really like the picture above. In the very first picture I showed you a hand dropping coins into a jar which signifies saving. And with your savings, it forms the soil and fertiliser to grow your money just like the above picture. Savings is a cliche topic and whatever I shared above may be shared by many others too. But, what I think is most important to you is TAKING ACTION to really start your saving plan because saving is the FIRST step to your financial freedom!

** Haha side note before I end. I have been toying with the idea of helping people who are keen to get into investing. I am still working out how should I deliver it. So do stay tuned for more update on this! 🙂 **

 

[Building Blocks]: 3 useful online resources to help with your investing journey

Living in a world connected by the internet means information are widely available just a few clicks away. No doubt, I myself have benefited immensely from the information I found online. Today, I want to share with you some of the useful online resources that will definitely be of help to your investing journey.

1) Investopedia

Investopedia was the very first website that I visited to understand more about investing. It is like a huge encyclopedia on anything related to finance. I would say that it is easily one of the top few investing websites that are easy to understand and well organised. Not only are there information on investing, there are information on current affairs, insurance and many more. The only down side of this is that it mainly focuses on the US markets. However I would recommend this website for beginners wanting to invest because their beginners’ tutorials are very comprehensive and easy to understand.

You can find tons of tutorials about investing at this website.

And if you are still clueless where to start from, I have compounded a list of tutorials from Investopedia that you should start with. Click on the link below for you to be teleported there haha.

1. Investing Basics 101: A tutorial for beginner investors 
2. Stock Basics Tutorial
3. Bonds Basics Tutorial
4. Mutual Funds Tutorial
5. Introduction to Fundamental Analysis
6. Basics of Technical Analysis

Here you go. Starting out with these few tutorials should allow you to understand investing clearer. If in doubt you can always drop a comment below and I will answer to them 🙂

2) InvestingNote

Think of InvestingNote like a Facebook for investors. It boast a huge collection of users ranging from beginner investors to the very experienced ones. Interestingly, this platform is set up by Singaporeans and was only launched recently. The community in InvestingNote is fantastic as many are willing to share about their strategies and styles of investing. What’s more? You can also find out more about the stocks you are interested in, like the information of the company, what other investors are talking about that stock etc etc.

For instance, if you are trying to find out more about Japfa, you can get a summarised information on Japfa’s price actions, fundamentals and financials on the left and the chart of Japfa on the right. Personally, I find InvestingNote’s charting platform to be one of the best. It allows you to plot your own lines, overlay them with a myriad of indicators and you can even save your drawings on the chart.

Scrolling down further, you can see what are some of the things other users are talking about and the upcoming events the company may have. It currently have information on companies in the SG, US and HK markets. But many of the users of InvestingNote mainly talk about SG stocks which are good for new investors looking to go into the local market.

What’s more important is that you can get these amazing features for FREE. All you have to do is to sign up with them. It seems like I am doing an advertisement for them haha. Rest assured I am not paid to do this. For me, this platform have really accelerated my learning on investing and hence I thought of promoting it to you guys.

3) Investment Blogs

Many investors do have their own blogs where they document their own investment experiences. Some of them are so influential that some investors buy whatever they preach. Personally, some of the blogs that I have came about have helped me in terms of understanding how different investors analyse a company, their investment strategies etc.

I think what’s really beneficial about learning from investment blogs is learning the way others analyse a company. By reading their investment thesis on certain companies, you can understand the way they think which you can apply when you are analysing the company you are planning to invest.

Here’s an article on 55 SG Financial Blogs that are useful.

For me I am a regular reader of TTI, thelittlesnowball, my15hourworkweek and TUBinvesting.

Do give them a visit! 🙂

In conclusion,

good resources are everywhere on the internet. Use it to propel your investment knowledge as much as possible. You will realise that you may not have to even pay a dime to attend courses which teach you about the basics of investing. Also, the best way to learn is from each other. Hence, I believe InvestingNote and reading of other investors’ blogs are two good ways to deepen your understanding of investing. Do note that everyone have their unique styles of investing, different upfront capital and different investment objectives. Thus, completely copying someone else’s method may not suit you. I would suggest adopting good practices and incorporate it into your own method of investing. Hopefully this post can help you realise some of the good investing resources online that will be beneficial to your investing journey!