Sometimes it’s easy for companies to grow. They can go on a borrowing binge to fuel expansion. But, it’s also easy to see how such a scenario can end badly for the company and its investors; after all, leverage acts as a double-edged sword. In tough economic climates, an overly-leveraged balance sheet can be a painful anchor for any company in its efforts to remain afloat. That’s why I prize a clean balance sheet; without significant debt, it’s tough for a company to sink. But that said, to find market-beating investments, it’s not enough for a company…
Sometimes it’s easy for companies to grow. They can go on a borrowing binge to fuel expansion. But, it’s also easy to see how such a scenario can end badly for the company and its investors; after all, leverage acts as a double-edged sword.
In tough economic climates, an overly-leveraged balance sheet can be a painful anchor for any company in its efforts to remain afloat. That’s why I prize a clean balance sheet; without significant debt, it’s tough for a company to sink.
But that said, to find market-beating investments, it’s not enough for a company to just havea balance sheet that has plenty of cash and little or no debt. Companies need to be able to grow too. Otherwise, their true economic values would stagnate and it would become tough for investors to profit over the long-term.
Here are 2 shares that have managed to display great growth without having to resort to large amounts of borrowings.
1. Riverstone Holdings (SGX: AP4)
According to my colleague Stanley Lim, Singapore’s northern neighbour Malaysia is actually “the global leader in producing natural rubber and nitrile rubber gloves.” Part of Malaysia’s dominance for these product categories comes from the fact that global glove-making giants like Hartalega Holdings and Top Glove Corporation – the two have annual production capacities of 14 billion and 42 billion gloves respectively – are both based and listed in the country.
Despite being a relatively tiny glove maker in Malaysia, Riverstone Holdings, with its ability to make 3.1 billion gloves annually, has managed to carve out a niche for itself in the more technologically advanced nitrile-based cleanroom gloves segment.
As part of the company’s growth strategy, Riverstone Holdings is targeting manufacturers of tablets and smartphones with its cleanroom glove offerings and related products. Initial response has been promising with the company commenting in the first quarter of 2014 that it’s been seeing “strong take-up” of its products amongst such manufacturers.
This bodes well for the company especially with the first phase of its new factory in Taiping, Malaysia, slated to be operational by the third quarter of this year. The new facility will be a huge expansion for the company’s production capacity given the following set of figures: At its current production capacity of 3.1 billion gloves, Riverstone Holdings’ total factories cover 22 acres; the Taiping facility alone would take up 30 acres of ground space.
At its current share price of S$0.94 each, Riverstone Holdings is valued at 14 times its trailing earnings. That’s just about in-line with the Straits Times Index’s (SGX: ^STI) PE (price/earnings) ratio of 14 as well.
2. Kingsmen Creatives (SGX: 5MZ)
As a player in the MICE industry (Meetings, Incentives, Conventions, and Exhibitions), Kingsmen is in the business of helping clients design, fabricate, and set-up installations for venues that include retail stores, offices, exhibitions, theme parks, and museums, amongst others. Some of its past clients include Loewe, Karl Lagerfeld, Ladurée, and Universal Studios Singapore.
Although Kingsmen’s services might seem to be easily replicable by competitors at first glance, the fact that 70% or more of the company’s clients return to it for its services suggests that there’s some kind of reputational- and quality-related barriers to entry at play here.
Given that, it seems that Kingsmen’s also well-positioned to capture some of the possible growth in Singapore’s MICE sector, which has some strong support; for instance, the Singapore Tourism Board was granted S$905 million in 2012 to spend to help to promote and grow the sector till 2017.
At its current price of S$0.92, Kingsmen’s shares carry a trailing PE ratio of 11.
Foolish Bottom Line
The two companies’ stellar corporate growth has translated into market-beating performance. Since the start of 2007, Riverstone Holdings’ shares have gained some 242% while the Straits Times Index has increased by just 10% to 3,288 points. With Kingsmen, its shares have gone up by 411% since the beginning of 2004; the Straits Times Index has appreciated by only 85% in contrast.
But, with all that being said, there’s no guarantee that the future of both companies would be as great as their pasts. It would still depend on each investor’s individual judgement in determining whether these market-beating shares can indeed continue to beat the market.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Kingsmen Creatives.