Benjamin Graham is considered by many to be the Father of Value Investing. His loyal disciples include the likes of Warren Buffet and Irving Kahn. His approach is simple. It entails looking at a company and comparing a list of fundamental measures against some strict criteria. Some of the gauges are used to measure the potential rewards from investing in the company, whilst others estimate the risk from the investment. So what would Benjamin Graham make of Straits Times Index (SGX: ^STI) stalwart Singapore Telecommunications Limited (SGX: Z74)? Firstly, with an earnings yield of 5.6% and a…
His approach is simple. It entails looking at a company and comparing a list of fundamental measures against some strict criteria.
Some of the gauges are used to measure the potential rewards from investing in the company, whilst others estimate the risk from the investment.
Firstly, with an earnings yield of 5.6% and a dividend yield of 4.3% SingTel certainly looks reasonably priced compared to the risk free rate of return available to investors. The risk-free rate is the yield on a high-grade bond such as the US 10-year Treasury. This currently stands at around 2.4%. What this suggests is that the rewards on offer to potential investors could be appealing.
However, it is also always important to balance any rewards against the risks you might have to take on to achieve them.
What could discourage Benjamin Graham is the amount of debt that SingTel holds. Currently, SingTel’s debt stands at around S$7b. That is almost three times the book value of the company. It is some way off the debt of less than twice the book value that we would ideally hope for.
Another measure of risk is the current ratio, which is ratio of current assets to current liabilities. For SingTel this value is just less than one. Ideally, Benjamin Graham would be looking for this ratio to be at least two.
Whilst the potential rewards on offer from investing in SingTel seem appealing, the risks are likely to be too great to tempt Benjamin Graham.
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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 contributor Adam Kuo doesn’t own shares in any companies mentioned.