Can this hidden growth stock continue to profit?

Welcome to the second part of the article on Japanese Food purveyor, Japan Foods Holding Ltd (SGX: 5OI). In my previous article, I covered the sources of revenue growth for Japan Foods. Today, we look at the company’s cash flow and balance sheet.

As a recap: Japan Foods recorded capital gains of about 293%. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3) was just 14.2% for the same duration. The SPDR STI ETF is a proxy for the Straits Times Index (SGX: ^STI). The company also distributed a total of about 8 cents per share in dividends.

Japan Foods has a suite of Japanese themed food concepts under its company umbrella. Foolish folks may have come across one of its 15 restaurant brands (some are franchised while some are self-owned) like Ajisen Ramen, Fruit Paradise, Menya Musashi and Osaka Ohsho. Outlets in Singapore are self-operated, while the restaurants in Malaysia, Vietnam, Hong Kong, and China are either sub-franchised or associates.

A closer look at profit

From our previous article, we have observed that Japan Foods has grown its revenue by a compounded annual rate of 7.5% over its past five financial years. We shall now take a look at the operating cash-flows and capital expenditures to see if the topline trickles down to the bottom line.

Can this hidden growth stock continue to profit? Japan Food - 2

Source: Company Earnings Report

For the most part, rising revenue at Japan Foods has also generated a matching increase in operating cash-flow. With exception to the financial year ended 31 March 2011 (FY2011), Japan Foods’ capital expenditure has also remained relatively low in relation to operating cash flow. This means that Japan Foods had generated ample free cash flow (operating cash flow minus capital expenditure) between FY2010 and FY2014.

Can this hidden growth stock continue to profit? Japan Food - 1

Source: Company Earnings Report

It would appear that the positive free cash flow has made its way to the company’s balance sheet in the form of an increasing cash position and a decreasing debt position. Japan Foods ended FY2014 with no debt and a healthy $16.8 million in cash and equivalents.

Foolish summary

As mentioned in my previous article, Japan Foods remains a relatively small restaurant operator. It has managed to grow its revenue over the past five financial years through rigorous experimentation with different concepts. The experimentation has not cost the company heavy amounts of capital as seen from how Japan Foods has remained mostly free cash flow positive throughout.

As a restaurant operator, Japan Foods has not been immune to the raising labor cost and general competition in its industry. To this topic, my fellow Fool Sudhan has pointed out that Japan Foods has suffered a 52% year-on-year plunge in net profit in the first half of FY2015. This is something Foolish folks should keep an eye on.

As of the closing price on 25 November 2014 of $0.55, Japan Foods traded at a trailing earnings ratio of about 17.9, and has a dividend yield of around 4%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.