This Share has Returned 308%. Can it Continue? – Part II

Welcome to the second part of the article on Hour Glass Ltd (SGX: AGS). In my previous article, I covered the sources of revenue for Hour Glass. Today, we look at the profit and balance sheet for the company.

As a recap: The luxury watch retailer’s shares are up 308% in the past five years. By comparison, the capital gain returns of the SPDR STI ETF (SGX: ES3), a proxy for the market barometer, Straits Times Index (SGX: ^STI), was 96% for the same duration. You can read more about Hour Glass here and here.

A closer look at profits

Hour Glass - 3

Source: Company Earnings Report

In general, Hour Glass has done well to grow its segment profits at a pace faster than its revenue. The South East Asia & Australia segment saw profits rise by 71% from the financial year ended 31 March 2010 (FY2010) to FY2014. Meanwhile, the North East Asia segment saw profits rise by 58% over the same period. Both profit increases exceeded the revenue growth rate of around 40% each over the same timeframe. However, it is notable that profit has somewhat stagnated for the South East Asia & Australia region in FY2013 and FY2014.

Hour Glass - 2

Source: Company Earnings Report

From the graph above, we can see that Hour Glass has remained free cash flow (FCF) positive throughout the five financial years under study. In particular, FY2014 has seen its operating cash-flow spike up substantially compared to the prior year. This was achieved through a combination of improvement in inventory turns, and reduction in inventory.

Hour Glass - 3

Source: Company Earnings Report

Although there was a small amount of debt for FY2014, Hour Glass’ balance sheet has remained mostly healthy throughout the five financial years. For the second quarter ended 31 September 2014, it reported $88.6 million in cash and equivalents and about $42 million in borrowings.

Foolish summary

Hour Glass has done well over the past five financial years, growing its revenue and profits over this timeframe. Its balance sheet remains healthy.

It is noteworthy that — as of 30 September 2014, the group inventory stood at $295.9 million, about half the amount of its annual sales. Significant amounts of inventory may come with the territory of a luxury watch retailer — therefore, managing its product mix becomes crucial for the company to stay relevant and profitable at the same time. As a luxury retailer, its business may also be affected by economic recessions, and policy changes in the countries that it operates in.

As of the closing price on last Friday (12 December 2014) of $0.64, Hour Glass traded at a trailing earnings ratio of about 8, and has a dividend yield of around 3.1%.

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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.