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Investors, Beware These Shares

Investing maestro Charlie Munger has a wise quip for investors which I love:

“Tell me where I’m going to die, that is, so I don’t go there.”

To Munger’s point, knowing what to avoid in the stock market may be just as valuable as knowing what to buy. And this brings me to the question: What should investors be avoiding, now?

Piyush Gupta, chief executive of DBS Group Holdings Ltd (SGX: D05), said recently that Asia’s credit cycle is turning. If that prognosis is true, then companies in Singapore which have been binging on cheap debt may be in for some pain in the future.

Sure, there would be companies that have locked down low interest rates for a number of years. But there’s always the risk that the upturn in the credit cycle can last for many years, such that rates can still remain elevated when these companies have to refinance their borrowings. And if so, the businesses of such firms would still be negatively impacted.

For these reasons (and to answer my earlier question on what to avoid), I’ve decided to screen for shares in Singapore that have: (1) a net-debt to equity ratio of more than 100%; and (2) negative operating cash flow over their past three completed-financial years.

The first criterion is meant to identify debt-laden companies. Meanwhile, the second is used to pick out companies that have had trouble generating operating cash flow. This is important because highly leveraged companies that lack the ability to produce cash flow even in a low interest rate environment that we have been in for the past few years would likely face an even tougher struggle to generate cash if and when the credit cycle turns.

After putting the two-criteria filter to work with the 750-plus shares listed in Singapore, the following are some of a larger group of shares which were picked out: Oxley Holdings Ltd  (SGX: 5UX), Maxi-Cash Financial Services Corp Ltd (SGX: 5UF), Aspial Corporation  (SGX: A30), and MoneyMax Financial Services Ltd (SGX: 5WJ).

The table below shows the net-debt (total borrowings minus total cash) to equity ratios that the quintet have.

Company Net-debt to equity ratio
Oxley Holdings 394%
Maxi-Cash 259%
Aspial 243%
MoneyMax 167%

Source: S&P Capital IQ

None of all the above is meant to suggest that these companies are definitely shares investors should stay clear of. These companies might just be on the cusp of a turn-around, or management could be in the midst of implementing positive and effective changes to the health of these businesses. There’s also the chance that Gupta’s forecasts on the change in the credit cycle turns out wrong – after all, forecasts, even by the pros, are often wrong – allowing these companies to continue operating in a low interest rate environment.

But all these said, it pays to keep in mind that the long-term returns of a share would be governed by how well its underlying business performs. Given the track records of the quartet so far, investors who choose to wade in should do so with their eyes wide open to the potential risks involved.

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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 Chong Ser Jing doesn’t own shares in any companies mentioned.