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These 2 Cheap Shares May Not Be Bargains After All

Credit: Terrance Heath

The duo of China Fishery Group Ltd (SGX: B0Z) and Ezra Holdings Limited (SGX: 5DN) might catch the eye of bargain hunters at the moment. At their respective current share prices of S$0.28 and S$0.535, they’re valued at really low price-to-earnings (PE) ratios of 7 and 4.4.

For some perspective, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the market barometer the Straits Times Index (SGX: ^STI), carries a PE ratio of 13.7.

With their valuations, it might seem like China Fishery and Ezra would make for sure-fire bargains. But, it pays to note that shares that look cheap can still turn out to be expensive mistakes if their business results would fall apart in the future.

And, this is where a note of caution can be sounded out with the duo in question.

Total debt to equity ratio and Return on equity for China Fishery and Ezra

Source: S&P Capital IQ

The chart above (click for larger image) plots the historical total debt to equity (TDE) ratios and returns on equity (ROE) for China Fishery and Ezra.

As you can see, the economics of both firms’ businesses have largely been deteriorating over the past two years. This is evidenced by their declining ROEs (Ezra’s ROE had seen in a sharp jump in the 12 months ended 30 September 2014, but prior to that, the metric had been steadily falling) despite an increase in leverage from already high bases.

A Fool’s take

None of the above is meant to suggest that the duo of China Fishery and Ezra would certainly be poor investments going forward. In fact, the business fundamentals of both may already be improving for all I know. But, given what we’ve seen so far, bargain hunters ought to proceed with caution and with their eyes wide open to the potential risks involved.

If China Fishery and Ezra’s businesses remain poor, they might not be bargains after all despite them carrying enticing valuations currently.

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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 doesn't own shares in any companies mentioned.