1 Simple Ratio You Can Use to Find Winning Investments

Searching for winning investments may sound challenging. After all, the Singapore stock exchange offers north of 700 different companies to choose from.

Thing is, if we start with a few simple rules or ratios, we can start to narrow down the field fairly quickly.

One such ratio is the cash-to-debt ratio.

Tell me more

For the cash-to-debt ratio, Tom Gardner, Chief Executive Officer of the Motley Fool, had a few thoughts to share. In his book Rule Breakers, Rule Makers, he quipped:

“Since inception, The Motley Fool has always said it of your personal finances and we’ll say it of our rule-making companies: We prefer that the financial statement show little or no debt. Who wants to own a business that wins a rich valuation today after announcing phenomenal earnings, but only because they borrowed heavily from their tomorrow?

Now, because most companies will, and must, borrow money at some point – just like you might take out a mortgage – I don’t want to cross off our list every organization with some debt on their balance sheet.

Instead, my favor is with those businesses whose cash savings are at least 1.5 times greater than their long term debt. Make no mistake about it — over the course of a decade or two, or three, bad things will happen to every company, even the greatest of them.”

Putting this ratio to use, we can take a look at a couple of listed companies in Singapore.

As luck would have it, my fellow Fool Ser Jing had recently pointed out three different Singapore-listed companies with low debt in his article here.

From his chart below, you can see a summary of the cash and debt for the trio of healthcare provider Raffles Medical Group Ltd (SGX: R01), food and beverage outfit Super Group Ltd (SGX: S10), and communication design and production group Kingsmen Creatives Ltd (SGX: 5MZ).

Balance sheet figures for Kingsmen, Raffles Medical, and Super since 2004

Source: S&P Capital IQ

As of the end of 2014, Kingsmen Creatives, Raffles Medical, and Super Group had cash-to-debt ratios of 12.5, 24.2, and 5.1 respectively; all three ratios are well above Tom’s 1.5 requirement.

Foolish summary

Although the cash to debt ratio is a useful tool to help sieve out winning companies, there can always be more that you can do.

Looking for companies that have repeatable businesses and strong gross margins and net margins could be good place to start. If the company’s sales is increasing, that could be another positive sign too. With more positive factors on our side, our chances of finding a winning investment may be better.

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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 owns shares in Super Group.