Here’s A Dirt-Cheap Share That Investors Might Want to Be Careful With

Offshore vessel owner and shipbuilder Marco Polo Marine Ltd (SGX: 5LY) might catch the eye of bargain-hunters right now.

At its current price of S$0.27, the company’s trading at just 6.4 times its profit over the last 12 months and 0.5 times its current book value. These are really low valuations.

In comparison, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has price-to-earnings (PE) and price-to-book (PB) ratios of 14 and 1.4 respectively.

But, having dirt-cheap valuation metrics does not necessarily make Marco Polo Marine a bargain. After all, cheap shares can still become expensive mistakes if their businesses go on to deteriorate.

On that note, there are signs that Marco Polo Marine’s business fundamentals may have more room to fall. The chart below shows how the company’s returns on equity and total debt to equity ratios have evolved over the past two years:

Marco Polo Marine's return on equity and total debt to equity ratio

Source: S&P Capital IQ

All things being equal, the use of higher leverage should help to juice a company’s return on equity. But as you can see, Marco Polo Marine’s return on equity has been trending down even as it has increased its leverage. This development may point toward deteriorating economics in the company’s business.

A Fool’s take

Marco Polo Marine’s low valuation at the moment may indeed represent a real opportunity for investors if its business can improve from here.

But, with 1) Marco Polo Marine displaying signs of weakening business fundamentals, and 2) the current uncertainty in the oil & gas industry as a result of the fierce declines in the price of oil over the past six months, investors would need to study the firm really carefully so as to be sure that it’s not a value trap.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

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 company mentioned.