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Would Warren Buffett Buy Ezion Holdings?

Warren Buffett likes simple-to-understand businesses. And what can be easier to comprehend than a business, such as Ezion Holdings (SGX: 5ME) that owns and charters jack-up rigs and liftboats to the offshore oil and gas industry.

But Warren Buffett wants more than just an easy-to-understand business. The company should demonstrate some strong fundamentals before the Sage of Omaha is likely to whip out his cheque book and pen.

Buffett likes to see some evidence of earnings stability. In the case of Ezion Holdings, its earnings have climbed steadily over the last ten years from a loss of S$2m in 2004 through to break-even in 2006 and onto a bottom-line profit of S$224m last year.

Over the last four or five years, margins have been both high and stable. That is another business characteristic that Buffett would like to see.

The Asset Turnover, which can be a measure of efficiency, might put Buffett off, though. An Asset Turnover of 0.15 would suggest that Ezion only generates S$15 for every $100 of asset employed in the business. That is lower than the market average by more than a factor of three. The Asset Turnover for Singapore’s blue chips is 0.5.

The company is also carrying debt on its balance sheet, which could deter Buffett. The company has Total Liabilities of S$2.2b and Total Assets of S$3.9b. That equates to a Leverage Ratio of 2.3, which is above the market average. It also has Net Debt of S$1.5b compared with a market value of S$1.9b.

The shares can be a little volatile compared to the market as a whole. It is also trading at a slight premium to its book value.

Warren Buffett might just give the company a miss. Ezion has some great characteristics. But it also has some worrying ones too.

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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 Director David Kuo doesn’t own shares in any companies mentioned.