Would Warren Buffett Buy COSCO Corporation (Singapore) Limited?

I never knew the word “jumbolisation” even existed. But I do now. It is on the COSCO Corporation (Singapore) Limited (SGX: F83) website, so it must exist.

Jumbolisation is one of the many things that the Chinese shipbuilder does. Apart from stretching a ship, it also repairs ships and builds oil rigs. But while the company might be an expert “jumbolising” a boat, its Net Income Margin is doing quite the opposite. That is unlikely to impress Warren Buffett.

Warren Buffett likes to see companies that have low earnings volatility, which is not one of COSCO’s key attributes.

Over the last ten years, bottom-line profits have fluctuated between a high of S$337m and a low of S$21m. Additionally, Net Income Margin has slipped from 55% in 2004 to just 0.5% last year.

That said COSCO is quite efficient. Its consistently-high Asset Turnover would suggest that it is able to generate high levels of sales from the assets at its disposal. Last year, it generated S$0.46 of sales from every dollar of asset.

However, COSCO is highly leveraged. It has S$8.2b of total liabilities compared with S$10.5b of total assets. That equates to a Leverage Ratio of about 4.5, which is almost three times higher than the market average.

A high financial leverage is not necessarily a bad thing. But COSCO’s Net Debt of S$3.7b could cause unwanted volatility that is outside of its control.

In its favour is a relatively low market value compared to net assets. A price-to-book of 0.8 could suggest that the company might be 20% undervalued.

COSCO might appeal to value hunters. But Warren Buffett is looking for businesses that can deliver consistent results over the long term. He might give COSCO a miss.

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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.