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Do Larger Companies Make Safer Investments?

Is it true that a company that’s large in size would make for a safer investment than smaller peers? I certainly don’t think so and here’s why.

The big big-losers

At the start of 2010, the quartet of Noble Group Limited (SGX: N21), Cosco Corporation (Singapore) Limited (SGX: F83), Yanlord Land Group Limited (SGX: Z25), and STATS ChipPAC Ltd (SGX: S24) all had market capialisations and annual revenues of more than a billion Singapore dollars. In other words, these four shares were not small companies at all.

But yet, as you can see in the table below (click for larger image), the group have seen their share prices fall by at least 42% over the past five-plus years.

Table for the four shares

Source: S&P Capital IQ

Despite being large in size, the quartet’s businesses had suffered over the past few years as a result of company-specific or industry-related issues. The table below showcases the damage these companies have taken (their profits have either shrank considerably or have remained negative).

Table of profit for the four shares

Source: S&P Capital IQ

Given what we’ve seen, we have to stop relating size to strength. All companies, regardless of their size, are still vulnerable to declines in their businesses.

It would be better for us as investors to focus more on the economics of the business we’re looking at rather than its size.

For example, if we had looked at STATS ChipPAC as a business back in 2010, we would still have been able to see that it’s in a tough and competitive industry and that it had been struggling to make a decent profit even when it has been reinvesting into its business. From 2000 to 2010, Stats ChipPAC’s average return on equity had been -6.14%.

Foolish Takeaway

It would be more fruitful for us as investors to select investments based on the quality and value of a business rather than on its size. As illustrated above, even large businesses can still subject their investors to the risk of huge destruction in value if their fundamentals are weak.

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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 Stanley Lim doesn't own shares in any companies mentioned.