Here’s 1 Winning Share Investors Have to Beware

Timber flooring services provider Jason Holdings Limited (SGX: 5I3) has been a wonderful winner over the past 12 months with its share price up a total of 117%.

Over the same period, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the fundamentals of Singapore’s market barometer the Straits Times Index (SGX: ^STI) – has gained just 5.2%.

Jason Holdings’ great recent performance might attract the attention of stock market participants who hope that the share can extend that winning streak. But as I wrote yesterday, one of the worst reasons ever to invest is “the stock has gone up.” Stocks can easily rise to levels which cannot be supported by their underlying business fundamentals and that’s the danger investors might be facing with Jason Holdings.

Jason Holdings' valuation

Source: S&P Capital

As you can see in the table above, at Jason Holdings’ current price of S$0.64, it’s carrying some really high valuations. For some perspective, the SPDR STI ETF has a PE (price-to-earnings) and PB (price-to-book) ratio of just 14 and 1.3, respectively, at the moment.

Of course, having high valuations need not necessarily mean that a share will turn out to be an expensive mistake. If the company manages to grow its business sufficiently in the future, it might yet turn out to be a bargain.

But, this is also where Jason Holdings may disappoint.

Jason Holdings' business metric

Source: S&P Capital IQ

The table above shows the changes in three important financial metrics – revenue, earnings, and cash flow – for the company over the past five years. You can observe that from 2009 to 2014, the company hasn’t been able to grow its earnings and cash flow at all. Meanwhile, revenue growth can only be described as decent-at-best.

There are also worries with the firm’s financial strength. As of 31 December 2014, Jason Holdings had only S$0.52 million in cash and equivalents on its balance sheet but a whopping S$22 million in borrowings; that’s not what a strong balance sheet would look like.

A Fool’s take

Jason Holdings may still turn out to be a long-term winner. But with its demanding valuation, lack of any strong historical growth, and weak balance sheet, investors in Jason Holdings will need to tread carefully with the share and be cognizant of the risks involved.

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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 Chong Ser Jing doesn't own shares in any company mentioned.