Noble Group Limited (SGX: N21) has been on a painful ride these past 12 months with its shares falling by more than 50% to S$0.68. To add salt into the wound, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has been flat over the same time frame. Noble’s decline raises the question: Will its shares be able to turn their fortunes around anytime soon? Here are three risks, in no particular order, which may impede a turnaround in Noble. 1. A declining profit margin Noble’s net profit margin…
Noble Group Limited (SGX: N21) has been on a painful ride these past 12 months with its shares falling by more than 50% to S$0.68.
To add salt into the wound, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has been flat over the same time frame.
Noble’s decline raises the question: Will its shares be able to turn their fortunes around anytime soon? Here are three risks, in no particular order, which may impede a turnaround in Noble.
1. A declining profit margin
Noble’s net profit margin has been on a steep slide since at least 2010, as the chart below shows:
Source: S&P Capital IQ
Although Noble’s revenue had grown by 52% from US$56.7 billion in 2010 to US$85.8 billion in 2014, its inability to keep its costs in check – seen in the sliding net profit margin – has resulted in a drastic decline in profit from US$606 million to just US$132 million in the same time frame.
Generally speaking, a business without the ability to grow its profits will see its economic value gradually erode over time and that’s a risk that investors may face with Noble if the deterioration in its profit margin continues.
2. A transparency issue
Noble’s shares had fallen by nearly two-thirds since the start of 2010 and that’s quite possibly a reflection of its falling profits as mentioned earlier.
But, the appearance of multiple investing reports from different parties over the past few months criticizing the quality of Noble’s business as well as its accounting practices had also likely played a part in the company’s 50% drop in price over the past 12 months. To that point, Noble’s shares had fallen by as much as 9.2% on 16 February, a day after the first of the negative reports was released on 15 February.
The reports claim that Noble has been very aggressive in its accounting practices so as to help inflate its profits and asset values.
While Noble did respond to some of the allegations with in-depth responses, the company has yet to clearly address all of the accusations that were raised. This may have the effect of dampening investors’ confidence and level of comfort with the firm.
3. A slowdown in commodity trading
China’s economy had expanded at its slowest pace in six years in the first quarter of 2015 and that has led to fears of negative impacts to the demand for commodities (the giant Asian nation is a voracious consumer of many commodities such as coal and iron ore).
Many major commodities have already seen their prices fall sharply over the past few years. For instance, oil had collapsed from more than US$100 per barrel in 2014 to around US$60 today; meanwhile, iron ore prices had declined from US$190 per tonne in 2011 to around US$60 today.
If demand from China would fall further, that might spell even more pain for commodity prices – and that’s not a good thing for Noble given that its business revolves around the trading of commodities and the management of their supply chains.
There are a lot of challenges for Noble to deal with and some are not even remotely within its control (such as falling commodity prices).
These are issues that bear watching from investors as they may be stubborn obstacles when it comes to any potential turnaround in Noble’s share price.
For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can 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 Stanley Lim doesn’t own shares in any companies mentioned.