Can Keppel Corporation Limited Hold Up In A Recession?

Singapore is no stranger to recessions. As such, a recession scenario can be something to think about before we invest.

Like much of the world, the Lion City’s economy suffered during the Global Financial Crisis of 2008-2009. In the third-quarter last year, Singapore had narrowly missed entering a technical recession. If history is a guide, it’s almost a certainty that there will be harder times for Singapore’s economy at some point in the future.

When that happens, we want to be sure that the companies we invest in can survive or even thrive.

Measuring the strength of the balance sheet

“We never want to count on the kindness of strangers in order to meet tomorrow’s obligations.”

– Warren Buffett

Having a strong balance sheet can be of great help to companies in meeting the demands of recessionary episodes. We can get a quick idea of a company’s balance sheet strength using two simple ratios.

Let’s run oil-rig builder and property developer Keppel Corporation Limited (SGX: BN4) through this calculation today. We will be using the company’s figures for the quarter ended 30 September 2015.

The first is called the current ratio. A measure of just how much liquidity a company has, this number is simply a company’s current assets divided by its current liabilities.

Keppel Corporation’s Current Assets S$17.1 billion
Keppel Corporation’s Current Liabilities S$10.2 billion
Current Ratio 1.68

Source: Keppel Corporation’s earnings report

With a current ratio of 1.68, Keppel Corporation meets the current ratio number of above 1.5 that we would like to see. But, the rig-builder has a fair bit of debt on its balance sheet. As of 30 September 2015, the company had S$7.8 billion in borrowings and just $1.8 billion in cash & equivalents.

Let’s now look at the second ratio: the quick ratio.

It is similar to the current ratio, but it takes the company’s inventory out of the equation. This is because inventories may not always be worth the amount that are recorded in the books. By removing inventory from the picture, you can find out if a company really has sufficient liquid assets to meet short-term operating needs.

Keppel Corporation’s Current Assets S$17.1 billion
Keppel Corporation’s Current Liabilities S$10.2 billion
Keppel Corporation’s Inventory S$11 billion
Quick Ratio 0.60

Source: Keppel Corporation’s earnings report

In general, we are looking for a quick ratio that is above 1. In Keppel Corporation’s case, its quick ratio of 0.60 has failed to clear the hurdle.

Inventory makes up the bulk of the company’s current assets and has risen compared to the end of 2014. This rise comes despite Keppel Corporation’s revenue falling by 16.5% year-on-year in the first nine months of 2015. Delivery delays from three customers as well as payment delays from Sete Brasil may have contributed to this.

Inventory is one key area to watch for Keppel Corporation moving forward as inventory growth in the absence of commensurate increases in revenue may be a sign of potential trouble to come.

Foolish summary

The two ratios above give you a hint on how Keppel Corporation is able to finance its current obligations when they become due.

They represent useful starting points, but further study is required to understand whether the company’s business is really able to sustain itself when a recession comes knocking on the door.

(Learn how to calculate the current ratio and quick ratio here.)

For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt 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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.