Can Fraser and Neave Limited Hold Up in a Recession?

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

Closer to home, Singapore’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 economies of Singapore and other countries in Asia 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

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 food and beverage (F&B) company Fraser and Neave Limited (SGX: F99) through this calculation today. The F&B outfit derives the majority of its revenue in Asia. 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.

Fraser and Neave’s Current Assets S$1.57 billion
Fraser and Neave’s Current Liabilities S$446 million
Current Ratio 3.5

Source: Fraser and Neave’s earnings report

I’m looking out for a current ratio of more than 1.5 in general. With its current ratio of 3.5, Fraser and Neave should likely have little problems in meeting its short-term financial obligations.

The majority of the company’s current assets consist of its cash and fixed deposits. As of 30 September 2015, the F&B retailer had S$961 million in cash and equivalents and around S$100 million in total borrowings.

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.

Fraser and Neave’s Current Assets S$1.57 billion
Fraser and Neave’s Current Liabilities S$446 million
Fraser and Neave’s Inventory S$254 million
Quick Ratio 2.9

Source: Fraser and Neave’s earnings report

In general, I’m looking for a quick ratio of over 1. As you can tell, Fraser and Neave once again clears the hurdle.

As mentioned, the majority of the firm’s current assets consists of its position in cash and fixed deposits. Meanwhile, the bulk of its current liabilities is made up of accounts payable.

At the moment, Fraser and Neave is in the midst of transitioning its business. The firm’s top-line for the financial year ended 31 September 2015 did not change much. But, its profit and free cash flow grew despite having flat revenue. Fraser and Neave’s large cash position and strong balance sheet could facilitate its transition.

Foolish summary

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

They represent a useful starting point, 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.)

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.