Why Diversification In A Company’s Business Is Important For Investors

Diversification for a business can come in many different forms. For instance, it can mean having a diverse customer base, or having diverse geographical sources for revenue.

Being diversified can help a business when one or a few of its markets turn south. Local engineering conglomerate, the S$9.5 billion Singapore Technologies Engineering Ltd (SGX: S63), is a good example.

According to its latest 2015 annual report, ST Engineering sourced 74% of its revenue from Asia, 24% from the US, 1% from Europe, and the remaining 1% from other locations around the globe. In the company’s letter to shareholders, chairman Kwa Chong Seng and president Tan Pheng Tock wrote how the company managed to navigate “an uneven global business environment.”

While the “US economy returned to sustained growth… the Eurozone [had] stayed economically stagnant.” In the case of China, “the slowing China economy dampened business sentiment and created headwinds across many economic sectors [in Asia].”

All told, ST Engineering’s 2015 revenue of S$6.34 billion was comparable to its 2014 revenue of S$6.54 billion. The profit picture was similar; ST Engineering’s profit had dipped by just 0.6% from S$532 million in 2014 to S$529 million. With these results, we can see how ST Engineering had weathered the challenging year of 2015 well with its geographically diverse business – when one region slows, there’s another to help pick up the slack.

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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 Ong Kai Kiat doesn't own shares in any companies mentioned.