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Why Noble Group Limited Is A Risky Stock For Investors

Yesterday, my colleagues and I held a live virtual chat with the readers of The Motley Fool Singapore. The chat was to allow participants to ask questions related to investing (you can see a replay of the chat right here).

One question – and a variant of it – that appeared frequently is this: “What do you think about Noble Group Limited (SGX: N21)?” Given what I see as wide interest in Noble Group from the live chat participants, I decided to share my views about the company in this article you’re reading now.

(Hint: The title’s pretty self-explanatory… but read on to find out why!)

The long view

At the Fool, we’re long-term investors and what we’re concerned with are a company’s business performance over the next three to five years or more.

To help with that assessment, one of the things I like to look at would be the company’s track record in generating cash flow. How does Noble Group fare in this regard? Poorly.

From 2010 to 2015, Noble Group has generated negative operating cash flow in three years. You can see this in the chart just below. Meanwhile, the company’s business churned out a negative US$486 million in operating cash flow in the first-quarter of 2016, though that’s admittedly an improvement from the negative US$597 million seen in the previous year.

Noble Group's operating cash flow from 2010 to 2016
Source: S&P Global Market Intelligence

Financial fortitude is another one of the things I keep an eye on. A strong balance sheet provides a company with a solid platform to grow its business; a weak, debt-laden balance sheet adds risk to the equation. How does Noble Group’s balance sheet look like? Shaky.

As of 31 March 2016, Noble Group has US$1.35 billion in cash and equivalents but total borrowings of US$5.04 billion, giving rise to US$3.69 billion in net-debt. The company also has shareholder’s equity of US$3.40 billion, resulting in a net-debt to equity ratio of 109%. That’s not what a healthy balance sheet looks like, in my view.

Cheap rubbish is still rubbish

One of the things about Noble Group that could attract investors would be its low valuation. At current prices, the firm’s valued at less than half its book value and merely 0.02 times its trailing revenue. Those are valuation numbers that are also near five year lows as the following chart illustrates.

Noble Group's price-to-book (PB) and price-to-sales (PS) ratio from 19 May 2011 to 19 May 2016
Source: S&P Global Market Intelligence

But as my fellow Fool David Kuo once wrote, “Cheap rubbish is still rubbish.” What matters is the future – in other words, what Noble Group’s business will look like in the years ahead. And as we’ve already seen earlier, Noble Group is a company with a flimsy balance sheet and a lousy track record of generating cash flow.

A Fool’s take

More analytical work has to go into the broth beyond all I’ve shared above before any investing conclusion can be made on Noble Group. But what I’ve seen about the company has already given me pause and make me think the company’s a risky one for investors. Those interested in Noble Group will have to wade in with their eyes wide open to the possible dangers that may lurk around.

(And oh..! The live chat was also for questions related to the launch of The Motley Fool Singapore’s first-ever stock recommendation service.)

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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 companies mentioned.