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1 Tiny Dirt-Cheap Stock With A Big Risk To Note

Creative Technology Ltd (SGX: C76) is a tiny stock in Singapore’s market. At its current share price of S$1.05, it has a market capitalisation of just S$73.8 million.

But, could the stock be a big bargain? It’s hard to say for sure, but it’s true that Creative Techonlogy has a dirt-cheap valuation. The company currently has current assets and total liabilities of S$179.6 million and S$65.7 million, respectively, which gives rise to a net current asset value of S$113.8 million (current assets minus total liabilities).

As you can tell, Creative Technology’s market cap is lower than its net current asset value. This trait makes the company a net-net stock.

In theory, net-net stocks can be thought of as great bargains. That’s because investors can get a discount on a company’s current assets (assets such as cash, short-term investments, and inventory etc.) net of all liabilities. On top of that, the company’s fixed assets (assets such as properties, factories, long-lived equipment and more) are also offered – for free.

But, net-net stocks can come with huge risks. More often than not, net-net stocks are companies that are in deep trouble, which explains why their shares are available at such low valuations.

In the case of Creative Technology, one big risk to note is its inability to generate cash from its business. In fact, the company has failed to produce positive operating cash flow since its fiscal year ended 30 June 2008. You can see this in the table below:

Creative technology operating cash flow 2
Source: S&P Global Market Intelligence

This burning of cash by Creative Technology can easily cause its asset value to shrink over time, thereby closing the gap between its net current asset value and market cap. Investors who are interested in Creative Technology by virtue of its low valuation would have to be aware of this big risk.

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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.