There’s a lot in common with SMRT Corporation Ltd (SGX: S53) and SBS Transit Ltd (SGX: S61) in the business side of things. After all, both companies provide bus and rail services in Singapore. This similarity may cause investors to think: Which of the two could be the better land transport stock right now? In order to arrive at an answer, there are many things investors need to look at. But in here, let’s focus on three key aspects of the pair’s business fundamentals: The strength of their balance sheets, their track record of growth, and their valuation. Strength of…
This similarity may cause investors to think: Which of the two could be the better land transport stock right now?
In order to arrive at an answer, there are many things investors need to look at. But in here, let’s focus on three key aspects of the pair’s business fundamentals: The strength of their balance sheets, their track record of growth, and their valuation.
Strength of the balance sheet
A weak balance sheet – one that has high levels of debt – exposes investors to higher levels of risk. This is why it’s important to study a company’s balance sheet.
If a company has a highly leveraged balance sheet and it has trouble meeting its debt obligations, its shareholders may have to face some painful consequences, such as the elimination of dividends and severe dilution.
As of 31 March 2016, SMRT has a net-debt (total debt minus cash and equivalents) to equity ratio of 64%. This is better than SBS Transit’s self-same figure of 78% for the same period.
Track record of growth
While the past is not a perfect indicator of the future, it still provides a useful yardstick for us to think about how a company’s business may perform in the years ahead.
Some numbers I’m interested in here are the changes in SMRT and SBS Transit’s revenue, earnings, and operating cash flow over the last five years:
Source: S&P Global Market Intelligence
As the table above shows, SMRT is the company that has experienced stronger historical growth. Its revenue and cash flow have both climbed at a faster annual rate than SBS Transit and its profit had declined at a shallower pace.
Even the best business can become a bad investment if it’s bought at too high a price. For our purposes here, there’s no need to obtain precise valuation numbers: The simple price-to-earnings (PE) ratio can suffice.
At SMRT’s current stock price of S$1.51, it is valued at 21 times trailing earnings. SBS Transit on the other hand, has a higher PE ratio of 36 at its current stock price of S$2.31.
A Fool’s take
In sum, SMRT looks like the stronger stock. It has the more robust balance sheet, faster historical growth rates, and lower valuation.
But, what we’ve seen here shouldn’t be taken as the final word on the investing merits of SMRT and SBS Transit. There are other important factors to study before any investing decision can be reached.
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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.