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1 Way To Detect Potential Danger In Your Stocks

In a conference in 1999, forensic accountant Howard Schilit said the following:

“Net income and cash flow from operations should track pretty closely. If cash flow from operations lags behind net income, usually the results are going to be very bad.”

There is clearly more to investing than just tracking a company’s net income and cash flow from operations and making sure they move or less in tandem. But, consider this as just one useful tool to have in your investing tool kit.

In any case, I thought it’d be interesting to look at how the net income and cash flow from operations for some of the blue chips in Singapore’s stock market have changed over the years. The blue chips I’m selecting are the three with the best stock price gains over the past five years and the three with the worst stock price returns over the same time period.

(I’m excluding real estate investment trusts, banks, and business trusts because of their different business structures.)

So, here are the stocks in the former group: Thai Beverage Public Company Limited (SGX: Y92), Comfortdelgro Corporation Ltd (SGX: C52), and SATS Ltd (SGX: S58). The following trio belong to the latter: Keppel Corporation Limited (SGX: BN4), Genting Singapore PLC (SGX: G13), and Sembcorp Marine Ltd (SGX: S51)

Thai Beverage, Comfortdelgro, SATS, Keppel Corp, Genting Singapore, Sembcorp Marine price return table
Source: S&P Global Market Intelligence 

Here’s a chart for Thai Beverage’s net income and cash flow over its last five completed fiscal years:

Thai Beverage's net income and cash flow from operations
Source: S&P Global Market Intelligence

Here’s the same chart for Comfortdelgro:

Comfortdelgro's net income and cash flow from operations
Source: S&P Global Market Intelligence

One for SATS:

SATS's net income and cash flow from operations
Source: S&P Global Market Intelligence

One for Keppel Corp:

Keppel Corporation's net income and cash flow from operations
Source: S&P Global Market Intelligence

The same thing for Genting Singapore:

Genting Singapore's net income and cash flow from operations
Source: S&P Global Market Intelligence

And finally, we have Sembcorp Marine:

Sembcorp Marine's net income and cash flow from operations
Source: S&P Global Market Intelligence

As you can see, the three best-performing stocks all have had cash flow from operations that either exceeded net income or pretty much tracked it. That’s not really the case for the trio of the worst-performing stocks. Keppel Corp and Sembcorp Marine have both had volatile cash flow from operations that does not really match the movement of their net income; Genting Singapore is the exception here.

A Fool’s take

What we’ve seen with the six stocks seem to highlight the usefulness of Schilit’s statement. After all, the worst-performing blue chips were generally the ones that had displayed big discrepancies between their net incomes and cash flow from operations.

But, it’s worth me repeating that investing goes way beyond a comparison of a company’s net income and cash flow from operations, as useful as doing so may be.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 company mentioned.