1 Small Bargain That May Hide Some Big Risks

Precision electronic components manufacturer CDW Holding Limited (SGX: D38) is one tiny stock in Singapore’s market given its market capitalisation of just S$67.9 million.

But, it looks to be a big bargain, at least on the surface. You see, the company’s net current asset value (total current assets minus total liabilities) of S$73.6 million is higher than its market cap. This makes the company a net-net stock.

CDW Holding NCAV
Source: S&P Global Market Intelligence

Net-net stocks are great bargains in theory. That’s because investors can get a discount on a net-net stock’s current assets (things such as cash and inventory) net of all liabilities. Furthermore, the company’s fixed assets (things such as properties, factories, long-lived equipment etc.) are thrown into the mix for free.

But, net-net stocks do come with risks. It’s often the case that net-net stocks are companies that are in dire trouble. This makes sense – how else would a company carry such a low valuation otherwise?

In the case of CDW Holding, its business has shrunk dramatically over the past few years. In 2012, the company had brought in US$196 million in revenue and US$11.4 million in profit. But over the 12 months ended 31 March 2016, CDW Holding’s top-line and bottom-line had both fallen by nearly half to US$106 million and US$6.4 million, respectively.

Meanwhile, the firm’s cash flow from operations has also lagged its net income in a significant manner in recent years. You can see this in the chart below:

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

Forensic accountant Howard Schilit once said that “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.”

A Fool’s take

CDW Holding’s shrinking business and discrepancies between its cash flow and net income should not be seen as signs that the company will definitely be a poor investment going forward. Instead, they should be taken only as important risks to keep in mind for investors who are tempted by the company’s very low valuation.

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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.