This Dirt-Cheap Small Stock May Be Hiding Some Huge Risks

Luxury watch retailer Cortina Holdings Limited (SGX: C41) is a small stock in Singapore’s market. At its current share price of S$0.77, it has a market capitalisation of merely S$127.5 million.

But, a statistical valuation measure points to the possibility of the company being a big bargain. Based on Cortina’s latest financials, it has a net current asset value (total current assets minus total liabilities) of S$138.0 million, which is higher than its market capitalisation. This trait makes Cortina a net-net stock.

Cortina NCAV
Source: S&P Global Market Intelligence

A net-net stock is a huge bargain, in theory. That’s because investors are able to get a discount on the company’s current assets (assets such as cash and inventory) net of all liabilities. Furthermore, the company’s fixed assets (assets such as real estate and long-lived equipment) are thrown into the hat for free.

That said, net-net stocks do come with their risks. They are often companies that are in deep trouble. This makes sense – companies with healthy businesses would not be available at such dirt-cheap valuations except in rare occasions.

In the case of Cortina, its business has hit some rough waters. The luxury retail industry is facing challenging conditions and this is reflected in Cortina’s numbers.

In the company’s recent fiscal fourth-quarter (the three months ended 31 March 2016), a 24% year-on-year decline in revenue to S$93.5 million had driven a stunning 79% plunge in profit to just S$1.4 million. The fiscal year’s results saw revenue slip by 9% and profit sink by 45%.

Management believes that “the slowing trend will continue” into the current fiscal year. Meanwhile, the firm also ended its fiscal fourth-quarter with a weak balance sheet that had S$86.2 million in total borrowings and just S$17.3 million in cash.

A Fool’s take

Cortina’s recent poor results and weak balance sheet should not be seen as signs that the company will certainly be a poor investment going forward.

But, they are important and big risks for investors who are interested in the company to keep in mind.

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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.