When we?re looking at a company as a potential investment choice, it is important to take note of both the positives and negatives with the business.
Being aware of the opportunities as well as the risks associated with a company help ensure that we?re not missing out on anything important that could impact said company either positively or negatively.
With the above in mind, I want to run through the positives and negatives with BreadTalk Group Limited?s (SGX: 5DA) business so that investors can have a useful investing overview.
But first, here?s a quick introduction of BreadTalk. The company runs food…
When we’re looking at a company as a potential investment choice, it is important to take note of both the positives and negatives with the business.
Being aware of the opportunities as well as the risks associated with a company help ensure that we’re not missing out on anything important that could impact said company either positively or negatively.
With the above in mind, I want to run through the positives and negatives with BreadTalk Group Limited’s (SGX: 5DA) business so that investors can have a useful investing overview.
But first, here’s a quick introduction of BreadTalk. The company runs food & beverage retail outlets under nine different brands.
It currently has a network of 934 stores across 17 locales in Asia and the Middle East. Of the 934 stores, 124 are in Singapore. Some of BreadTalk’s brands are the BreadTalk bakeries and Din Tai Fung Chinese-cuisine restaurants.
Shares of the company have done very well over the past five years, rising a total of 115% in price alone.
With an introduction to BreadTalk out of the way, let’s start with the positives about the company’s business.
First, it has double-digit top-line growth. From 2011 to 2015, BreadTalk’s revenue has climbed at an annual rate of 14%. The first six months of 2016 have not been too good to BreadTalk though – its revenue had dipped slightly by 1% from a year ago.
Second, it has been paying an annual dividend consistently since initiating one in 2006. Moreover, those dividends have been kept within a tight range of S$0.013 and S$0.018 per share from 2011 to 2015.
Third, the company has been generating positive operating cash flow in each year since 2005. In the five year block from 2011 to 2015, BreadTalk’s cash flow from operations have averaged S$62.7 million per year.
We now turn to the negatives with BreadTalk, the first of which is related to its debt.
Debt is a cheaper way for a company to raise capital to fund growth when compared to equity. Used wisely, debt can improve the overall profitability of a company and maximise wealth for its shareholders. But, debt is a double-edged sword – its presence increases the financial risks faced by a company.
BreadTalk’s debt level has been growing fast in recent years. In 2011, it had S$40.4 million in debt and S$118.8 million in cash and short-term investments; in 2015, BreadTalk’s cash and short-term investments had grown only slightly to S$139.2 million, but its debt has jumped fivefold to S$202.4 million.
The second negative is BreadTalk’s lack of earnings growth. Despite strong revenue growth from 2011 to 2015, the food and beverage company’s net income had actually declined from S$11.6 million to S$7.6 million over the same period.
The third negative is related to BreadTalk’s earnings. Due to the company’s lower earnings in 2015 as compared to 2015, its return on equity has also fallen sharply, from 15.8% in 2011 to just 6.0% in 2015.
A Foolish conclusion
So there you have it – an investing overview of the pros and cons with BreadTalk. I may have missed out on other pertinent aspects of BreadTalk’s business, but I still hope the information presented here can be useful for any of you who are either investors in BreadTalk or potential investors in the company.
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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.