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Here Are 3 Investing Danger Signs Found In An Ex-Blue Chip Stock Before It Collapsed

Back in 10 March 2016, I wrote and published an article titled 2 Reasons For Long-Term Investors To Be Cautious About This Blue Chip Stock. The blue chip stock in question was Noble Group Limited (SGX: N21) and much has changed since then.

For a start, Noble can no longer be considered a blue chip stock. Back when my earlier article was published, the company was one of the 30 stocks that comprised Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI). But, Noble was removed from the list back in 21 March 2016.

Then, there’s the matter of Noble’s share price. The commodities trader’s shares closed at a price of S$0.425 each on 10 March 2016. Today, Noble’s shares are exchanging hands at merely S$0.172 apiece, some 60% lower.

In 2 Reasons For Long-Term Investors To Be Cautious About This Blue Chip Stock, I wrote that Noble “has not only failed to generate consistent profits and cash flows over the past decade, it has also turned in poor returns on equity while having a highly-geared balance sheet.” I also mentioned that current and prospective investors of the company may want to note about the risks.

Turns out, the risks had come home to roost and driven the company’s stock price down hard. You can see in the table below how Noble Group’s earnings per share, operating cash flow, return on equity, and net-debt to equity ratio have changed from 10 March 2016 to today.

Noble financials table
Source: S&P Global Market Intelligence

Over the past 10 months, the company saw (1) no improvement in its negative earnings, (2) a worsening of its cash flow situation, and (3) a return on equity that has dropped deeper into negative territory.

The only saving grace is an improvement in its net-debt to equity ratio. But, the net-debt to equity ratio still remains high. It’s also worth noting that the ratio had dropped mainly because of one-off events such as Noble’s US$500 million rights issue and the US$750 million sale of a stake in an associated company.

Noble’s experience is a reminder for investors that the appearance of the following characteristics in a stock is a yellow flag to take note of: (1) inconsistent profits and cash flows, (2) poor returns on equity, and (3) high leverage.

Of course, not every stock with those characteristics is a poor investment choice. But when you see all three signs appearing simultaneously, there had better be a good reason why that’s so.

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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.