If You See These Traits In A Company, Be Extra Careful

Back in 5 June 2015, I wrote and published an article titled 1 Ugly Truth About The Stock Market And How You Can Protect Yourself From It.

In the article, I pointed out a type of business that the legendary investor Warren Buffett warned investors to avoid. Here’s the description of the business from Buffett that I shared:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.

Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk [the site in which the first controlled powered airplane flight took place], he would have done his successors a huge favour by shooting Orville down.”

I went on to share the identity of three locally-listed companies that I thought had the traits Buffett pointed out. The trio were Ezra Holdings Limited (SGX: 5DN), Golden Agri-Resources Ltd (SGX: E5H), and Noble Group Limited (SGX: N21). Here’s the table of their financials that I made for my earlier article:

Table for Ezra, Golden Agri, and Noble
Source: S&P Global Market Intelligence

The table shows that all three companies had experienced significant revenue growth from 2009 to 2014. But, their capital expenditures in that period ran up to the billions and most importantly, the trio also saw their profits shrink considerably.

In the one and a half years since the publication of my aforementioned article, Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), has declined by 9%. That’s not a good experience. But, Ezra has seen its share price fall by a stunning 83% while Noble’s not too far behind with its share price having collapsed by 76%. Golden Agri-Resources is the exception, as its share price has inched up by 2%.

The experience of Ezra and Noble are a stark reminder for investors to be careful with any company that – to quote Buffett – “grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

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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.