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What Does Sarine Technologies Ltd’s Balance Sheet Say About Its Dividend?

Credit: Simon Cunningham

Sarine Technologies Ltd (SGX: U77) is an Israel-based company that develops and manufactures precision technology products that are used in the processing of rough diamonds and gemstones into the polished versions you see in jewellery stores.

The company been a long-term market beater. Over the last 10 years, its stock price is up 303% while the Straits Times Index (SGX: ^STI) has actually declined by 3%. But that’s not all – Sarine Technologies has also been paying an annual dividend over its last 10 fiscal years.

This begs the question: Just how sustainable is Sarine Technologies’ dividend?

Unfortunately, there is no easy answer. But, there are some things about a company’s business we can look at for clues. Here are three of them, keeping in mind that they are not the only important aspects: (1) the company’s profit history, (2) a comparison of the company’s free cash flow and dividend, and (3) the company’s balance sheet strength.

In this article, I will address the third point. For the first and the second, you can check out here and here, respectively.

Balance sheet strength

Dividends are paid out to investors in the form of cash.

In other words, a company must have enough cash in hand or at least have the ability to borrow money (if necessary) to pay its dividend. Generally speaking, a company with a strong balance sheet has the resources needed to help fund its dividend. (It should also be noted that borrowing money to pay a dividend is not ideal.)

To gauge the strength of a company’s balance sheet, there are two things we can look at, amongst many others: A company’s current cash balance; and the company’s debt to shareholders’ equity ratio. In general, we are looking out for a high cash balance sheet and a low debt to shareholders’ equity ratio.

Sarine Technologies currently (latest financials as of 30 September 2016) has a cash balance of US$34.9 million and zero debt. This suggests a strong balance sheet.

A Foolish conclusion

Earlier in this article, I had shared three things about a company’s business investors could like at to give them clues on how sustainable the company’s dividend is. The third is something we have just studied. As for the first and second, it turns out that:

  1. Sarine Technologies has volatile revenue and profits.
  2. The company has paid a dividend that’s within its means.

(I had earlier shared the links for the analyses of Sarine Technologies’ profit history and free cash flow. Here they are again for convenience: profit history and free cash flow.)

So if I put the three things together, Sarine Technologies is a company that has (1) a history of volatile revenues and profits, (2) a track record of paying dividends within its means, and (3) a strong balance sheet. Investors in the company should be comfortable with the volatile nature of Sarine Technologies’ business, which may occasionally lead to a cut in its dividend during a downturn.

With everything being said, do bear in mind that there are other important aspects about a stock to investigate, as I had mentioned earlier, when it comes to assessing the sustainability of its dividend.

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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.