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What Would Warren Buffett’s Investing Mentor Think Of Ezra Holdings Limited Now?

At its current share price of S$0.05, offshore support services provider Ezra Holdings Limited (SGX: 5DN) looks to be a really cheap stock on the surface. That’s because it has a price-to-book (PB) ratio of merely 0.46 based on its latest financials as of 31 August 2016.

For perspective, the SPDR STI ETF (SGX: ES3) has a PB ratio of 1.25 right now; the SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI).

When it comes to deciding whether a stock with a low valuation really is a bargain or not, Benjamin Graham would be someone we can turn to for some answers. Graham may not be well-known outside investing circles, but he’s actually the mentor of the popular billionaire investor Warren Buffett.

Graham had passed away over four decades ago in 1976, so there’s no way anyone today can get direct thoughts from him. But during his highly successful investing career, Graham had developed a 10-point investing checklist which can help us look at his stocks from his vantage point.

So, let’s see how Ezra passes through the checklist:

1. An earnings-to-price yield that’s at least twice the triple-A bond rate

An earnings-to-price yield is the inverse of the P/E ratio. In Ezra’s case, this criterion can’t be applied because the company has negative earnings over the last 12 months.

Verdict: No

2. A P/E ratio that is 40% or less than the highest P/E ratio the stock has had over the past five years

Given Ezra’s negative earnings as mentioned earlier, the company naturally can’t pass muster here.

Verdict: No

3. A dividend yield of at least two-thirds the triple-A bond yield

Ezra did not pay out any dividend in its last completed fiscal year and so its yield is zero, which means the company can’t clear the bar yet again.

Verdict: No

4. A stock price that’s below two-thirds of the stock’s tangible book value per share

Data from S&P Global Market Intelligence show that Ezra currently has a tangible book value per share of S$0.095. The company’s share price of S$0.05 at the moment is only around 50% of the tangible book value per share.

Verdict: Yes

5. A stock price below two-thirds of net current asset value (where net current asset value = total current assets minus total liabilities)

The offshore support services provider has a negative net current asset value – so naturally, it is off the mark for this criterion.

Verdict: No

6. Total debt less than tangible book value

Ezra’s latest financials show that it has total debt of over S$1.63 billion but a tangible book value of merely US$280 million. It’s a clear “No” here.

Verdict: No

7. Current ratio (total current assets divided by total current liabilities) greater than two

With total current assets and total current liabilities of S$849 million and S$2.06 billion, respectively, Ezra has a current ratio of just 0.41.

Verdict: No

8. Total debt less than twice of net current asset value

Ezra has a negative net current asset value, so this is a criterion that can’t be applied. But, it’s worth noting that the company has really high total debt of S$1.63 billion.

Verdict: No

9. Compound annual earnings growth rate of 7% over past 10 years

Over its last 10 completed fiscal years, Ezra has seen its earnings per share fall mightily from S$0.109 to a negative S$0.412.

Verdict: No

10. Stability of earnings: No more than two years of declining earnings of 5% or more over the past 10 years

Nope – even in the years Ezra was producing a positive profit over its last 10 completed fiscal years, it had suffered massive profit declines of over 50% in three years.

Verdict: No

In tallying the numbers, Ezra has a score of just 1 out of a possible 10 using Graham’s checklist. With such a result, it’s hard to see how Graham would develop any interest in the company at all as a possible investing opportunity.

There’s another important point worth keeping in mind. Earlier today, The Business Times reported that Ezra could be in danger of becoming insolvent – that is, having a negative book value – after its Japanese partners unveiled two writedowns totalling 51 billion yen (around S$635 million) for a joint-venture entity called Emas Chiyoda Subsea. Ezra owns 40% of Emas Chiyoda Subsea with the aforementioned Japanese partners holding the rest.

Ezra’s shares have been halted from trading “pending [the] release of an announcement” since Wednesday morning.

It’s always worth digging beneath the surface when it comes to shares with cheap-looking valuations. There could be massive risks lurking beneath.

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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.