Ezion (SGX: 5ME) is a company that has been battered by low oil prices that have been seen since 2014.
As a developer and owner of rigs that provide support services to the offshore energy markets, Ezion has seen demand for its rigs shrink materially. For perspective, the company’s revenue in 2016 is 18% lower than in 2014. Its stock price has also been crushed – over the last 12 months, Ezion’s stock has fallen by 41% to S$0.34.
This decline may have attracted the attention of bargain hunters. But, it’s worth noting that not every stock that has fallen hard would be a good investment opportunity. To gain some insight on whether Ezion is a legitimate bargain, we can turn to the late Benjamin Graham.
As a successful investor, the mentor of the billionaire investor Warren Buffett, and the author of two classic investment texts (Security Analysis and The Intelligent Investor), Graham is a revered figure in the investing community. During his investing career, Graham had developed a 10-criteria investing checklist which can help us look at stocks through his eyes.
With that, let’s take Ezion for a spin with Graham’s checklist:
1. An earnings-to-price yield that’s at least twice the triple-A bond rate
As a quick background, the earnings-to-price yield is the inverse of the ubiquitous P/E ratio. Ezion can’t meet this criterion however, as its earnings figure over the last 12 months is negative.
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
In the first criterion, we have seen how Ezion has negative trailing earnings. As such, the company naturally can’t clear this criterion too.
3. A dividend yield of at least two-thirds the triple-A bond yield
Ezion’s latest financials are for the 12 months ended 31 December 2016. In that year, the company’s dividend was zero. So, it has obviously failed to cross the hurdle here.
4. A stock price that’s below two-thirds of the stock’s tangible book value per share
As of 31 December 2016, Ezion has a tangible book value per share of S$0.90, according to S&P Global Market Intelligence. The company’s current stock price is merely 38% of S$0.90.
5. A stock price below two-thirds of net current asset value (where net current asset value equals total current assets minus total liabilities)
The latest financials from Ezion show that it has a negative net current asset value of S$1.645 billion.
6. Total debt less than tangible book value
Ezion’s total debt and tangible book value are S$2.155 billion and S$1.867 billion, respectively, as of 31 December 2016.
7. Current ratio (total current assets divided by total current liabilities) greater than two
The company’s current ratio is just 1.11 right now, given its total current assets of S$791.9 million and total current liabilities of S$711.5 million.
8. Total debt less than four-thirds of the net current asset value
Ezion can’t tick the right box here given that it has a negative net current asset value, as I’ve mentioned earlier.
9. Compound annual earnings growth rate of 7% over past 10 years
In 2006, Ezion’s earnings per share was 0.11 Singapore cents. But in 2016, the company’s earnings had fallen to a negative 3.33 cents. This does not result in a compound annual growth rate of anywhere near 7%.
10. Stability of earnings: No more than two years of declining earnings of 5% or more over the past 10 years
The company had an excellent record of earnings growth from 2007 to 2014 (a jump from 0.59 cents to 21.1 cents). Unfortunately, Ezion saw a 90% fall in its earnings per share in 2015. This was followed up with its earnings descending into negative territory in 2016.
In a roundup of the scores, Ezion has met just one out of the 10 criteria in Graham’s checklist. There are many different ways to determine whether a stock’s a good investment opportunity But for investors who are looking at stocks from Graham’s vantage point, Ezion is clearly not a legitimate bargain.
For more investing tips and updates on what's happening in the world of finance, you can sign up here for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
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.