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After Collapsing By 70% In A Month, Would Noble Group Limited Interest Warren Buffett’s Investing Mentor?

Commodities trader Noble Group Limited (SGX: CGP) has seen its stock price fall by an astonishing 70% over the past month to S$0.425.

Given the magnitude of the decline, I thought it would be interesting to see if Noble Group would be a company that would interest Benjamin Graham right now.

The late Graham, who loved to hunt for bargain stocks, may not be very well-known to the general public. But, he’s a bona-fide investing legend. He was the investing mentor of billionaire investor Warren Buffett, and was the author of two classic investment books, namely, Security Analysis and The Intelligent Investor. During Graham’s career, he had developed a 10-point investing checklist which can help us look at stocks through his eyes.

Here’s how Noble Group fares against Graham’s 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. Unfortunately, this criterion can’t be applied in Noble Group’s case, since its trailing earnings is negative.

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

I’ve mentioned just above that Noble Group’s earnings is negative right now, so the company can’t pass this criterion either.

Verdict: No

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

Noble Group’s latest financials are for the 12 months ended 31 March 2017. In that period, the company had failed to pay a dividend, resulting in its dividend yield being zero. So, it’s clear that Noble Group has failed to meet this criterion.

Verdict: No

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

As of 31 March 2017, Noble Group has a tangible book value per share of S$3.97 (Noble Group reports in the US dollar, but I’ve converted its financials into Singapore dollar terms for easy comparison with its stock price). Given that Noble Group’s current stock price of S$0.425 is merely 10.7% of its tangible book value, the company is able to tick the right box here.

Verdict: Yes

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 commodities trader gets the nod here again. Noble Group currently has total current assets and total liabilities of S$13.83 billion and S$11.50 billion, respectively, which gives a net current asset value of S$2.33 billion. At Noble Group’s current stock price, the company’s market capitalisation of S$551.4 million is just 23.7% of its net current asset value.

Verdict: Yes

6. Total debt less than tangible book value

At the end of 2017’s first quarter, Noble Group’s total debt and tangible book value stood at S$6.761 billion and S$5.203 billion, respectively. It’s clear that Noble Group has failed to clear the bar here.

Verdict: No

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

With total current assets of S$13.83 billion and total current liabilities of US$7.156 billion, Noble Group has a current ratio of 1.93, which is short of the required level here.

Verdict: No

8. Total debt less than four-thirds of the net current asset value

It’s a ‘No’ here. Four-thirds of Noble Group’s net current asset value would be US$3.10 billion, which is way lower than the company’s total debt of US$6.76 billon.

Verdict: No

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

Noble Group’s earnings in 2016 was negative while its earnings in 2006 was positive. Given these numbers, the company’s compound annual growth in earnings is clearly nowhere near or higher than 7% per year.

Verdict: No

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

Noble Group had recorded declines of more than 10% in its earnings per share in the following years over the past decade: 2009, 2010, 2011, 2013, and 2014. I’ve not included years in which the company produced negative earnings per share (that would be 2015 and 2016).

Verdict: No

In a tally of the scores, Noble has met just two out of Graham’s 10 investing criteria. With such a result, it is highly unlikely that Graham would be interested in Noble Group at the moment. This is a great example of how a stock that has fallen need not necessarily be a bargain.

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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.