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Focus On These 3 Factors When Evaluating A Glove Company

One of the best performing industries in the last five years in South East Asia’s stock market, especially Singapore and Malaysia, was the gloves sector.

Companies sucn as Top Glove (SGX: BVA) and Riverstone Holdings Limited  (SGX: AP4) or their peers listed in Malaysia like Kossan Rubber Industries Berhad (KLSE: KOSSAN), Hartalega Holdings Berhad (KLSE: HARTA), SUPERMAX CORPORATION BHD (KLSE: SUPERMX) are some of the best-performing companies in the past five years.

There is so much interest in these companies that they are mostly trading above their average valuations. For example, Top Glove – the biggest of the group, is trading at a P/E ratio of about 24 times. Kossan – the second largest, is trading at about 26 times earnings, while Riverstone is trading at about 19 times its earnings.

And if you are one of those investors who are looking at investing in these companies, you will need to do some research beforehand.

But there is so much information out there about these companies. So, what should investors focus on when evaluating gloves companies? Unfortunately, this answer will vary. But I prefer to track six factors when evaluating a glove company.

Industry demand

The glove companies, on aggregate, represent the glove sector.

As such, the prospects of any glove company will largely depend on the size of the industry, and its market share of the industry.

The good news here is that the demand for gloves will likely grow in the foreseeable future. So what investors need to track here is the growth rate of the industry. According to Top Glove, this should range between 6-8% per annum for the foreseeable future.

Company’s capacity

The next important factor that investors should focus on when evaluating a glove company is its capacity, or more precisely, its expected capacity growth rate in the next few years.

This will have a direct impact on the company’s sales revenue as growth in capacity indicates that the firm’s sale volume will grow in the future.

Typically, we hope to see that a glove company can grow its capacity at the same rate, if not higher than the industry growth rate.

Nevertheless, investors should also pay attention to any over-expansion, as this might have an adverse impact on the company’s bottom line.

Revenue growth

Any increase in capacity mentioned above should naturally translate into higher revenue. Here, the emphasis is on the word naturally.

In normal situations, a glove company’s revenue naturally grows as it grows its sales volume. This is not the case when there is an oversupply of gloves in the industry, which might result in a price war.

Thus, investors should pay attention to the long term revenue growth rate of the company and avoid businesses that have growth in revenue consistently lagging the growth in its sales volume.

Key takeaway

In this article, we looked at three important factors that investors should focus on before investing in a glove company. We will look at the remaining three factors in another article.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.The Motley Fool Singapore has recommended shares of Riverstone Holdings. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.