2 Simple Criteria To Help You Stay Out Of Trouble In The Stock Market

Back in February and March this year, I wrote three articles on the oil and gas companies, Ezra Holdings Limited (SGX: 5DN), Nam Cheong Ltd (SGX: N4E), and Triyards Holdings Ltd (SGX: RC5).

The articles (see here, here, and here) looked at the companies through a 10-point investing checklist developed by the late Benjamin Graham. Graham was a successful investor, the mentor of billionaire investor Warren Buffett, and the author of two classic investment texts, Security Analysis and The Intelligent Investor.

In my articles on Ezra, Nam Cheong, and Triyards, I wrote that Graham would very likely not be interested in them at all, given that they had failed the checklist. Graham’s checklist turned out to be prescient. Since the publication of my aforementioned articles, Ezra, Nam Cheong, and Triyards have seen their stock price collapse by 77.1%, 28.6%, and 65%, respectively. Over the same time periods, the Straits Times Index (SGX: ^STI) has gained 12.1%, 9.4%, and 8.5%.

Source: S&P Global Market Intelligence

Graham’s checklist touched on three important areas: (1) A stock’s valuation; (2) the strength of the stock’s balance sheet; and (3) the stability and growth in the stock’s historical profits.

When I wrote my articles on Ezra, Nam Cheong, and Triyards in February and March this year, all of them had weak balance sheets (characterised by high debt levels and a low current ratio), and a poor track record in generating growing and/or stable earnings.

The experience of the three oil and gas companies is a good reminder for investors to be wary of stocks that have debt-laden balance sheets and an inability to deliver growing profits. Staying away from such stocks could help steer you far from trouble in the stock market. Of course, not every stock with these two characteristics will be a loser. But, if you see these characteristics appear, consider them a yellow flag at the very least.

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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.