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This Famous Stock is Undervalued by the Singapore Market Currently

One way to determine if a stock is undervalued is to compare its market capitalisation with its net current asset value.

If the market capitalisation of a stock is lower than its net current asset value, then it could be undervalued. Such stocks are known as net-nets. The father of value investing, Benjamin Graham, liked to invest in net-net stocks.

The net current asset value of a stock can be calculated using the following formula:

Net current asset value = Total current assets – Total liabilities

In theory, a net-net stock is a bargain as investors can get a discount on the company’s current assets, such as cash, after stripping off all liabilities. Moreover, the company’s fixed assets, such as properties, are thrown into the mix for free.

Having said that, net-net stocks are usually businesses that are in serious trouble and have poor business fundamentals. This means that investors who invest in these companies are also at risk of losing their capital if things continue going south.

One net-net stock in the Singapore stock market currently is Creative Technology Ltd (SGX: C76). The firm, which was founded here in 1981, is famous for its Sound Blaster sound cards. The sound cards were once the de facto standard for personal computer audio.

Financially, things have not been going so well for Creative Technology. It has been experiencing losses for a few quarters, up till its latest fiscal first quarter (the three months ended 30 September 2017).

For the quarter, Creative Technology posted revenue of US$16.1 million, a fall of 7% year-on-year. It turned in a net profit of US$22.8 million, reversing a net loss of US$6.2 million from a year ago. However, the bottom line in the  fiscal first quarter was boosted by a one-off gain from the settlement of patent lawsuits amounting to US$31.2 million.

As of 30 September 2017, Creative Technology had total current assets of US$124.8 million, and total liabilities of US$37.9 million. This gives a net current asset value of US$86.9 million, or around S$117 million.

At its current stock price of S$1.12, the digital entertainment products company has a market capitalisation of S$78.8 million. The ratio of Creative Technology’s market-capitalisation-to-net-current-asset-value is thus 0.67. This also means the company is selling at a 32.6% discount to its net current asset value.

Even though Creative Technology is a net-net stock right now, it does not mean that we have to gobble up its shares immediately. Not all net-net stocks work out well for an investor, and some will end up losing you money. Therefore, diversifying widely is critical in protecting our portfolio.

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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 contributor Sudhan P doesn’t own shares in any companies mentioned.