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A Deep Dive into HRnetGroup Ltd, One of the 30 Best Stocks in Singapore for 2018

HRnetGroup Ltd (SGX: CHZ) was featured as one of the 30 best stocks to own in Singapore for 2018. The shares were picked using Joel Greenblatt’s Magic Formula, which was made famous in Greenblatt’s book, The Little Book That Beats The Market. To know how exactly the formula works, you can head here.

To apply the formula, we should just “close our eyes,” buy the 30 stocks and hold them for a year. However, some investors may not like this hands-off approach. If you belong to the hands-on camp, this new series of articles is for you.

Starting from the last company in the list of Magic Formula stocks for 2018, we will take a look at each of the 30 stocks’ business and critical financial figures to help you understand them better. Today, our focus is on HRnetGroup.

Understanding the business

HRnetGroup, which debuted on our stock exchange in June last year, is the biggest Asia-based recruitment agency in the Asia-Pacific region, excluding Japan.

According to Frost & Sullivan, the firm is also the largest recruitment outfit by revenue in Singapore, with a market share of 20.5%. Other than Singapore, it has operations in Kuala Lumpur, Bangkok, Hong Kong, Taipei, Guangzhou, Shanghai, Beijing, Tokyo and Seoul.

HRnetGroup operates two business segments – professional recruitment and flexible staffing. A well-known brand under the flexible staffing segment is RecruitExpress. In all, HRnetGroup serves more than 2,000 clients, including many Fortune 500 companies.

The company’s revenue and profit

Firstly, we will look at the income statement. This statement shows us how much revenue the company brought in from the sale of its goods and/or services, and how much is left after paying all the various expenses needed to run the business. The leftover portion is the profit.

The table below shows the key figures from HRnetGroup’s income statement in its last three financial years (the company has a financial year that ends on 31 December every year):

Source: S&P Global Market Intelligence

It can be seen from the table above that the company’s revenue, gross profit and net profit have been increasing consistently in the past three years.

HRnetGroup’s net profit margin has also gone up from 10.3% in 2014 to 11.3% in 2016. This points to an improvement in both operational efficiency and profitability over the years.

The company’s financial health

Although revenues and profits are critical, they do not tell investors the whole story. For instance, the income statement does not show if a company can survive a prolonged economic downturn. The balance sheet, however, can reveal the health of a company by providing a snapshot of its financial condition.

The table below shows the key figures from HRnetGroup’s balance sheet over the last three years:

Source: S&P Global Market Intelligence

HRnetGroup is in perfect shape with lots of cash and no debt. With a current ratio of 2.2, it would most likely be able to meet its short-term obligations easily.

The company’s cash flows

Many of you may have heard the saying, “Cash is king”. Although the income statement shows the amount of profit a company makes every year, this profit does not necessarily translate into the actual cash that flows into a company’s coffers due to accrual accounting.

Accrual accounting requires businesses to record revenues and expenses when the transactions happen, not when the cash is exchanged. Also, the income statement usually includes non-cash revenues or expenses. To get a true picture of the flow of money in and out of a company, we have to look at the statement of cash flows.

The table below shows the key figures from HRnetGroup’s statement of cash flows, for the same period as its income statement and balance sheet shown above:

Source: S&P Global Market Intelligence

The company has generated positive free cash flows for the period under observation with very low capital expenditures. Free cash flow is cash that the company can use to pay out dividends to shareholders, buy back shares, make acquisitions, or strengthen the balance sheet, among other things.

The recruiter does not have a fixed dividend policy, but in 2017 and 2018, it intends to dish out 50% of its net profit after tax (excluding exceptional items) as dividends.

The Foolish takeaway

We have looked at the essential financial figures needed to analyse HRnetGroup’s historical business performance. Hopefully, these numbers can give you a better sense of its business. Stay tuned for more on the rest of the companies from the 2018 best stocks list. For a repository of all the articles in this series, you can head here.

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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.