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A Deep Dive into China Mobile Limited, One of the 30 Best Stocks in Singapore for 2018

China Mobile Limited (SGX: K3PD) was featured as one of the 30 best stocks to own in Singapore for 2018. The 30 best 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 China Mobile.

Understanding the business

China Mobile, which boasts the world’s most extensive mobile network and the world’s largest mobile customer base, is a leading telecommunications services provider in China. It offers full communications services in all 31 provinces, autonomous regions and directly-administered municipalities throughout China and Hong Kong.

As at 31 December 2016, it had a total of 849 million mobile customers and 77.62 million wireline broadband customers.

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 China Mobile’s income statement in its last five financial years (the company has a financial year that ends on 31 December every year):Source: S&P Global Market Intelligence

The telecommunication outfit’s revenue has been growing over the years, but its gross profit and net profit have been falling.

The net profit margin has been declining with the falling bottom-line as well. This is not something investors would like to see as it may mean increased competition in the telecommunications arena and China Mobile is unable to hold its own.

The company’s financial health

Although revenues and profits are important, 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 China Mobile’s balance sheet over the last five years:Source: S&P Global Market Intelligence

Even though the company is not debt-free, its debt looks manageable, given the meager total-debt-to-equity ratio. It is also highly likely to be able to meet its short-term obligations as its current ratio is healthy.

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 China Mobile’s statement of cash flows, for the same period as its income statement and balance sheet shown above:Source: S&P Global Market Intelligence

Although company’s free cash flows are positive for the period under observation, they have been coming down from 2012 to 2016. 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.

China Mobile has been dishing out a dividend for the past five years, but it has fallen from HK$3.411 in 2012 to HK$2.732 in 2016. The decline is in line with the falling free cash flows.

The Foolish takeaway

We have looked at the essential financial figures needed to analyse China Mobile’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 for 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.