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

Valuetronics Holdings Limited (SGX: BN2) 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 Valuetronics.

Understanding the business

Valuetronics is an integrated electronics manufacturing services provider with its headquarters in Hong Kong. The firm was founded in 1992 and offers a wide-range of design, engineering, manufacturing, and supply chain support services for electronic and electro-mechanical products.

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

The firm’s revenue, gross profit and net profit have been erratic over the past five years. However, its net profit margin had increased steadily from 3.6% in 2013 to 6.8% in 2017.

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 Valuetronics’ balance sheet over the last five years:Source: S&P Global Market Intelligence

As at 31 March 2017, Valuetronics had around HK$753 million in cash with no debt. This is a strong balance sheet. 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 Valuetronics’ 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 had generated positive free cash flows for the last five years with low capital expenditure needs. 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.

According to data from our data provider, Valuetronics had paid out dividends every year for the past five years.

The Foolish takeaway

We have looked at the essential financial figures needed to analyse Valuetronics’ 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.