Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) 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 Yangzijiang.
Understanding the business
Yangzijiang, which went public in April 2007, is the largest China-based company in the Singapore stock market. It is also a leading shipbuilder in China in terms of manufacturing capability and capacity.
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 Yangzijiang’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 firm’s net profit had fallen over the past five years. Together with the declining bottom-line, the net profit margin had come down from 24% in 2012 to 12% in 2016. This could mean that Yangzijiang is having trouble growing its business.
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 Yangzijiang’s balance sheet over the last five years:Source: S&P Global Market Intelligence
Yangzijiang’s debt looks manageable as the total-debt-to-equity stood at around 33% in 2016. It also has a healthy current ratio, so it is highly likely to be able to meet its short-term obligations.
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 Yangzijiang’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 shipbuilder had generated positive free cash flows for four out of the five years. 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.
Yangzijiang had been dishing out a dividend every year for the past five years, with the 2016 dividend at 4.0 Singapore cents per share.
The Foolish takeaway
We have looked at the essential financial figures needed to analyse Yangzijiang’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.