Golden Energy and Resources Ltd (SGX: AUE) 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 Golden Energy and Resources (GEAR).
Understanding the business
GEAR (formerly known as United Fiber System Limited) is mainly involved in the exploration, mining processing and marketing of thermal coal sourced from its coal mining concession areas. The concession areas are in Indonesia’s South Kalimantan, Central Kalimantan, Jambi and South Sumatra.
Other than coal mining and trading, the firm is also engaged in a forestry business, owning forestry concession rights in four regions located in South Kalimantan.
As at 16 March 2017, PT Sinar Mas, one of the largest conglomerates in Indonesia, had an 86.87% stake in Golden Energy and Resources.
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 GEAR’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
Over the past three years, the company’s revenue, gross profit and net profit have been erratic. The company is largely exposed to the movement of coal prices and therefore, any sluggish coal demand could drastically affect the firm’s profitability.
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 GEAR’s balance sheet over the last three years:Source: S&P Global Market Intelligence
Even though the company is not debt-free, its borrowings look manageable. 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 GEAR’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 had generated positive free cash flows in only one out of the three 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. Without sufficient free cash flow, the company might have to borrow more to sustain its business.
The Foolish takeaway
We have looked at the essential financial figures needed to analyse GEAR’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.