China Sunsine Chemical Holdings Ltd (SGX: CH8) 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.
Our FREE SGX stock pick!
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 Sunsine Chemical.
Understanding the business
China Sunsine Chemical is a leading speciality rubber chemicals producer. It also ranks as the world’s largest producer of rubber accelerators and China’s largest producer of insoluble sulphur. The company serves more than 65% of the global top 75 tire makers, including Bridgestone, Michelin, Goodyear and Pirelli.
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 Sunsine Chemical’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 company has impressively grown its bottom line by around 45% annually from 2013 to 2017. Its net profit margin has also increased from 4.5% in 2013 to 12.5% in 2017. These could mean that the firm’s business is of high quality.
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 Sunsine Chemical’s balance sheet over the last five years:Source: S&P Global Market Intelligence
China Sunsine Chemical has a strong balance sheet with a healthy current ratio.
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 Sunsine Chemical’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 rubber chemicals producer 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.
China Sunsine Chemical had been dishing out a dividend every year for the past five years, with the 2017 dividend at 3.0 Singapore cents per share.
The Foolish takeaway
We have looked at the essential financial figures needed to analyse China Sunsine Chemical’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.
Meanwhile, are you worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy
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.
Editor's note: The cash flow table was updated in August 2018 due to errors in the growth rates.