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A Deep Dive into Capital World Ltd, One of the 30 Best Stocks in Singapore for 2018

Capital World Ltd (SGX: 1D5) 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 Capital World.

Understanding the business

Capital World (formerly known as Terratech Group Limited) is a property developer, but with a twist – the company establishes joint ventures with landowners in order to minimise its own initial capital outlay. Capital World is also involved with the production and sale of premium-quality marble blocks and slabs, aggregates, and calcium carbonate powder.

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 Capital World’s income statement in its last three financial years (the company has a financial year that ends on 30 June every year):Source: S&P Global Market Intelligence

Capital World had increased its net profit from RM9.2 million in 2015 to RM70.1 million in 2017, at an annualised rate of 176%. It ended 2017 with a commendable net profit margin of 38.1%.

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 Capital World’s balance sheet over the last two years:Source: S&P Global Market Intelligence

As of 30 June 2017, the property developer had RM10.5 million in cash with negligible debt. This points to a strong balance sheet.

Even though the current ratio is slightly below one, the company should be able to meet its short-term obligations as most of the current liabilities are deferred revenue. These are payments received in advance for goods which have not yet been delivered.

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 Capital World’s statement of cash flows for the last two years:Source: S&P Global Market Intelligence

The company did not generate any free cash flows for the past two 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.

The Foolish takeaway

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