Lung Kee (Bermuda) Holdings Limited (SGX: L09) was ranked in the third spot out 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 Lung Kee.
Understanding the business
Headquartered in Hong Kong, Lung Kee is engaged in manufacturing and marketing of mould bases. It is also involved in the trading of metals and parts. Lung Kee has a primary listing on the Hong Kong stock exchange and a secondary listing here in Singapore.
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 Lung Kee’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
Lung Kee had grown its net profit at a faster rate than its revenue over the past five years, enabling its net profit margin to improve from 6.5% in 2013 to 10.8% 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 Lung Kee’s balance sheet over the last five years:Source: S&P Global Market Intelligence
Lung Kee has had a strong balance sheet with little or no debt for the period under study. It is highly likely to be able to meet its short-term obligations since its current ratio is very 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 Lung Kee’s statement of cash flows, for the same period as its income statement and balance sheet shown above:Source: S&P Global Market Intelligence (data unavailable for 2017)
The company had produced 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.
Lung Kee had paid out a dividend every year for the period under study, with the 2017 dividend at 48 HK cents per share, including special dividends.
The Foolish takeaway
We have looked at the essential financial figures needed to analyse Lung Kee’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.