3 Worrisome Trends That Investors Should Know About M1 Ltd’s Business

M1 Ltd  (SGX: B2F) is an easily recognisable company in Singapore, given that it’s our island nation’s third largest operational telco.

One of the things that I like to do when analysing a company is to study its track record. The past is no guarantee of the future. But historical information is the most reliable thing that we can use as our basis to forecast what lies ahead.

And this brings me to five trends that investors should note about M1’s business. Unfortunately, all of them are negative. For the sake of brevity, I’ll share three trends in this article, and discuss the remaining two in the coming days. [Editor’s note: An article on the remaining two trends has been published. It can be found here.]

Falling profits

To begin with, let’s look at M1’s profits. This is one of the most important things an investor should study with any company.

From 2013 to 2017, M1’s profit after tax had declined by 17% in all to S$132.5 million. What’s more, from the peak of S$178.5 million reached in 2015, M1 has seen its profit after tax fall by 26% to 2017’s level.

Rising gearing

The gearing ratio is calculated by dividing a company’s net debt (total debt minus total cash) by its equity. It is a measure of how much financial risk a company is taking on.

From 2013 to 2016, M1’s gearing increased from 0.5 to 1.0, before dipping slightly to 0.9 in 2017.

As a rule of thumb, a gearing that is higher than 1 is considered high. But, it is also common for telcos to have gearing ratios in excess of 1, since these companies have very stable streams of revenue, and also are able to take on more financial risk.

So, I don’t think M1’s current gearing ratio is unreasonably high. But, I am a little concerned with the increase in the company’s gearing over the last few years.

Ineffective capital expenditure

The next negative trend that I will focus on is the changes in M1’s capital expenditure from 2013 to 2017.

Generally, investors do expect a company to incur capital expenditure in order to sustain and/or grow its business.

In the case of M1, it has been incurring significant capital expenditure. From 2013 to  2017, the company’s capital expenditure had grown in every single year (except for 2015), climbing from S$125.3 million to S$151.1 million.

Yet, as mentioned earlier, M1’s profit has declined over the same period. In other words, the capital expenditure incurred by M1 over the years has failed to sustain the company’s business.

I’ll wrap things up with M1’s negative trends here, but as I mentioned, I’ll be sharing more in the coming days. Stay tuned!

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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 Lawrence Nga doesn’t own shares in any companies mentioned.