At the beginning of the year, my Foolish colleague, Ser Jing, wrote an article on the top 30 stocks for 2018. The stocks were chosen based on a formula developed by Joel Greenblatt, which was described in his 2005 investing book, The Little Book That Beats The Market.
Among the top 30 stocks listed, HRnetGroup Ltd (SGX:CHZ) caught my eye. The company boasts a solid track record of growth and recently announced double-digit growth in both revenue and its bottom line. With that in mind, I took a closer look at the company and found a few things that make it an appealing growth stock.
Skin in the game
Warren Buffett was a keen believer in investing in companies which management themselves are shareholders. This ensures that management’s and minority shareholders’ interests are aligned.
HRnetGroup’s management team of Peter Sim, JS Sim and Adeline Sim own around 83% of the company. That can give minority shareholders comfort that the management team have their interests at heart.
Beyond that, the company has implemented an employee rewards scheme to reward outstanding employees by giving them shares in the company. The group calls this the “123GROW Plan” whereby employees are rewarded with shares if they hit certain sales targets.
The group also asked co-owners to swap a part of their minority stakes in the respective subsidiaries for shares through another plan called the “88GLOW Plan”. This ensures that they, individually, have an interest in how the overall group performs.
The 123Grow Plan already seems to be working wonders with both revenue and sales per employee growing at double-digit figures in the latest quarter in 2018. The percentage of productive sales employees has also grown from 64% in the first quarter of 2017 to 70% in the first quarter of 2018.
Clean balance sheet and strong cash flows
We have all probably heard of the expression, “Cash is king”. This is especially important for a company that operates in the industry that HRnetGroup does. For one, it requires capital to pay its flexible staff. It extends credit to their clients for up to 60 days.
Thankfully, HRnetGroup is well covered in this regard. In 2017, the company generated S$35 million in cash from operations after working capital changes. With the recent cash injection from funds raised through its initial public offering (IPO), the company now sits on S$292.1 million in cash with zero debt.
That is more than enough for any working capital needs and provides the company with financial ammunition to make more acquisitions or to pay out more dividends in the future. Moreover, even with little debt employed, the company has a very healthy annualised return on equity of 20.9%.
The Foolish bottom line
There are certainly many things that investors should like about HRnetGroup. Not only does it have a stellar track record of growth, the company also currently sits on a mountain of cash, which can be used for growth.
In addition, the management team has skin in the game, ensuring that they have minority shareholders’ interest at heart. Furthermore, it seems that the broader investing community has yet to spot this gem of a company. HRnetGroup currently trades at 13.3 times its annualised earnings. For a company with such a high ROE, zero debt and strong cash flows, this seems like a bargain in my eyes.
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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 writer Jeremy Chia own shares in HRnetGroup Ltd. The Motley Fool Singapore has a recommendation on HRnetGroup Ltd.