My colleague Royston Yang recently shared five simple but effective tell-tale signs we can use to see if a company is falling into trouble. I thought it’ll be useful for investors if I shared some Singapore-listed shares that exhibited these signs.
Sign 1: Falling revenues
Tourism attractions owner and operator Straco Corporation Ltd (SGX: S85) is one example of a company which has recently reported falling revenues. For the first quarter of 2018, it reported a 31.7% year-on-year decline in revenue to S$18.8 million; for the second quarter of 2018, there was a 6.4% year-on-year decline in revenue to S$28.3 million.
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The company cited the temporary breakdown of one of its assets, the Singapore Flyer, as the main reason for its lower revenue in the first quarter. As for the second quarter, the reason was due to value-added taxes on ticket revenue for its Shanghai aquarium that was accounted and paid for upfront starting in 2018; lower revenue from the aquarium and the Singapore Flyer also contributed.
As can be seen above, the large decline in revenue of nearly 32% in the first quarter of 2018 was a temporary event which has since been rectified. But investors should monitor the fall in Straco’s revenue that was reported in the second quarter to determine if there is likely to be continued deterioration in revenue for the company.
Sign 2: Declining margins
Pan-Asian bricks-and-mortar retailer Dairy Farm International Holdings Ltd (SGX: D01) has seen its net profit margin fall over the years, as the company’s costs continue to increase while there’s a struggle to grow revenue. The table below shows the company’s net profit margins since 2013:
Source: Dairy Farm earnings updates
The company has seen its costs rise in two main areas: staff costs, and rental costs. Annual wage inflation has pushed up staff costs in the South-East Asian countries that Dairy Farm operates in, while landlords have been asking for higher rent. Dairy Farm’s net profit margin has therefore fallen over the years. It remains to be seen if the company can reverse this trend and improve its net profit margin in the years ahead.
Sign 3: Increasing amounts of receivables
Cityneon Holdings Limited (SGX: 5HJ) has seen its receivables balloon recently, as it transforms its business from being a contractor helping businesses to fit-out their premises, to one which owns Intellectual Property and travelling sets. Here’s a table illustrating the increases:
Source: Cityneon earnings updates (Note: Cityneon only started reporting quarterly numbers in 2018)
As can be seen, the rise in Cityneon’s receivables has outstripped the growth in revenue. This could be a cause for concern if it means that the company is recognizing revenue but is collecting money more slowly. Investors should monitor the receivables amount in future periods to see if it remains persistently high or trends higher – both may be a sign that the company is having issues with collecting money.
Sign 4: Growing Pile of Inventory
Hi-P International Ltd (SGX: H17) recently announced a profit warning which was attributed to a postponement in the billing of certain production tools. The company is a tooling specialist in Singapore and has grown over the years to become one of the region’s largest and fastest-growing integrated contract manufacturers today. If we observe the company’s inventories, we can see that it has been building up over the past few quarters (table below):
Source: Hi-P earnings updates
Note that a build up of inventories is not always a red flag as the company may be expanding rapidly and is thus stocking up on inventories to sell through. But for companies such as Hi-P, due to the nature of the industry it is in, it may be worthwhile to monitor the company’s inventory levels as it may indicate that customers are not buying as much as they used to.
Sign 5: Significant amounts of write-offs or impairments
Commodities trader Noble Group Ltd (SGX: CGP) is a prime example of a company which has announced significant write-offs of assets as well as impairments. It all began in 2015 when the company reported a shock US$240 million loss for the fourth quarter of 2014 due to an unexpected US$438 million write-off, of which US$200 million was related to an Australian-listed associate, Yancoal. Then, in Noble’s 2017 second quarter earnings update, the company announced that there was a US$60 million impairment loss on palm oil assets held for sale. As a result of these write-downs, and also its very high debt load, Noble has racked up millions of dollars in losses and has seen its share price fall by over 99% from a peak of more than US$14 in June 2014.
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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston owns shares in Straco Corporation.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing owns shares in Straco Corporation, Dairy Farm International Holdings, Hi-P, and Noble Group.