Slightly less than three years ago, on 17 August 2016, I published an article highlighting six stocks in Singapore’s market that had multi-year track records of producing positive profits but negative operating cash flows. In my article, I also shared why this trait is important; I quoted forensic accountant Howard Schilit:
“Net income and cash flow from operations should track pretty closely. If cash flow from operations lags behind net income, usually the results are going to be very bad.”
It turns out that the six stocks I mentioned had collectively produced a poor performance for their shareholders. So, tracking just two simple numbers from a company – its profit and its operating cash flow – could help you avoid big losers in the stock market.
The six stocks in my 17 August 2016 article are Oxley Holdings Ltd (SGX: 5UX), AnAn International Ltd (SGX: Y35) (the company changed its name from CEFC International Ltd in September 2017), Aspial Corporation (SGX: A30), Hyflux Ltd (SGX: 600), Ying Li International Real Estate Ltd (SGX: 5DM), and Vibrant Group Ltd (SGX: BIP). The table below shows the dividend-adjusted returns for the sextet and Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), from 17 August 2016 to 23 July 2019.
Source: S&P Global Market Intelligence
Hyflux’s shares have been suspended from trading since May 2018 after the company had faced difficulties in meeting its financial obligations. As a result, I no longer have pricing data on Hyflux’s Singapore shares from my data provider S&P Global Market Intelligence. The remaining five stocks have generated an average loss of 33.5% for the time period we’re looking at, far behind the gain of 30.6% produced by the Straits Times Index, despite Oxley posting a positive return of 21.3%.
If Hyflux’s data was available, the average loss would likely be significantly heavier. Hyflux is currently undergoing a painful restructuring, which could see the company being rescued by United Arab Emirates-based utility company Utico, but at the cost of significant or total dilution to Hyflux’s existing shareholders. According to Bloomberg, Hyflux’s share price was around S$0.47 in mid-August 2016 and more than 50% lower at S$0.21 at the time of suspension.
Not every company that has experienced a few years of negative operating cash flow despite being profitable will see its share price tumble in the years ahead. But if a company has this trait, there better be good reasons why that’s so.
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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 Chong Ser Jing owns shares in Hyflux and Ying Li International Real Estate.
Motley Fool Singapore 2019