Watch PE when valuing a company

[CityFarmer]

I still believe valuation base on PE.

There is always a good correlation between PE and P/FCF, which PE is easily available and widely used.

I do agree with freedom and yeokiwi comments, and seems nothing more to add further.

[hongonn]

Teh Hooi Ling is one of the few decent financial writers around. I suppose, in this article, she is trying to write the article in layman terms so that most readers can understand.

Recently i borrowed a book written by her and surprisingly these are really a pleasant read. The book is "Show me the money vol 4" compiling her past articles in business times. You can see she done a lot of homework, research and study to compile the data, graph the chart, draw some conclusions.

This is quite a refreshing find especially after you read a few fundamentalist books, the rest of the books tend to repeat itself. Further more her book in on local context, so you find it is so relevant and close to home.

I would say she is kind of rare to find researcher in singapore. Yes she also able to put economist class terms into layman terms, and she covers a lot of topics.

Hehe i would like to appraise her hard works here.

[CityFarmer]

Teh Hooi Ling is one of the few decent financial writers around. I suppose, in this article, she is trying to write the article in layman terms so that most readers can understand.

Recently i borrowed a book written by her and surprisingly these are really a pleasant read. The book is "Show me the money vol 4" compiling her past articles in business times. You can see she done a lot of homework, research and study to compile the data, graph the chart, draw some conclusions.

This is quite a refreshing find especially after you read a few fundamentalist books, the rest of the books tend to repeat itself. Further more her book in on local context, so you find it is so relevant and close to home.

I would say she is kind of rare to find researcher in singapore. Yes she also able to put economist class terms into layman terms, and she covers a lot of topics.

Hehe i would like to appraise her hard works here.

Feel like to add her book into my reading list... able to get from NL?

[ValueBeliever]

The way the press is controlled even articles are targeted at the new investors to the market. STI manipulated by index linked stocks.

Spore is a totalitarian state in a investment sense? Few choices and everything is rigged by those in power. Capital Land, GLC and favored listed Co. These type of Co. command better value, higher PE valuation and perceived valuation. U buy Chinese u die, u buy Yoma no peace, U buy Capital Land rest assure both dividend and PE manipulation can continue!

This kind of valuation is of no use now in the market! It use to be more balance, until greedy SGX list chinese stock by the billions. Greed has destroy the type of valuation Ms. Teh is targeting as smaller cap valuation Co. for growth value play! Very low valuation until nobody could believe if its faking the accounts?

Is this a reading of the tea leaves of bringing back the crowd? Or take the eg. of local CO.

Breadtalk, its valuation is already high and growth doesnt look exciting either. Market players that understand and follow its ubiquitous physical presence are just hoping that it business model will morph bigger player - higher revenue followed by higher EPS. But so far that has not happen yet. Co. continue to pursuit growth at expense of margin n more than 60% of that revenue goes into rent. Yes Rent. As consumer you're paying alot more of that Toast Box as rent. Rent is what kills our local Co. now! Not every locality that Breadtalk/Toast box pick is right, sometimes it just a lot of rent a lot of traffic. Plenty of competitor also. SMEs to the gov is just a by-word - there is no successful SMEs that can survive unless they got the right connection! Plenty of pennies SME around that are all dead, looking for RTO - another dirty word.

As Reits take a strangle hold on revenue listed Co. make for distribution to unit holders, we are going to be squeezed by believing that the listed Co. with a low PE will work for people believing in equity growth. ie. money that all SMEs make will need to be paid out to Reits first than shldrs of listed Co. (non Reits). This is the new model of all listed Co. that operate in Singapore that dont own their premises. Old Lee said dont sell HDB, means also dont ever sell the place your operate.

Safer to just buy Reits and lock it away. Thesedays equity buy base on PE is tough buy. There are just too many killer factors in listed Co. operating cost.

Not forgetting, PE valuation with little dividend dish out means fewer attraction for new investor. These are all real market place issues which the simple article of promoting PE doesnt tell the investor.

My own guess is that she is just being told not to over do her job? Market has changed much since the bullish days where she had a list of stocks and complex valuation and well-known interview.''

She could for eg. spent time dealing with whats wrong with SGX. With today global trading, hopeless MAS is still trying to find curbs on label local as "unsophisticated" and not allowed to trade elsewhere!

The market valuation in my opinion is taking on too much risk. Higher labour cost, strike and asking of no differentiation betw Countries labour is raising the risk. These are all serious issues coming up!!

[FFNow]

I tend to agree with what MW said - "Cash flows are the lifeblood of a company". The P&L statement is for accounting sake only. The value of a company is based upon the cash it can generate into the future. P/E gives a quick-and-dirty valuation of a business and I use it at times too. However, I don't base my stock selections only based on that. I look at FCF too. Earnings are important but it can be manipulated more easily than cash flow. If the company has good cash flow but no earnings, it might be a turnaround situation.

[VIChris]

I tend to agree with what MW said - "Cash flows are the lifeblood of a company". The P&L statement is for accounting sake only. The value of a company is based upon the cash it can generate into the future. P/E gives a quick-and-dirty valuation of a business and I use it at times too. However, I don't base my stock selections only based on that. I look at FCF too. Earnings are important but it can be manipulated more easily than cash flow. If the company has good cash flow but no earnings, it might be a turnaround situation.

Hi FFNow, trying to understand your statement "If the company has good cash flow but no earnings, it might be a turnaround situation". Could you elaborate more and appreciate if you could share on why, when one company doesn't has no earnings but has good cash flow, it might be a turnaround?

Thanks for sharing!

[hongonn]

Feel like to add her book into my reading list... able to get from NL?

Yes you can do that. But if we keep doing that soon singapore will becomes a country without book store.

[FFNow]

Hi FFNow, trying to understand your statement "If the company has good cash flow but no earnings, it might be a turnaround situation". Could you elaborate more and appreciate if you could share on why, when one company doesn't has no earnings but has good cash flow, it might be a turnaround?

Thanks for sharing!

Hi VIChris, it's best explained through this site: http://www.investopedia.com/ask/answers/...z2FDCsAq56. With positive free cash flow, the money can be pumped back into its business to bring earnings back to positive by making more quality goods and selling them, etc but that will take some time. A good example is Grand Bank Yacht.

[Musicwhiz]

I think one has to first realise that cash and earnings are two different aspects of a Company - earnings are much more easily manipulated and can be "managed" through write-downs, revaluations and fair value accounting. Cash, on the other hand, is much harder to fake (barring the Satyam case!).

So a company in a turnaround situation would be generating cash, but would be unprofitable due to inventory write-downs/offs or other impairment losses.

Watch the cash flow carefully and assess if the Company has good standing within the industry, and you may be able to discover a gem. Though I must say that ascertaining an appropriate margin of safety is not easy in such cases.

[Nick]

I like to point out that the reverse is also possible - the FCF figure can be manipulated with ease ! Let me first clarify that I am not stating that the figure in the cash-flow statement is false but rather the use of the figure can give rise to misleading valuation. The P&L statement contains helpful information about depreciation or amortization which is very important in accessing the return of invested capital over time. Let's examine the history of the shipping trust listed in SGX. Both FSLT and RMT relied heavily on the Trust's cash-flow while ignoring the profits (and in most cases losses). If investors looked at the price in relation to the cash-flow, they would have thought it was a steal and happily accepted the 10% dividend yield. It is clear on hindsight (or to astute investors then) that this model was flawed - earnings was far more important since the vessels did truly depreciate with time ! The Trust should have never paid out more than it earned since it needed to replenish its fleet with time. The history of PST vs FSLT & RMT justifies this statement. The same argument could be made for Cityspring which consistently generated losses despite reporting consistent free cash-flow (or cash earnings) and paid quarterly dividends. Yet it had to turn to shareholders twice for funds to repay its debt ! Essentially, both figures are important. We cannot ignore any of this financial figures. If we just look at cash-flow, we might end up with a portfolio of loss-making cash generating assets which are basically self liquidating models. Earnings are extremely important and should not be discounted in favour of FCF.

Note: I am not saying FSLT, RMT, Cityspring are poor investments now. Investors do your own homework.

(Not vested in any of these companies)