LEARNING SERIES: PROFIT FROM RED FLAGS – #5

Happy 53rd National Birthday Singapore!

In conjunction with the National Day, I am please to share that Investwhizz has decided to open up our stock analysis tool (beta testing) for free! Click here to check it out (I have used OV8 – Sheng Siong counter as an example).

You may use it to search for any stocks that are listed in Singapore!

 

Link for the earlier post: https://www.investwhizz.com/2018/08/05/learning-series-profit-from-red-flags-4/

 

 

 

Seven

Red Flag #2

Cost of Sales more than Revenue

In the below scenario, we are seeing a company having a Revenue of 24Mil but is having a Cost of Sales of 30Mil. This would result in a negative Gross profit of 6Mil.

  2015
Revenue 24 Mil
Cost of Sales (30 Mil)
   
Gross Profit (6 Mil)

 

Red Flag: Cost of Sales > Revenue. We would question the company’s ability to survive in the long run.

 

 

How can this happen:

  1. Company is too aggressive in securing market share and lowball their to the extent that they are unprofitable
  2. Company had secured contract to deliver the sales no matter what is the market condition
  3. Sudden surge in price of raw material & company is unable to pass on the cost to the customer
  4. There is a price war between competitors
  5. Underutilization of the capacity due to low book orders

 

Analysis:

The company is running a very high risk as a negative Gross Profit would mean the more the company sell, the larger loss the company will make.

Although this might sound illogical to have, we are seeing many listed companies out there having such traits.

In this case, we would need to understand if this is a temporary or long term situation. If it is long term, the company would be running a huge risk of default.

 

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See you in the next post!