Investing Lessons From Hyflux, Singapore's Embattled Water Treatment Firm

The chapter on Hyflux Ltd (SGX: 600) is about to come to a close.

A few days ago, the firm announced that its judicial managers have applied to the court to wind it up.

The latest move comes after unsuccessful negotiations with an investor to buy over the group and a failed restructuring attempt.

Its judicial managers believe that the remaining value of Hyflux is best realised in a liquidation, which is a process that brings a business to a close and distributes its assets to creditors and owners.

If the court approves, it will mark the end of Hyflux, which was once a success story of Singapore Inc. This will come at least five years after trading in Hyflux securities were suspended in May 2018.

With that, here are two quick checks investors can perform to protect their investment portfolio and prevent something similar from hitting their stocks.

1. Balance Sheet Test

The first question investors should ask would be:

“Does the company I own have a strong balance sheet?”

Companies with robust balance sheets are more likely to withstand harsh economic conditions than those bogged down by huge amounts of debt.

What I mean by a strong balance sheet is that the firm should have more cash than debt.

If that’s not possible, its debt load should be manageable so that it doesn’t run the risk of going bankrupt.

As for Hyflux, its debt-to-equity ratios were over 100% for many years since 2010. Anything above 100% is risky, in my opinion.

The debt-to-equity ratio is calculated by taking a company’s total debt and dividing it by shareholders’ equity.

Here’s a snapshot of the company’s debt-to-equity ratios from 2013 to 2017:

We can see that Hyflux’s debt-to-equity ratio climbed from 144% in 2013 to 155% in 2017. Its balance sheet was laden with debt all those years, and it was certainly a risky proposition.

2. Cash Flow Test

The next question to ask is:

“Does the company I own produce cash flow?”

A company may generate earnings, but it may not necessarily bring in cash due to the concept of accrual accounting.

Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs rather than when the actual cash payment is received or made.

Therefore, focusing on the actual cash flow for a business is more important.

And that’s also the reason for the well-known saying in the business world that goes:

“Turnover is vanity, profit is sanity but cash is king.”

Without cash flow, a company has to borrow money from banks or undertake equity fundraising to sustain its daily operations.

Turning our attention to Hyflux, here’s a table showing its operating cash flow figures from 2013 to 2017:

Hyflux didn’t generate any cash flow from operations during the time frame. In fact, the last time Hyflux had positive cash flow from operations was way back in 2009.

Putting It All Together

Hyflux marked its first full-year loss in its operating history in 2017, but the disaster has been in the making since it was highly leveraged and had trouble bringing in cash.

Generally, companies with weak balance sheets and the inability to produce any cash flows for a long time are highly likely to be in financial distress.

So the lesson here is that we should ensure companies that we invest in have healthy balance sheets and produce cash flows at the very least.

Investing in such companies won’t guarantee investment success (since there are no sure wins in the stock market), but they will at least protect the downside.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.