TL;DR The financials of the business don't seem very strong due to high debt levels and weak cash flows. The valuation of the business also seems too high. There are lower risk and cost associated with capital, which might lead to a higher valuation of the firm.
Source: Top Glove
Business Profile
Source: ABC
Top Glove is a large manufacturer of gloves that operates in Malaysia, Thailand and China, with offices in the US as well. The company captures 26% of the world market share and serves the healthcare and non-healthcare segment. All in all, Top Glove serves 2,000 customers internationally. They have also been expanding rapidly through M&A, seeking to capture 30% of the global market share by 2020.
Source: The Edge Markets
Income Statement
For 2018 itself, the margins of the firm look pretty good. These margins have also improved over time, which shows that the firm has become more profitable. However, despite revenue growth, the earnings of the business have fallen. This means that despite a drop in earnings, profit had improved.
Balance Sheet
For 2018, the balance sheet of the firm seems weak. This is due to short-term liquidity being quite weak, with debt to earnings ratios being weak as well. Hence, the default risk for the firm would be on the high end. These metrics had weakened over time as the company took on more and more debt.
Cashflows
For 2018, the cash flows of the firm seem fairly weak as well, with a free cash flow margin of 3.54% only. This is due to high reinvestment needs which had resulted in weak cash flows. Free Cashflows had decreased YOY due to higher reinvestment in fixed assets as well as working capital. This occured despite an increase in earnings from the previous year. Given their relatively high dividend payout ratio, it might be unlikely that the firm will continue to pay out dividends. The high free cashflow to equity is caused by a lot of debt being taken on. If these funds are used for investment, then there will be less cashflow for dividends.
Efficiency Metrics
As a whole, the firm is quite efficient in its use of capital. The high ROE figure is enabled by high net profit margins, but also by good asset turnover and low equity multiplier. As we can see, the reinvestment rate is very high, which reduced free cashflows. However, return on capital is very high too, which could suggest that the firm would have very strong growth in earnings the following year if we hold ROC constant.
Valuation
As a whole, the firm seems to have a pretty good valuation for some metric, while weak metrics for others. This is caused by very high multiples, except for P/E and P/EG ratio. This could be due to several reasons such as the very EV from the large amounts of debt, as well as the low free cash flow metrics. The companion variables look good, but the valuation might be too high. Perhaps most investors had probably priced their shares based on cash flow growth in the future, which had not materialised yet.
Cost of Capital
Astonishingly, their cost of capital is very low, due to their very strong interest coverage ratio, but also due to the negative beta that the shares trade at. Their ROIC is much higher than the cost of capital, which suggest that the firm is generating a lot of value based on invested capital.
TL;DR The financials of the business don't seem very strong due to high debt levels and weak cash flows. The valuation of the business also seems too high. There are lower risk and cost associated with capital, which might lead to a higher valuation of the firm.
Source: Top Glove
Business Profile
Source: ABC
Top Glove is a large manufacturer of gloves that operates in Malaysia, Thailand and China, with offices in the US as well. The company captures 26% of the world market share and serves the healthcare and non-healthcare segment. All in all, Top Glove serves 2,000 customers internationally. They have also been expanding rapidly through M&A, seeking to capture 30% of the global market share by 2020.
Source: The Edge Markets
Income Statement
For 2018 itself, the margins of the firm look pretty good. These margins have also improved over time, which shows that the firm has become more profitable. However, despite revenue growth, the earnings of the business have fallen. This means that despite a drop in earnings, profit had improved.
Balance Sheet
For 2018, the balance sheet of the firm seems weak. This is due to short-term liquidity being quite weak, with debt to earnings ratios being weak as well. Hence, the default risk for the firm would be on the high end. These metrics had weakened over time as the company took on more and more debt.
Cashflows
For 2018, the cash flows of the firm seem fairly weak as well, with a free cash flow margin of 3.54% only. This is due to high reinvestment needs which had resulted in weak cash flows. Free Cashflows had decreased YOY due to higher reinvestment in fixed assets as well as working capital. This occured despite an increase in earnings from the previous year. Given their relatively high dividend payout ratio, it might be unlikely that the firm will continue to pay out dividends. The high free cashflow to equity is caused by a lot of debt being taken on. If these funds are used for investment, then there will be less cashflow for dividends.
Efficiency Metrics
As a whole, the firm is quite efficient in its use of capital. The high ROE figure is enabled by high net profit margins, but also by good asset turnover and low equity multiplier. As we can see, the reinvestment rate is very high, which reduced free cashflows. However, return on capital is very high too, which could suggest that the firm would have very strong growth in earnings the following year if we hold ROC constant.
Valuation
As a whole, the firm seems to have a pretty good valuation for some metric, while weak metrics for others. This is caused by very high multiples, except for P/E and P/EG ratio. This could be due to several reasons such as the very EV from the large amounts of debt, as well as the low free cash flow metrics. The companion variables look good, but the valuation might be too high. Perhaps most investors had probably priced their shares based on cash flow growth in the future, which had not materialised yet.
Cost of Capital
Astonishingly, their cost of capital is very low, due to their very strong interest coverage ratio, but also due to the negative beta that the shares trade at. Their ROIC is much higher than the cost of capital, which suggest that the firm is generating a lot of value based on invested capital.