Value of time

Time is getting tighter for me these days. I remembered fondly years ago, that I'll have time to walk around shopping malls and have the leisure to stand and stare. I can go jogging around 4pm, or swimming at 1pm - those are the days. Still, to get out of the rat race, this is the little sacrifice one must make to quicken the process a little.

Dream mentioned that I must take time to smell the flowers. I agree fully. If yesterday is a cancelled cheque, tomorrow is a promissory note, then today is cash on hand. While planning for the future is important, I cannot be too blind to the good things happening to me presently. One must be thankful not only for the good things that happened, but more importantly, for the bad things that never happen.



Here's something meaningful:

To realise the value of one year;
Ask a student who has failed a final exam.

To realise the value of one month;
Ask a mother who has given birth to a prematured baby.

To realise the value of one week;
Ask an editor of a weekly newspaper.

To realise the value of one hour;
Ask lovers who are waiting to meet.

To realise the value of one minute;
Ask someone who has missed a train, bus or plane.

To realise the value of one second;
Ask someone who has survivied an accident.

To realise the value of one millisecond;
Ask someone who has won a silver medal in the Olympics.

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My ideas on insurance

As a lay person to insurance, it is not easy to ‘break into’ the knowledge banks of insurance. While I profess that I’m no way near a level where I can tell people what to do with their insurance, at least for now, I understand my own insurance needs and plans – which is the raison d’etre for wanting to know more about insurance.


Let’s just talk about the difference between a whole life plan and a term plan. A whole life plan is an insurance policy where the insured gets a cash value, usually towards the 3rd year of the policy. This cash value will grow in value, and it consists of two parts – the non-guaranteed part (usually projected at 3.75% or 5.75% pa) and another guaranteed part. The whole life insurance plan puts the premium that you pay into a participating fund (par fund for short). This par fund consists of a mix of assets, usually more geared towards bonds (higher percentage) and equities (lower percentage). Back in the heydays of bull markets, insurance policies of olden days project their non-guaranteed returns at a rate of 7-10% (that’s what I heard from others) and the selling point of these policies is the high cash values (as always, compared to fixed or savings accounts in banks) that the insured stands to gain when he cashes it out. I think it didn’t work out too nicely when the insured realized that the actual cash value is so far off the projected returns years down the road.


Well, on paper, anything goes. The best and most sophisticated model might not yield the most accurate predictions. Hence, for me, I never like to look at the non-guaranteed part of the cash value. It’s better to plan your life on not having the non-guaranteed portion than to have a shock in the future. This philosophy of not looking at the non-guaranteed portion of any cash values in policies extends not only to whole life but to other savings plans too. I just never look at the non-guaranteed part of the cash values. Call me a conservative if you wish.




To me, insurance is not about investment. I do not think highly of mixing insurance with investment. Obviously not everyone thinks the same as me, hence it’s crucial to decide how you treat insurance. As KK puts it, are you treating insurance as an expense or as an investment? If you treat it as an expense like me, you’ll want a cheap insurance with maximum coverage in terms of both breadth (i.e. how much coverage) and length (i.e. duration of coverage). You’ll not care for any cash benefits or returns because this is immaterial to your purpose of buying insurance. On the other hand, if you treat insurance as an investment, then you’ll want to worry about how much returns you are getting, and whether the returns are mostly in guaranteed part or non-guaranteed part, the composition of the par fund etc.


There are no bad insurance products, just a mismatch between products and the buyer. If you want to be serious in being financially independent, you’ll have to take responsibility in finding out more about insurance as it’s an integral part of being financially responsible to yourself and your family.


Now, what about term plans? Term plans, firstly, have no cash values to talk about. It’s purely for insurance and the premiums you paid are not put into the par fund to grow it. Hence, the premiums are usually much cheaper (around 4 times cheaper, all else being equal).


I think it’ll be good to list the comparison between term plan and whole life plans here:


Personally, I’m holding 2 whole life policies. One is a traditional whole life policy where the policy will be in-force as long as the premiums are paid. The other is a limited payment whole life plan where the premiums are paid for a period of your choice of 10 yrs, 15 yrs, 20 yrs, 25 yrs etc, but the policy will be in force till you expire (or up to age 100).


The reasons I bought and the reasons I’m holding are quite different. Since the reasons why I bought are less than stellar, let’s talk more about why I’m still holding on to the whole life plans:


1. For the limited payment whole life plan, I like the fact that after a period of 15 years (I chose it), I do not have to pay for the premiums anymore. This will cover me for 100k for the rest of my life, with an additional option to change to an annuity upon hitting a certain age. This means that I will not have to pay for the premiums for this plan when I reached age 45, well before my retirement age. This certainty is well worth the extra premiums I paid for this plan.


2. The limited payment whole life plan will be my base insurance coverage till I expire. I have no intention to convert to an annuity plan nor to cash it out, otherwise I would not have any more coverage. Should I hit any unfortunate event after I cashed out my plan or converted to annuity, my savings will be eroded. This is not something I would want to happen towards the end of my life.


3. The other traditional whole life plan I will have to cut upon hitting retirement. I wonder how I can pay the premiums to keep the policy in force after I stopped working. Hence towards the end of last year, I started to cut the initial 180k coverage to 50k to reduce the premiums paid. Thus, I would have a sum of money ready the moment I decided to cash out this policy.


Having settled my base insurance, I will next work on temporary coverage using term plans. This will start as soon as I start my family. The reasons why I chose term plans are:


1. The term plans is to boost my insurance coverage in case something happens to me, so my dependents will need a sum of money to maintain their current lifestyle. But as my dependents get less dependent on me, I do not need to have such coverage anymore.


2. Ideally, I plan to boost my insurance coverage using term plan, for a period of D+25 years, where D is the year where my last child is born. 25 years should be sufficient time for the last child to earn his/her own keep and hence will no longer be dependent on me. The term plan should also be sufficiently cheaper than whole life plans, so the financial burden will not be too great on me.


The whole idea here is to use a combination of whole life and term plans to achieve exactly the goals you want to achieve for insurance. Limited whole life plan to act as a base insurance coverage, topped with term plans to boost coverage until the dependents get less dependent. Of course, other essentials like hospitalization and surgery (H&S) plans, personal accident (PA) plans and disability income plans are crucial for a well rounded insurance coverage. Perhaps more on those in future posts.

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Note that I'm not a qualified financial advisor. I'm just posting my thoughts on it, and I do not advise anyone to follow my own philosophy towards insurance. Do seek the proper advice if you need more help. There is a possibility that the information given here is wrong. Hey, what do you expect from a layperson trying to break into the insurance bank? Gimme a break (literally)

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Personal finance distilled

You know, I've been reading a lot of books on personal finance. But after reading a great variety of them, you'll get a rough idea of what most of them advocates. I'll attempt to summarise those few pointers that I get from reading all these books (don't ask me which book mentions what, I seriously can't remember).


1. Know your expenses well.

This is very easily said, but hard to follow. I've been tracking my expenses for more than a year already, so everytime I spend money, you'll see me whip out my handphone and key in the amount so that I can tally up to my spreadsheet. Initially I wanted to do it only for a few months as I thought it's quite insane to do this, but after a while, it began to look like a sort of game. Every month, I'll tally up and see how the graph looks like, thus motivating me further.



The graph above shows my own expenses vs income for last year 2008. The difference between the blue (expenses) and the red (income) is my savings. That is extremely motivating for me to see my savings growing more.


2. Pay yourself first

This is more for people with fixed salary. Most books will recommend people to save up a portion of their salary and deduct a fixed percentage of say 30% into another 'untouchable' account. The rest, they can spend it to pay for bills and their monthly expenditures. This is essentially a forced savings, somewhat like CPF, except that you have more say on how much you want to contribute.

For variable income people (like me), what I do is that I'll put into my 'untouchable' account as soon as I have a sizeable amount. For example, if I have more than 1.5k in my bank, I'll put in 1k into that untouchable account. This requires more active managing, because I have to think about the near term cash outflow. I do not ever want to withdraw money out of the untouchable account unless absolutely necessary, so if I didn't plan out properly, I'll run in short term cashflow problems.

This kind of savings is significant. If one takes home a pay of $3,000 and pay himself 30% first, he'll get $10,800 in a year, excluding interest. Do not belittle it. It'll be even more if he pays himself 40% first, amounting to a huge sum of $14,400 in one year.


3. Identify your needs and wants

This comes as a result of first knowing what your expenses are, from step 1. If you do not know how much you spend on what, it's hard to audit your expenses to manage it better. It's important to identify your needs and wants because wants are not necessary.

Usually before I buy something, I'll have an intense desire to get it straightway. There's no point in reasoning out because the reasons will always expand to fill the desire. What I'll do is that I'll cool myself off for a time period, then if I still think I have to do with it, I'll go and buy it. For my accoustic guitar, I've been toying with the idea of buying it for almost 2 years. It cost slightly less than $300. For a CD that I really like, maybe I'll delay buying for up to 6 months or more. If I still like it, I'll get it.

Can you delay your gratifications, sometimes indefinitely? That being said, one must not feel deprived for doing without it. Enough is a balancing point between too much and too little.


4. Understand and manage your debts

Don't get yourself immersed in debts. Certain debts are good and others are bad. If you want to buy a car, but you can't have the money, so you borrow 100% of the amount and pay off in 10 yrs - that's very bad debt. How does one differentiate between good and bad debts?

For me, I classify things into assets or liabilties. Things that allow me to increase my money are my assets. Things that suck in money from me are my liabilities. For example, I would like to buy a car so that I can work harder and faster. With my own sets of wheels, I can save a lot more time, reach places a lot faster and probably squeeze in a few more work. It's more than worth the cost of the payment. Here, I'm borrowing to leverage on time.

For those that depreciate in value (like car or a washing machine), it's not wise to borrow money to pay for it. Some people I know borrow money for renovation, wedding, television sets etc...those are really bad debts.


5. Earn more money

I've seldom read books that tell you this thing. Earning more income is possibly the best way to save (i.e. if you don't spend more to 'reward' yourself too). There's plenty of ways to earn more - do a better job and try to get promoted or teach some skills that you can do very well. Most will probably choose tuition as it's easy and provides a healthy cashflow. With one student, you can possibly bring in an extra $200-$300 in per month, instead of lying in the sofa watching tv on weekends. How about teaching roller blades, cycling, swimming, baking etc?


6. Have adequate insurance

I've known people with less than adequate insurance. There are many insurances one can buy, ranging from:

1. Life insurance (death benefit)
2. Critical illness (like heart attacks, cancers, strokes etc)
3. Hospital and surgical insurance
4. Accident plans (can include things like dengue fever)
5. Elderly care (for those who are old and have problem fulfilling some basic acts of being a healthy independent human being)
6. Disability income (if you can't work because of disability, you'll get an income for a period of time)

Different life stages will require different kinds of coverage. For my life stage, I'll probably need more critical illness, hospital and surgical insurance and perhaps death benefits. The thing about insurance is this: it's equally bad to over insure and to under insure. If one over-insures, he is paying a lot more money than needed for the possibility of a claim event happening. If one under-insures, he have to folk out more money in the event that something happens. Both are equally not optimum. But from what I see, it seems there's less possibility of people being over insured, haha

What's the purpose of insurance? It helps to pass some of the risk to others. Can you afford to pay for $XXX,XXX in the event of cancer striking? If you can't fork out the amount of money, it's better to pay $X,XXX per year for a limited amount of time in order to pass the risk to others. As simple as that.

This issue about insurance deserves an article on its own, so I'll stop here. For now, it's suffice to say that without proper insurance, all the savings you've built up will be wiped out. Such events might be rare, but it's possible and probable. If you've read Black swan theory, it's always these exceptional circumstances that will have significant impact on your lives, so prepare yourself for it.

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Woe be to those who missed out ROE

I was just waiting for the bus to come when I thought more in depth about the concept of return on equities, otherwise known as ROE for short. It’s not those little things that you put onto sushi though.



WARNING: THIS IS ONE OF THE MOST CHEAM AND LONGEST POST I EVER DID ON ACCOUNTINGS. PROCEED WITH CAUTION.

ROE, usually denoted as a percentage, is defined as the net profits per equities of a company. Equity is the amount that is left when you subtract total liabilities from total assets. In this article, I’ll explore the idea of how difficulty it is to maintain a consistent ROE throughout the years. I figured out an example while waiting for the bus, so I’ll just use that one to illustrate.

Suppose Bullythebear Company (BTB for short) is opening for business. To start off the business, BTB managed to raise $150 from venture capitalist. However, because BTB still needs to buy some fixed asset to kick start the business, it’ll have to borrow $50 from the Kingpin. Being a kind soul, Kingpin do not require any interest to be paid up, so there is no interest charged on the $50. BTB will immediately have a cash/cash equivalent of $200, listed as a component under the assets column. The balance sheet will look somewhat like this:




BTB proceed to buy a piece of machinery (that can be used forever and hence do not need depreciation charges at all) that is used to produce the revenue, costing a princely sum of $120 paid up front without credit. Hence, from the cash/cash equivalent of $200, $120 of which will be used up, leaving $80 (200 – 120 = 80) left. The balance sheet looks like this:




So after the first year of business, BTB made a revenue of $100, and after all the costs and taxes involved, retains a net profit of $52. The $52 will be received immediately and will add to the initial $80 cash, hence the cash/cash equivalent will be raised from $80 to $132 (80+52 = 132). There is a corresponding entry in equity under retained earnings, which is the exact amount as the cash/cash equivalent, being $52. The balance sheet and income statement looks like this:




Let’s do some FA for the company at this present moment.

ROE is 25.74% (52/(150+52) = 25.74%).
Net margins is 52.0% (52/100 = 52%)
Financial leverage is 1.25 ((132+120)/202)
Asset turnover is 0.40 (100/(132+120))

Hey, not bad numbers at all!

Into the second year, BTB manages to raise revenue by 15%, which is pretty decent. Unfortunately, the direct and indirect costs associated with making the revenue also increases proportionately, creating a net profit of $59.80. Again, this sum is collected in full without credit and thus increases both the cash/cash equivalent and the retained earnings. The balance sheet and income statement looks like this:



Take a look at the figures now
Revenue increment: 15%
ROE is 22.84%
Net margins is 52%
Financial leverage is 1.19
Asset turnover is 0.37

Hey, the ROE drop from 25.74% in the first year to 22.84% in the second year, even though the company is pretty decent. The net margin remains the same and the revenue increase by 15%. This is the difficulties that company faces when they want to maintain their ROE – it’s not easy, especially when they hold their retained earnings in cash which is sitting there earning a miserable interest. The more the company earns, the harder it will have to work in order to maintain the same ROE because the asset base increases!

Let’s see what happens in year 3 when there is a great year for our BTB company, with revenue increasing by 29.6%. Here’s the balance sheet and income statement:



Here are the figures:
Revenue increment: 29.6%
ROE is 22.84%
Net margins is 52%
Financial leverage is 1.15
Asset turnover is 0.38

Here, the ROE is maintained at 22.84%, same as the previous year. But look what it takes to achieve this same consistent ROE feat – a revenue increment of nearly 30%. Can you see how hard it is to keep on maintaining the same ROE again and again, year after year? It takes not only good use of the retained earnings, but also great management insight to invest the excess earned every year to good use. It’s not easy at all!

Here's a few insights that I gained by doing this rather rigorous way of exploring how ROE numbers are generated:

1. ROE is very difficult to maintain. Every year, the management will have to decide on how to maintain ROE, which isn't fun at all. Holding too much cash is great, but it'll drag down the ROE. Invest more into their business - what if they can't generate the kind of returns? Management will also have to think about giving back earnings in terms of dividends, especially when they are not confident of using it wisely. The worst they can do is to invest in non-core business for the sake of expanding their empire. It'll drag down ROE, suck up precious cash, and even have to spend money to get out of it eventually.

2. This comes as a surprise actually. I knew it but never really thought hard about it. Financial leverage drops as one gets more and more asset base. This is the result of increasing the asset faster than one's borrowings. Just by retaining cash, the financial leverage ratio drops substantially.

3. I've a much better understanding of the relationships between the 3 statements found in financial reports. I used to do all these accounting in the past (I blogged it an article found here), as part of my journey to learn fundamental analysis, and I remembered I took half a day to do just a simple tracking. This one, I did it in 1 hour. Hey, practise do make prefect - just keep staring and crunching numbers for 1 full year, it'll work wonders.

4. I start to appreciate more when I see companies with high and consistent ROE. Take a look at Hongguo:

----------ROE(%)
2003------19.68
2004------20.49
2005------22.46
2006------22.31
2007------22.30
2008------19.7 (*)

* estimation based on 9M08's ROE

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Celestial

I’ve got another request by one of the superfriends to do a review on Celestial. I’ve covered Celestial quite some time ago, around end of 2007 I believe, so I think it’s a good time that I revisit this company again and see what had transpired between then and now.

Celestial is in the business of manufacturing soyabean protein-based food and beverage products and is selling them under its own brand name. They are also entering the biodiesel business which began a trial run last Oct 2008.

For this review, I’m only reading their 3QFY08 results, which they released back in November last year. Here’s a few statistics (based on 9MFY08 data):

Net margins: 22.8%
ROE: 25.7%
Annualised diluted EPS (assuming conversion of bonds to shares): SGD 0.14
Current assets/Current liabilities: 1.3
Total assets/Total equities : 1.73
Total liabilities/Total equities: 0.73
PE (based on today’s price of 0.340) = 2.4x

Here are a few things that I noticed and thought about:


1. Net margins are pretty high at 22.8%. However, compared to FY06, their net margins are at 31.9%. Even last year’s net margin was at 23.3%. We are definitely seeing some trends in the erosion of their net profits. I’ll say they are being held hostage by the high prices of soya bean. This can be seen in their Cost of good sold (COGS) as a percentage of their revenue. Since the last time I tracked this, their COGS (as a % of revenue) had increased from 55.7% in FY06, to 61.0% in FY07 and to the present 64.9% for the 9 months into FY08.

This is something that they have not much control on. I’m not sure if they hedge the price of soya beans purchased with something like a commodity futures contract, somewhat like what SIA did to lock in future oil price.


2. Other expenses like distribution costs had also shot up sharply. We’re talking about close to 50% rise in 3Q08. Not sure how they distribute their products, and not sure if it’s linked to oil too. But I do know that Celestial needs to do more to control their costs, which are already eating up their once very healthy net margins.

Considering that their net margins are so easily eroded within a span of 3 years, perhaps they do not have much of an economic moat. That being said, a net margin of 20 % plus is nothing shameful.


3. They have been easing down on their financial leverage since I began tracking it. Their financial leverage (defined as total assets/total equities) went from 2.17 back in FY06 to 1.99 in FY07 to the current 1.73 in FY08. The secured borrowings they had made back in FY07 had been fully paid up, leaving SGD 243 mil unsecured borrowings to be payable within one year or less (as at 30th Sept, 2008). This is from the zero coupon convertible bonds issued on 12th June, 2006, with a maturity of 5 years i.e. 12th June, 2011.

The price of the conversion of the bonds to share was adjusted to $2.47 per share. With the current crisis looming and the low share price of Celestial (last transacted at $0.340), I doubt if many shareholders will want to convert their bonds to shares, especially when the conversion price is like 7+ times more than the current share price.

They mentioned that if the bondholders held on till maturity (i.e. June, 2011), Celestial have to pay 129.263% of the principal amount (S$235 mil) by then. This means that Celestial will have to cough up nearly SGD 303 mil (RMB 1,515 mil) in 2011, assuming none of the bondholders convert to shares. That is a potential time bomb waiting to explode.

They did, however, have cash/cash equivalents of RMB 1,397 mil sitting at their company’s coffers now. It depends on how wisely they plan to use this amount of cash. Spend it foolishly and they will have to borrow more money to repay the bondholders when it approaches 2011. Would it be easier to borrow money then? I do not have the answers.


4. ROE (annualized) for FY08 is an impressive 25.7%. It’ll be more enlightening to look at the breakup of the ROE and tracking it over the years, since I have the data at hand.

------------------Financial leverage-----asset turnover-----net margins-----ROE
FY2006--------------2.17------------------0.38------------------31.9%------------26.3%
FY2007--------------1.99------------------0.52------------------23.3%------------24.1%
FY2008*-------------1.73------------------0.65------------------22.8%------------25.7%

* FY08 figures are estimated on the basis of the figures given in the 9M into the FY08. I assumed a straight trend leading to 4Q08 and the estimation can be wildly off the actual figures

We can see from the breakup of the ROE figures how Celestial improves it’s ROE. It is using less leverage (good sign), churning out more revenues per dollar of assets (good sign) but with lesser net profit margins (bad sign). I’ll say that the quality of their ROE is actually better, even though it’s lower than FY06, because it’s not as highly leveraged.

ROE of above 20% is still impressive, at least to me.


4. Current ratio is good at 1.3x, but I’ve no past figures to guide me on this. But let’s look at the absolute figures. They have RMB 1,971 mil worth of current assets, of which 71% consists of cash/cash equivalents. Assuming a bad debt of 50% on their trade/receivables and zero value on their inventories, their adjusted current assets will stand at RMB 1637 mil, which is more than enough to cover all their total liabilities amounting to RMB 1,532 mil.

I think no worries on their solvency in the near term. Of course, if businesses are affected, there’ll be more bad debts, the liabilities will also shoot up…but that will be anybody’s guess.


5. Operating cashflow which is coming in is good. However, one huge figure worries me, which is the amount of cash that flows out due to their investment in their plant, property and equipment (PPE). For the 9MFY08, cash comes in at RMB 380 mil, but flows out at RMB 470 mil due to investment in their fixed assets, and another RMB 160 mil flows out from financing activities. No wonder they need to issue convertible bonds to raise money. I do not know their plans for expansions in the near term…are they going to invest more money into their PPE? If not, things will go fine and they can even give out some dividends and have some remaining to save up for rainy days.


6. The management seems to have prepared for the eventuality of the bondholders redemption in 2011. They are already planning to look into different re-financing options. More updates on this potential time bomb will be given come FY08 full year results, so they say. Due to this, they also chose not to declare any cash dividends for the FY08 – this means next quarter when they close the results of the year, no hope on getting any dividends. This is a prudent and conservative approach taken by the management to ensure the long term survivability of the company.

The new biodiesel business is in trial period, starting last Oct 2008. They are determining the prospect and strategy for this business, so it’s a good idea not to hope for any positive contribution coming from this new business segment.


7. Ultimately, what to do for Celestial? Invest more to average down? Cut loss and move to supposedly more stable blue chips?

At PE of 2.4X, there’s not much expectations for Celestial based on the current price. I’m still worried about how they are controlling their expenses, which is eroding their margins. I do not think Celestial will be one of those companies that will go belly up, unless something drastic happens to the soya bean industry (look at what the milk scandal did to big players like Sanlu and Mengniu). Do take note of the potential convertible bond redemption coming closer to 2011. If bondholders redeem their monies, Celestial will have to seek new financing to pay them. If bondholders convert to shares (possible, but unlikely), there’ll be around 10% dilution to existing shareholders.

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Data pulse

Trying to help out a fellow regarding his investment into this firm, Datapulse. From the books that I read, either this or Datacraft was one of the hotly punted stocks way back in the dot com era. I started browsing through the statements with a skeptical eye, knowing that Datapulse was dealing with those computer, gadgety stuff (they are actually providers of total solution to CD/DVD for content distributors in Asia Pac region). How good can they be. I think I'm wrong.

I only looked at their FY08 results released in 2008, Sept.

Net profit margins: 18.2%
ROE: 16.6%
Current assets/current liabilities: 4.0x
Total assets/Total equities: 1.25
Diluted EPS: 2.25 cents
PE (based on today's price of 0.135): 6x
Dividend yield : 14.8%

Here's my thoughts:

1. They must be doing something right. I thought the kind of business they are doing are so easily replicable and with not much of a competitive edge of others. But take a good look at their impressive net profit margins of 18.2%. This could be one off of course. ROE of 16.6% is pretty impressive too, especially for the kind of business they are doing. Usually for business geared towards manufacturing, I expect to see a rather lower ROE because of the high fixed cost perhaps coupled with high borrowings too. How wrong. Their ROE is hampered somewhat by the high cash/cash equivalents they are holding, but in these times, perhaps this is what prevents them from collapsing.

2. Looking at the current ratio and gearing, it's quite hard for me to see them needing any emergency cash to tide over current liquidity issues. Their current assets (of which 74.5% consists of cash/cash equivalents) can cover their current liabilities for 4 times. They have no problems with longer term debts too, with non-current liabilities consisting only of 24% of total liabilities. If they have no problems with short term liabilities, they wouldn't even have to blink for non-current liabilities.

In fact, their cash/cash equivalents of 45 mil can more than cover total liabilities of 20 mil PLUS dividend of 2 cents to every shares they own (around 11.9 mil) and still have 13.1 mil left over. Hey, do not belittle this penny share ok?

3. Based on the above rough calculation, I would say no problems to them continuing to give dividends in the future, IF they can maintain their business. A big IF, I know. Are they able to do that? I do not have the answers, as I do not have the expertise nor interest in their area of business.

4. Cash flow wise - a clean bill of health. Cash is coming in for sure. In fact, the quality of their recorded earnings are very good. Due to the accrual nature of accounting (and the fact that business give credit), what is recorded as earnings might not materialize as cash, so we might see a case where there is superb earnings but little cash flow. However, Datapulse's earnings are very much translated into cash flow. If we take their net profit of 13 mil, add in the non-cash depreciation charges of 7 mil, we can around 20 mil, which is exactly what their operating cash flow show. No nonsense at all.

The biggest cash flowing out is actually the dividends paid out to shareholders. This drains off around 12 mil from the company's coffer. For FY08, they are spendin a fair bit (5.7 mil) investing in their assets. Not sure what their plans are for the coming year, but I'm sure they won't be putting in so much into their capital expenditure.

In my opinion, no worries in terms of cashflow.

5. Good time to buy? With PE of 6x, dividend yield of 14.8%, low debts, good cashflow to pay off all debts and dividends, it seems not a bad option at all. One of the risk is that we do not know the extent of how the recession will affect the demand, and hence, their business. If business is affected, a lot of things mentioned here will also be affected. Another risk is whether there are better use for the money. Is there a better investment around?

If you treat this as a dividend play, it's not too bad. If they give their dividends of 2 cents per share forever (another big IF), you'll get back your investment capital in around 7 years. Probably faster since this rough calculation ignores capital gain. So if the real question to ask is really how stable their business is. Answer that, and the rest will follow.

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