In recent times, I had purchased a stock called Penguin International. Then it was 20+ cents and had price earnings and free cash flow ratio in the low single digits. It was a value investor's dream reporting strong growth and was priced attractively at its reported numbers. However, the share price has moved south and is now at 12 cents.
What Changed?
I had overlooked the fact Penguin's earning could be affected by a downturn. Penguin’s customers were companies in the oil & gas industry. Unfortunately, a downturn did happen and now deliveries and orders for its vessels has slowed. As a result, lesser revenue was recognized with increasing inventories. Penguin’s profitability only decreased one year after the slump of oil price.
Learning Points
This episode showed how reported numbers are merely the rear view mirror of a car; no matter how good they are, what matters is where the road ......