Would Peter Lynch Buy Raffles Medical Group?

Ser Jing - Raffles Medical Group First Quarter Results, In the Pink of Health (pic)A doctor says to a patient: “We’ve run every test we can think of and the results show you are definitely out of money.”

If that quip about hospitals wasn’t so true-to-life, it could almost be laugh-out-loud funny. Private hospitals are, today, run as highly efficient businesses. And none more so than Raffles Medical Group (SGX: R01), which has posted 11 unbroken years of profit increases. But would that be enough to tempt Peter Lynch to whip out his cheque book and pen?

Probably one of the first things that Lynch would home in on would be a company’s profitability. Ideally, the earnings should be stable and consistent. Better still, there should some signs of an upward trend. Raffles Medical figures highly here. Over the last 11 years, Net Income has increased around 30% a year.

Another thing that Lynch would examine would be the PE ratio. This can be a useful gauge of how expensive the shares might be. In particular, the PE ratio should typically be in the lower range of the historical average. At S$3.33 and forecast earnings of S$0.13, Raffles Medical is valued at 25 times forward earnings.

That is not especially cheap historically but nor is it outrageously expensive when judged against the earnings growth. If Raffles Medical can continue to grow earnings at about 30%, that would imply a PEG (or Price Earnings to Earnings Growth) ratio of less than one. But that is a big “if”.

A strong balance sheet would be something else that Peter Lynch would like to see. Raffles Medical’s Leverage Ratio of 1.2 is lower than the market average. The median for the 30 companies that make up the Straits Times Index (SGX: ^STI) is 1.6. What’s more, Raffles Medical has net cash on its book. That could put a smile on Peter Lynch’s face.

Another thing that Lynch would be looking at closely would be the dividend and the payout ratio. Since 2001, Raffles Medical has gradually ratcheted up its dividends from S$0.01 per share to S$0.05 last year. Interestingly, the payout last year only represented 11% of earnings, which would suggest the company still has plenty of gas left in the tank.

On balance, Raffles Medical has many positives for a for a likely Peter Lynch stock. The only question mark is whether the company can continue to grow at its blistering historic rate.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.