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One Share with a Remarkable History of Profitability

The return on equity (ROE) is a very useful yardstick for investors in measuring the profitability of a company as it tells us how well a business is able to generate profits from each shareholder dollar that’s invested in it.

In fact, a high ROE coupled with little or no debt is one of the important factors that billionaire investor Warren Buffett would focus on when deciding upon a company for investment. In light of that, interesting investing opportunities might arise for investors who chance upon companies with a long track record of having superior ROEs while employing minimal leverage.

One such company would be Boustead Singapore (SGX: F9D). With a market capitalisation of S$989 million at its current share price of S$1.92, the company’s still relatively small in our local stock market. But despite its small size, it does have a wide range of operations and could even be considered a conglomerate of sorts.

Boustead Singapore currently operates under four divisions (sorted in order of importance based on the division’s percentage-contribution to the company’s total revenue for its last completed financial year): Industrial real estate solutions; Energy-related engineering; Geo-spatial technology; and Water & wastewater engineering.

Phenomenal ROE

Over the past decade since its financial year ended 31 March 2003, Boustead Singapore has managed to make use of its expertise in its areas of operations to earn superb returns for shareholders with an average ROE of 21% in that time frame. The remarkable thing is that the company had even managed to do so while employing minimal leverage most of the time (as evidenced by an average of 18% for its total debt to equity ratio in that period).

Financial year ended 31 March

Return on equity

Total debt to equity ratio

2003

11%

32%

2004

13%

32%

2005

14%

44%

2006

19%

16%

2007

23%

13%

2008

31%

8%

2009

31%

14%

2010

20%

10%

2011

22%

11%

2012

22%

8%

2013

28%

11%

Average over past 10 years

21%

18%

Source: S&P Capital IQ

Meanwhile, the Straits Times Index (SGX: ^STI) (which represents 30 of the largest corporations in Singapore) has a weighted average ROE of only 18% currently while having a weighted average total debt to equity ratio of some 75%. When compared with the Straits Times Index’s figures, Boustead Singapore’s achievement seems all the more remarkable.

Market-beating returns

Now, Buffett wouldn’t have placed such heavy emphasis on finding companies with great ROEs and little debt if it meant that such shares couldn’t generate satisfying shareholder returns over the long-term; with Boustead Singapore, it too has proved to be a solid outperformer in the market.

Since the start of 2003, the company’s corporate success has helped it generate capital gains of 860% as its shares shot up from S$0.20 each to S$1.92 today; in comparison, the Straits Times Index has gained ‘merely’ 145% from 1,341 points to 3,280 points in the same time frame. In fact, Boustead Singapore’s market-beating status is enhanced even further if we factor in reinvested dividends – its total return would have jumped to 1,520% instead of ‘just’ 860%.

Foolish Bottom Line

Past success is certainly no guarantee of future success. As such, it’ll pay for any investor to dig deep into Boustead Singapore’s businesses to find out the probability of it being able to continue turning in great business results as it had done so regularly in the past. But either way, the company’s historical performance is at least something that’s worth marvelling at.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.