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Would Warren Buffett Buy Mandarin Oriental?

MandarinOrientalLogoWarren Buffett likes strong brands. Just take a look at some of the companies that he has invested in over the years: American Express; Budweiser; Coca-Cola; Dairy Queen and Heinz.

The one thing that connects these companies is pricing power. But does Mandarin Oriental (SGX: M04) have enough branding power to attract the interest of the Sage of Omaha.

Perhaps the one thing that Buffett looks for more than anything is a business with high margins. That can be a testament of a company’s ability to raise prices even in tough conditions. Mandarin Oriental’s operating margin comes in at a healthy 13%, which compares well with another of Asia’s luxury hotel owner Shangri-La (SGX: S07).

Buffett also like to see a business sweating its assets. It can be a sign of a company’s focus on efficiency. A commonly-used measure is the Asset Turnover, which is the amount of revenue generated for every dollar of asset employed.

Mandarin Oriental’s Asset Turnover of 0.4 is below the average for the 30 companies that make up the Straits Times Index (SGX: ^STI). That said, there are signs that the company is improving its efficiency.

Mandarin Oriental is carrying a hefty chunk of debt on its balance sheet. With a total debt pile of S$1 billion and cash of S$400m, the luxury hotel operator has net debts of some S$600m. That is unlikely to impress Warren Buffett. Interestingly, the shares are not especially volatile, which could put the company back into Buffett’s good books.

Another thing that Buffett is likely to scrutinise is whether the shares are cheap compared to the book value. Mandarin Oriental has tangible asset of S$1.2b and a market value of S$2.3b, which would value the company at almost twice its book value. That is unlikely to excite the boss of Berkshire Hathaway.

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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.