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Vicom’s Secret to Beating the Market

Over the past 11 years since the start of 2003, Vicom’s (SGX: V01) share price has advanced by 844% to S$5.90. If gains from reinvested dividends were factored in, the company’s returns would have ballooned to an even more impressive 1,846%.

By way of comparison, the Straits Times Index (SGX: ^STI) had grown by ‘only’ 146% to its current level of 3,300 points in the same time period. What’s behind the company’s secret sauce?

Warren Buffett’s favoured investing criteria

For that, we’d have to first turn to billionaire investor Warren Buffett. Back in 1988, Buffett wrote down one of his preferred criterion for evaluating businesses for investment in his Berkshire Hathaway annual shareholder letter:

[B]usinesses earning good returns on equity while employing little or no debt.”

The reason for him doing so is because such businesses often (though, not always) have strong competitive advantages in their markets – that’s what allows them to earn those high returns. And, when a business can earn superior profits on shareholder’s equity over long stretches of time, its shares will also likely tag along for the ride.

Vicom’s secret sauce

In light of the above, the reason for Vicom’s market-beating returns becomes clearer when we turn to its returns on equity over the past decade

Year

Return on equity Total debt to equity ratio

2003

18% 20%

2004

15% 4%

2005

15% 0%

2006

17% 0%

2007

22% 0%

2008

24%

0%

2009 27%

0%

2010 25%

0%

2011 25%

0%

2012 24%

0%

2013 23%

0%

Average from 2003 to 2013 21%

2.2%

Source: S&P Capital IQ

From 2003 to 2013, Vicom had earned an average return on equity of 21% while basically carrying no debt for the past eight years. That’s a remarkable achievement when we juxtapose the Straits Times Index’s corresponding figures with the company’s: the index has a lower weighted average return on equity of 14% currently and yet it has a total debt to equity ratio of 70%.

Foolish Bottom Line

Vicom’s past record has certainly been impressive and has been a key driver of its market-beating share price returns. But, history is not a perfect indicator of the future and investors would have to dig deeper into Vicom’s business to assess the probability of the company being able to continue putting in great business results.

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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 owns shares in Berkshire Hathaway.