1 Share with a Great History of Profitability

The healthcare industry is often termed as ‘defensive’ because healthcare services will always be in demand. When people become ill, they’ll need treatment regardless of how well the economy is doing.

But despite the strong economic characteristics of the industry, not every healthcare provider can operate profitably. The table below would give a meaningful snapshot of what I mean by highlighting the historical net profit margins for a number of locally-listed healthcare providers that include Raffles Medical Group (SGX: R01), Singapore Medical Group (SGX: 5OT), and Pacific Healthcare Holdings (SGX: P47)

Net Profit Margin


Raffles Medical Singapore Medical Pacific Healthcare


21% 33% 8%


16% 17% -14%


17% 5% -12%
2010 19% 7%


2011 18% -4%


2012 18% -5%


2013 25% -28%


Source: S&P Capital IQ

It’s easy to tell how Raffles Medical Group’s performance has been way better than some of its industry peers. But, that’s not at all the company excels in; Raffles Medical Group has also been able to churn out great returns on equity over the past decade despite carrying a balance sheet that has minimal debt.


Return on equity Total debt to equity ratio


8.5% 2.8%


9.7% 2.1%


11.5% 2.2%


14.3% 1.8%


22.9% 12.6%




2009 16.1%


2010 16.9%


2011 16.2%


2012 15.7%


2013 19.7%


Average 15.1%


Source: S&P Capital IQ

Billionaire investor Warren Buffett once penned down one of his preferred criterion in picking investment targets: Businesses that can earn good returns on equity while carrying little or no debt. Looking at the figures immediately above, it’s fair to say that Raffles Medical Group would have aced that measure.

The company’s excellent corporate track record has also led to market beating share price returns. Since the start of 2003, shares of the company have gained 1,361% in price. By way of comparison, the Straits Times Index (SGX: ^STI) has gained just 146% to its current level of 3,294 points.

Foolish Bottom Line

Can Raffles Medical Group’s business be able to do as well in the future as it had done in the past? That’s a topic that’s certainly up for discussion.

But either way, when used wisely, the returns on equity of a company can be a powerful tool to help investors unearth great investing opportunities. That’s because shares with a history of solid returns on equity while carrying little or no debt often have strong competitive advantages in their businesses that can protect their profits from competitors; it’s also why Buffett would place such a high emphasis on a company’s returns on equity.

But, despite its apparent usefulness, the return on equity is not perfect. While it can help find companies with strong competitive advantages, it cannot tell us where those advantages might lie. As investors, we will still have to assess such businesses qualitatively to find out more. After all, a company’s future results are not a function of its past returns on equity but how it makes use of its assets in the years ahead. The same goes for Raffles Medical Group.

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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 Raffles Medical Group.