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1 Potentially Strong Market Beater

For billionaire investor Warren Buffett, a company displaying a strong return on equity over long periods of time without taking on high leverage is a sign that it has quality folks at its helm. In addition, the metric also informs him that such a company could be a great business to own.

This is what Buffett wrote on the topic in his 1979 Berkshire Hathaway Annual Shareholder Letter:

“The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.”

This is him again in his 1987 shareholder letter:

“Only 25 of the 1,000 [largest industrial and service] companies [in the U.S.] met two tests of economic excellence – an average return on equity of 20% in the 10 years, 1977 through 1986, and no year worse than 15%. These business superstars were also stock market superstars: During the decade, 24 of the 25 outperformed the S&P 500.”

Using the insights Buffett has shared, let’s look at what Singapore’s share market has to offer. As it turns out, a share like Boustead Singapore Limited (SGX: F9D) might just catch Buffett’s eye.

Boustead Singapore financials

Source: S&P Capital IQ

In the decade ended 31 March 2014 (Boustead’s financial year ends on 31 March), Boustead’s lowest return on equity was 19.6% while the average is a remarkable 26.4%. And as you can see from the chart above (click on it for a larger view), the company had also achieved such strong returns on equity without employing undue leverage (in fact, the gap between its cash and debt has been widening over the past decade). This is something worth pointing out because the easiest way for a company to juice up its return on equity is to take on more debt. But, Boustead has maintained excellent economic performance without the need for more leverage.

Foolish Bottom Line

With such strong returns on equity, it’s perhaps no surprise to find that the infrastructure-related engineering outfit has outpaced the Straits Times Index (SGX: ^STI) significantly over the long-term. Since the start of 2004, Boustead has gained 447% in price while the STI, Singapore’s share market barometer, has grown by just 84%.

All the above isn’t meant to be a buy or sell call on Boustead. But given its superb track record thus far, the company might be worth a deeper look by investors hoping to unearth the next strong market beater.

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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.