This Share Might Be Worth a Deeper Look as a Quality Investment

My colleague Chin Hui Leong had recently shared a nine-point checklist which Pat Dorsey had come up with. Dorsey, who currently heads the investment firm Dorsey Asset Management, was previously the Director of Equity Research at Morningstar.

Dorsey’s checklist is designed such that it can be done in 10 minutes so that investors can effectively sift out companies which might be worth a deeper look. The nine points are as follows:

  1. The firm provides regular financial updates, has a long track record as a publicly-listed entity, and a market capitalisation that isn’t too small.
  2. It has consistently earned an operating profit.
  3. It has generated consistent operating cashflow.
  4. The firm earns a good return on equity.
  5. It has been able to grow its earnings consistently.
  6. It possess a clean balance sheet.
  7. The firm can generates lots of free cash flow.
  8. There are infrequent appearance of one-time charges.
  9. There has not been major dilution of shareholders’ stakes in the firm.

If you’d like a deeper look as to why these criteria make sense, Hui Leong’s articles would be a great place to start (here they are again: Part 1, Part 2, and Part 3). With that, let’s move onto Raffles Medical Group Ltd (SGX: R01), a company which ticks off all the right boxes in Dorsey’s check-list.

Raffles Medical Group is a healthcare services provider based in Singapore that has been listed since 1997 (that’s almost two decades ago!). The firm, which runs the renowned Raffles Hospital in Singapore, provides quarterly earnings releases and has a market capitalisation of S$2.17 billion (as of 19 January 2015).

As you can see in the chart immediately below, the firm has consistently generated operating profits, operating cashflows, free cashflows, as well as net income. On top of that, all four financial metrics have also unmistakably climbed upwards over time.

Raffles Medical Group's operating profit, operating cash flow, free cash flow, and net profit

Source: S&P Capital IQ

Next, when you look at the chart below, you can also see that Raffles Medical Group has been able to earn a great return on equity (the firm’s average return on equity between 2003 and 2013 has been 15.1%) while by and large employing negligible borrowings.

Raffles Medical Group's return on equity and balance sheet

Source: S&P Capital IQ

Quick scans of the company’s historical financial filings over the past decade would also reveal that one-time charges have been far and few between.

Lastly, we come down to changes in the firm’s share count and as you can see in the next chart, there has been a steady increase in that figure.

Raffles Medical Group - sharecount

Source: S&P Capital IQ

On first glance, that isn’t good. But, it should be noted that a large part of the increase has been due to two things: (1) the firm’s practice of allowing shareholders to receive dividends in the form of new shares; and (2) a stock split that occurred in 2007. Both aren’t really examples of harmful dilution.

A Fool’s take

It’s important to remember that Dorsey’s checklist is meant to help narrow down the list of shares for further study and isn’t meant to be used to pick investment targets. But as we’ve seen, Raffles Medical Group’s track record thus far would qualify it for a deeper look as a potential quality investment.

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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.