This Is 1 Share That Has Checked Off All the Right Boxes to Potentially Be a Quality Investment

The use of checklists can help save time and effort – and also aid in reducing errors – for many different activities, investing included.

And when it comes to useful investing checklists, we can turn to Pat Dorsey, who’s currently the head of the investment firm Dorsey Asset Management.

Dorsey, who was also previously the Director of Equity Research at Morningstar, had once designed a nine-point checklist which investors can complete in 10 minutes so that they can quickly end up with a  list of companies which can be worthy of a deeper study.

My colleague Chin Hui Leong had recently taken a close look at Dorsey’s checklist and you can check it out here. The nine points in Dorsey’s list are given below:

  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 appearances of one-time charges.
  9. There has not been major dilution of shareholders’ stakes in the firm.

If you’d like some elaboration 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 all these in mind, let’s drill down to Vicom Limited (SGX: V01) and see why it has checked off all the right boxes to be a potential quality investment.

Vicom is a testing and inspection outfit and has been listed since 1995. The company reports its earnings every quarter, and carries a market capitalisation of around S$556 million. Vicom’s business can be segmented into two parts: Vehicle testing and inspection; and non-vehicle testing and inspection.

Under the former, Vicom runs seven out of the nine vehicle inspection centres located in Singapore, so it can be thought of to be a market leader in that space. As for Vicom’s non-vehicle testing and inspection services, it is mainly provided by the company’s SETSCO subsidiary, which was acquired back in 2003. SETSCO does things like “quality assurance testing and evaluation of building materials, structural and chemical analysis, food and microbiological analysis, [and] environmental monitoring, amongst others.”

Over the past decade between 2003 and 2013, Vicom has been generating operating profits, net profits, operating cash flows, and free cash flows without fail. To top that off, the quartet of financial metrics have also unmistakably been marching higher over the years. All these can be seen in the chart immediately below:

Vicom's operating cash flow, free cash flow, operating income, and net income

Source: S&P Capital IQ

As for Vicom’s returns on equity and the strength of its balance sheet, the next chart below can give us a good picture. The firm has generated an average return on equity of 22% for the decade ended 2013 and remarkably, it has done so with a balance sheet that has carried zero debt since 2005.

Vicom's ROE and balance sheet figures

Source: S&P Capital IQ

Vicom has hardly recorded any one-time charges in the 10 years between 2003 and 2013, so it gets a pass there too.

Vicom's share count

Source: S&P Capital IQ

I trust it’s obvious to see from the chart immediately above that Vicom has experienced an increase in its share count over the years. But, the magnitude of that growth is tiny – only around 0.8% per year on average. So, it’s still fair to say that there hasn’t been any major dilution of shareholders’ stakes in the firm.

A Fool’s take

It’s important to remember that Dorsey’s checklist had been designed to narrow the field, and wasn’t meant to be used to pick investment targets.

Before any investment is made, a deeper look into Vicom is still required in order to better understand its risks and growth potential. But in any case, the company’s stellar track record thus far would still make it worthwhile for investors to engage in that deeper dive.

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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 Vicom Limited.