Finding a Company That Would Fit My Investing-Glass-Slipper and Be My Cinderella

At the end of the Cinderella fairy tale, the handsome Prince managed to find the love of his life.

He did so after identifying the only lady in the kingdom who managed to perfectly fit a glass slipper that was left behind by the elegant but mysterious Princess who had captured the Prince’s heart at a ball.

When it comes to investing, I too am constantly on the search for my Cinderallas that can perfectly fit my own investing-glass-slipper. I thought I’d share how my glass slipper’s being built here.

But before I do, it’s worth pointing out that you may have your own unique glass slipper as each individual’s investing activity would – to some degree or another – be customized to their own unique circumstance in life at the moment.

That perfect fit

With that out of the way, let’s dig into the design of my glass slipper:

1. A return on equity of more than 15%.

This is straight forward – I want to see a company have the ability to reinvest shareholder’s capital with a good rate of return.

2. A compounded revenue growth rate of at least 5% per year for the past 10 years.

Having a firm that can grow its revenue is important because it can be a sign that its products or services are desired by customers and can remain relevant over time.

3. A compounded net income growth rate of at least 5% per year for the past 10 years.

We have to ensure that a company is growing both its top- and bottom-lines. A company that is only growing revenue without increases in profit might not be doing a good job for its shareholders.

4. A compounded free cash flow growth rate of at least 5% per year for the past 10 years.

At the end of the day, only a company with sustainable free cash flow production will be able to continue growing without taking on excessive debt or diluting the ownership stakes of its existing shareholders.

5. Dividends per share growing by a compounded annual rate of at least 5% per year for the past 10 years.

A bird in the hand is worth two in the bush. Having a company that consistently pays out a bigger dividend each year can help generate great returns for shareholders.

Finding Cinderella

Using the five criteria above, I built a filter using S&P Capital IQ. After running it, here’s the list of the shares that came through:

  1. Sim Lian Group Ltd (SGX: S05)
  2. Kingsmen Creatives Ltd.  (SGX: 5MZ)
  3. Jardine Cycle & Carriage Limited  (SGX: C07)
  4. Sarine Technologies Ltd  (SGX: U77)
  5. OSIM International Ltd.  (SGX: O23)
  6. Silverlake Axis Ltd  (SGX: 5CP)
  7. CWT Ltd (SGX: C14)
  8. Dairy Farm International Holdings Ltd  (SGX: D01)
  9. Vicom Ltd  (SGX: V01)
  10. Low Keng Huat Singapore Ltd  (SGX: F1E)
  11. Singapore Exchange Limited  (SGX: S68)

Foolish Summary

You might think that all the companies which appear in the list can be my Cinderella. But the truth is, there are some which I would not consider for an investment. And what this means is that I’ve used the screen only as the starting point for my research – it is certainly not the deciding factor.

This is an important point to note: Stock screens have their weaknesses and should never be the final word on what makes for a good investment. And to that point, stay tuned as I’d be exploring some of the pitfalls which come with running stock screeners in a future article.

For more investing analyses and important updates about the financial and stock markets, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 Stanley Lim owns Dairy Farm International Holdings Ltd.