Here’s why This Share Could Be a Quality Investment

Healthcare services provider Raffles Medical Group Ltd (SGX: R01) has been a stunning long-term success story in Singapore’s stock market.

Since the start of 2004, Raffles Medical’s shares have grown by 970% in price alone from US$0.36 to S$3.89. In comparison, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has only doubled over the same time frame.

But, that was then and this is now. Can Raffles Medical continue delivering smashing returns for investors going forward?

Keeping in mind the idea that it’s a share’s business performance which drives its price over the long-term, some hints for answering the tough question above can come from assessing the quality of Raffles Medical’s business.

A quality checklist

One quick way to gauge the quality of a business would be a checklist that’s developed by investor Pat Dorsey. The checklist, which is found in his book The Five Rules for Successful Stock Investing, has nine different criteria:

  1. The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has 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 generate 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.

The checklist works in such a way that a company which scores a “yes” for all or most of the criteria would be worth a deeper study by investors as the firm likely has a quality business that can lead to a winning investment.

For some in-depth elaboration as to why these criteria make sense in the context of it being able to help sieve out quality businesses, you can check out my colleague Chin Hui Leong’s work. There are three parts to it, so here they are: Part 1, Part 2, and Part 3.

With that let’s run Raffles Medical through the checklist.

A big thumbs-up

As a quick introduction, Raffles Medical is perhaps most famous for owning and operating its flagship Raffles Hospital in Singapore. The company also has 100 multi-disciplinary clinics scattered all over the island in addition to having five medical centres in Hong Kong and one in Shanghai.

The company has been listed since 1997, has quarterly earnings releases, and also has a sizeable market capitalisation of S$2.17 billion. These characteristics would give Raffles Medical the nod for Dorsey’s first criterion.

Moving on, we can see in the chart below how the firm has managed to consistently generate operating income, net income, operating cash flow, and free cash flow over the decade ended 2014. What’s more, all four financial figures have also been growing strongly through that period. With these, Raffles Medical would be ticking the “yes” box for criteria 2, 3, 5, and 7.

Raffles Medical Group's operating income, operating cashflow, free cashflow, and net income from 2004 to 2014

Source: S&P Capital IQ

Returns on equity for Raffles Medical have also been strong for the same timeframe as above. As you can see in the chart below, the company’s average return on equity from 2004 to 2014 had been higher than 15% (15.6% to be precise).

The company has also been able to achieve its high returns on equity while carrying a rock-solid balance sheet that had more cash than debt for the most part.

Given these, Raffles Medical would be getting the thumbs up for criteria 4 and 6.

Raffles Medical Group's return on equity (ROE), total cash, and total borrowings - from 2004 to 2014

Source: S&P Capital IQ

We’re at the penultimate criterion in Dorsey’s checklist and Raffles Medical shines here too: There’s hardly been any significant one-off charges with the company for the period under study.

Raffles Medical Group's share count from 2004 to 2014

Source: S&P Capital IQ

Major dilution of shareholders’ stakes has also not occurred with Raffles Medical. While the firm’s share count has indeed been climbing over the past 10 years (as you can tell in the chart just above), the rate of growth has been meagre at just 2.7% per year.

A Fool’s take

Rounding up the scores, we have Raffles Medical acing Dorsey’s nine-point checklist. It thus follows that the share may just be a quality investment.

But while the healthcare services provider has had a great track record, investors shouldn’t stop here. The strength of a firm’s business is just one piece of the puzzle. Before any investing decision can be made, other factors – such as the firm’s future prospects and valuation – need to be mulled over too.

For more investing analyses and important updates about the stock market, sign up to 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 Chong Ser Jing owns shares in Raffles Medical Group.