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3 Shares That Do Not Possess Warren Buffett’s Favourite Business Trait

When it comes to assessing how strong a business is, the presence of pricing power ranks very highly in the eyes of billionaire investor Warren Buffett. This is what Buffett has said on the topic:

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

In investing, the act of negative thinking – thinking about what not to do – is very valuable. With that, here are three shares in Singapore’s market that do not seem to possess much pricing power at all: Tiger Airways Holdings Limited (SGX: J7X), Ezra Holdings Limited (SGX: 5DN), and Golden Agri-Resources Ltd (SGX: E5H).

Historical gross margins for Tiger Airways, Ezra, and Golden Agri-Resources

Source: S&P Capital IQ

The chart above plots out the historical gross margins for the trio going back more than eight years ago.

A company’s gross margin measures the percentage of profit it earns for each dollar in sales that it makes after deducting all the costs that are directly related to the sale.

Trends in a company’s gross margin, as well as a comparison of it with the firm’s industry-peers, can serve as an indication on how much pricing power it has (if there is any in the first place). A lack of pricing power can show up in erratic or declining gross margins as the company would be unable to pass on any price increases to its customers.

Based on the chart above, “erratic” and/or “declining” are good descriptions on how the gross margins of the trio of Tiger Airways, Ezra, and Golden Agri-Resources have been over the years. That’s a strong clue on how the trio lack pricing power.

A Fool’s take

Driving home the importance of the presence of pricing power in a share’s business would be the returns of the trio over the past five years. Since 13 April 2010, Tiger Airways, Ezra, and Golden Agri-Resources’ shares have lost some 74%, 77%, and 21%, respectively, even after accounting for the effects of reinvested dividends.

By contrast, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has generated a total return of 21% over the same time frame.

None of the above is mean to say that the trio would necessarily be bad investments from this point on as we’ve yet to consider the valuation angle (after all, even a poor business would be a great investment at the right price).

But, for investors who’re out looking for strong businesses which can make for enriching long-term investments, they’d need to approach Tiger Airways, Ezra, and Golden Agri-Resources with some caution given the trio’s apparent lack of pricing power.

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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 doesn't own shares in any company mentioned.