7 Reasons Why Riverstone Holdings Limited Can Continue Being a Wonderful Investment

Gloves maker Riverstone Holdings Limited (SGX: AP4) has been a wonderful winner in our local share market since its listing on November 2006. At S$1.30 currently, Riverstone’s share price has climbed by more than 300% since closing at S$0.315 on its first day of trading.

In comparison, the Straits Times Index (SGX: ^STI), Singapore’s market benchmark, has gained “just” 135% over the same timeframe.

This raises the question: Can Riverstone continue being a great investment? It won’t be an easy question to answer, but some clues can perhaps be gleaned from the quality of the company’s business, keeping in mind the idea that it’s the performance of a share’s business which ultimately dictates its price over the long-term.

Checking on quality

A useful tool to help us dig into the quality of a business would be a nine-point checklist that was developed by investor and author Pat Dorsey.

The checklist, which is found in Dorsey’s book The Five Rules for Successful Stock Investing, is meant to help quickly sift out companies which might be worthy of a deeper study by investors. It contains the following nine 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.

Companies which score a “Yes” on all or most of the criteria within the checklist would likely have a quality business. For a deeper look as to why these characteristics make sense in the context of finding a solid business, you can check out my colleague Chin Hui Leong’s three-part series on the subject: Part 1; Part 2; and Part 3.

Some big thumbs up

As a quick introduction, Riverstone is a manufacturer of nitrile and rubber cleanroom gloves as well as premium nitrile gloves that are used in the medical industry. The company currently has an annual production capacity of 4.2 billion gloves and will be adding another 1 billion in capacity by the end of the year.

With all that out of the way, let’s get going with how Riverstone has fared against Dorsey’s criteria.

The company has more than seven years’ worth of history as a publicly-listed company; it has quarterly earnings releases; and it possess a sizeabe market capitalisaion of nearly S$500 million at the moment. These traits would mean that the first criterion would deserve a tick in the box.

Chart 1 below plots the history of Riverstone’s operating income, net income, operating cashflow, and free cash flow from 2007 to 2014. As you can see, the first three financial metrics have been growing steadily through the years while free cash flow has been inconsistent.

With Chart 1’s figures, the hurdles set in criteria 2, 3, and 5 have been handily met. Criterion 7 might deserve a “No” response, but investors should note that Riverstone’s erratic free cash flow is partly a result of the firm spending capital to fund future growth by building up its glove production capacity – that’s a good thing for shareholders if the additional capacity is met by more demand in the future.

Chart 1, Riverstone's operating income, operating cashflow, free cashflow, and net income from 2007 to 2014

Source: S&P Capital IQ

The next chart – Chart 2 – shows Riverstone’s returns on equity and key balance sheet figures for the same time period as above. We can observe that Riverstone has not only managed to generate very strong returns on equity over the years (from 2007 to 2014, the important financial metric has never been below 16.7% and has averaged out at 18.6%), it has also done so with a rock-solid balance sheet that has had either minimal or zero debt.

It’s a noteworthy accomplishment by Riverstone because companies often use leverage to help juice their returns on equity. But as we’ve seen, that’s clearly not the case with the firm.

With that, Criteria 4 and 6 would both deserve a big thumbs up.

Chart 2, Riverstone's return on equity (ROE), total cash, and total borrowings from 2007 to 2014

Source: S&P Capital IQ

We’re down to the last two criteria on Dorsey’s checklist and for the penultimate one, Riverstone manages to shine there too – the firm has not logged any sizeable one-time charges in its income statement for the time period we’re looking at.

Chart 3, Riverstone's share count from 2007 to 2014

Source: S&P Capital IQ

For Dorsey’s last criterion, we can turn to Chart 3, which plots the changes in Riverstone’s share count from 2007 to 2014. The company’s share count has been climbing at an average rate of 2.6% annually over the years – that might not sound like much, but it’s still something for investors to keep an eye on. For that reason, Riverstone would chalk up a “No” on criterion 9.

A Fool’s take: 7 points for a winner

In a tally of the scores, Riverstone has aced seven of the nine criteria in Dorsey’s checklist. This may be taken as a sign that the firm has a good business and thus stands a chance of being a solid investment going forward.

But with that said, investors have to realise that more work needs to be done beyond this before any investing decision can be made – Dorsey’s checklist is meant to help with just narrowing the field.

The quality of a company’s business is just one important piece of the puzzle that’s made up of other equally important pieces like valuation and the firm’s future prospects, amongst others.

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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 companies mentioned.