5 Signs of Winning Companies – Part 1

To find a winning company, one way is to find one with a good management team that is able to steer the company to greater heights.

Unfortunately, evaluating management teams tends to be subjective and hard to quantify. But that’s not always the case, according to value investor Yeo Seng Chong from the Yeoman Capital Management.

He believes investors can engage objective measures as well.

To be sure, Yeo is someone we lend our ears to. His flagship fund has turned in a hearty 13.4% annual return for more than 17 years under his management. This track record handily beats the annual return of the SPDR STI ETF (SGX: ES3) of 8.6% from its inception on 11 April 2002 till the end of last month. The SDPR STI ETF is a proxy for the market indicator the Straits Times Index (SGX: ^STI).

So what are these five signs? I will cover two of them in this article, and the other three, in a second part linked below. Without further ado, here are five signs we can look out for.

Listing history and track record

Firstly, Yeo prefers companies which has at least five years of public filings. This can form a prerequisite for any company that we look for. The public filings would allow the investor to observe the performance of the company “under the public eye” as well as obtain audited financial statements from the company over the time period. From there, what Yeo would be looking for is honest management who are competent.

It is the search for competence in this case leads us to the second sign …

Financial track record

Among the signs of competent management is the maintenance of a good ROE base and a solid earnings track record over the long term. To elaborate, Yeo does not prefer to see severe erosion in a company’s earnings or sharp write-downs in the company earnings over time. A strong balance sheet is also a consideration.

As an example, glove manufacturer Riverstone Holdings Limited (SGX: AP4) may make the cut. As you can see from the chart below, the company has maintained an ROE above 15% over the period below. Furthermore, its total cash levels has increased over the timeframe while debt levels were kept almost zero.

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

Source: S&P Capital IQ

But a good ROE alone may not be enough for Yeo. The value investor has another three signs to share – and that will be in the second part of the article that you can find right here!

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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 contributor Chin Hui Leong doesn't own shares in any company mentioned.