These 2 Companies May Have Great Managers in the Eyes of Warren Buffett

Credit: Fool Editorial Photos

Warren Buffett is arguably one of the world’s best investors.

Since assuming control of Berkshire Hathaway 50 years ago in 1965, he has helped grow the company’s book value per share (a proxy for the true economic worth of the firm) by a phenomenal 19.4% per year through intelligent investing in the stock market as well as shrewd acquisitions of private firms.

Along the way, he helped transform Berkshire from what was then a dying textile manufacturer into a bona fide conglomerate today with interests in insurance, rail roads, manufacturing, food & beverage, newspapers and more.

Given his achievements over the past 50 years, Buffett’s views on investing would carry plenty of heft. Here’s him in 1977 writing about how investors can judge a company’s managerial performance (emphasis mine):

“Most companies define ‘record’ earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding. … we believe a more appropriate measure of managerial economic performance to be return on equity capital.”

With Buffett’s words in mind, healthcare provider Raffles Medical Group Ltd (SGX: R01) and inspection and testing firm Vicom Limited (SGX: V01) may have great managers at their helm.

Here’s how Raffles Medical’s shareholder’s equity (the value of a company’s that’s “left over” for shareholders after all assets have been theoretically liquidated to settle all obligations), earnings, and returns on equity have changed since 2005:

Raffles Medical's changes in equity, changes in earnings, and returns on equity (ROE)

Source: S&P Capital IQ (click for larger image)

Here’s a chart for Vicom showing the same financial metrics over the same time period:

Vicom's changes in equity, changes in earnings, and returns on equity (ROE)

Source: S&P Capital IQ (click for larger image)

As you can see, both firms have been generating growth in earnings that have exceeded the increase in their shareholder’s equity in a good number of years. In addition, both Raffles Medical and Vicom have also consistently earned healthy returns on equity; the financial metric for the two had come in at an average of 16.2% and 22.9%, respectively, over the nine year period from 2005 to 2014.

There’s a good reason why investors may want to look at this measure of “managerial economic performance” when evaluating companies as potential investing targets.

In a likely reflection of the quality and growth of their businesses by the market, Raffles Medical’s shares have soared by 956% since the start of 2005 while Vicom’s has jumped by 529%. Those are great returns, especially when we consider how Singapore’s market barometer, the Straits Times Index (SGX: ^FSSTI), has gained just 62% over the same time frame.

Meanwhile, firms like Singapore Airlines Ltd  (SGX: C6L) and Neptune Orient Lines Ltd (SGX: N03) have seen their shares drop by 4% and 56%, respectively, in the same duration as above. The chart below plots their returns on equity since 2005 and you can observe the gulf in the managerial economic performance between the pairs of SIA and NOL, and Raffles Medical and Vicom; the former pair’s average returns on equity from 2005 to 2014 (at 6.6% for SIA and just 1.0% for NOL) had been way below that of the latter pair.

Singapore Airlines' (SIA) and Neptune Orient Lines' (NOL's) returns on equity

Source: S&P Capital IQ (click for larger image)

A company’s return on equity is not the sole determinant of how well it’d fare as an investment, but given Buffett’s words and what we’ve seen, it’s certainly a trait worth keeping an eye on in our quest to find winning shares.

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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 Berkshire Hathaway, Raffles Medical, and Vicom.