If there is one thing that Warren Buffett likes – more than cokes and burgers – it is predictability. It is for that reason that he focusses on the probability that a company will report a certain rate of earnings growth.
One measure that he looks at closely is the Net Income Margin. He wants to see some semblance of consistency, which, thankfully, Straco Corporation (SGX: S85) is able to provide.
The median Net Income Margin for the leisure company is 30%. What’s more, over the last decade, the bottom-line profit for the company, which operates the Singapore Flyer, has climbed steadily from S$1 million to S$49 million. Last year’s Net Income Margin was an enviable 38%.
Buffett also wants to see a company make proper use of its assets. Straco Corporation is reasonably efficient. Its median Asset Turnover of 0.35 implies that is has generated S$35 of sales on every S$100 of assets at its disposal.
Volatility is something that Buffett considers. Volatility in this instance is not the violent movement of share prices. Instead, it is earnings volatility, which can be caused by businesses that take on too much debt.
Straco had Total Assets of S$335 million and Net Liabilities of S$100, which equates to a Leverage Ratio of 1.44. That compares well to the median Leverage Ratio of the Singapore market of 1.80.
Straco Corporation ticks many of the boxes that Buffett would like to see in a good investment. On the balance of probabilities, he might be tempted to take a ride on the Singapore Flyer.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock - Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock - Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool’s purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.