Checking Up Raffles Medical Group Ltd’s Business Fundamentals

Over the last three years, healthcare services provider Raffles Medical Group Ltd (SGX: BSL) has seen its stock price fall by 14%. Investors are probably not all that happy with that performance and may be asking themselves whether it’s time to sell.

At the same time, those that don’t own Raffles Medical could be wondering if it’s fallen into bargain territory. An analysis of the company could help us with these questions.

If you ask me, there are two primary parts to analysing a company. There’s an analysis of the intangible factors of the company (such as how innovative is the management team, and whether its products or services are well-loved by users), along with an analysis of the key numbers and ratios.

These analyses can give us very different viewpoints into a company, and I view both as essential. An analysis of the company from a non-numerical perspective can’t really give a full picture without also digging in to the numbers. And vice versa.

Today we’re going to tackle the numerical analysis of Raffles Medical. Specifically, we’re going to be talking about the following key ratios: (1) Growth ratios, (2) Profitability ratios, and (3) Debt ratios.

Raffles Medical’s growth ratios

We love to see growth at the companies that we invest in because a growing company can create a huge amount of value over the course of time. Research from Swiss bank Credit Suisse goes as far as to say that “Sales growth is the most important driver of corporate value.”

Here are the current values for Raffles Medical’s key growth ratios:

Source: S&P Global Market Intelligence

Why exactly do I like these ratios? After that quote above from Credit Suisse, my interest in revenue growth should be pretty clear. But, in short, I see revenue growth as the best overall view into whether a company is actually growing.

Of course profit growth is also important. Except when a company is still very young, we’d like to see that profits are growing in line with, if not faster than, revenue. If there’s strong revenue growth without profit growth, that could be a sign of a problem.

Finally, growth in book value can give us another lens to look at a company’s growth. As a company earns profits over time and (hopefully) experiences compounding growth on those profits, investors should see its book value grow.

Investors do, however, need to take notice of dividends and regular share buybacks, as both of these can slow the growth of book value, even though they can still be good for investors. Raffles Medical’s stock, for instance, has a dividend yield of 1.8%, so that will have some impact on the growth of its book value.

Raffles Medical’s key profitability ratios

Revenue growth is only good for us as investors if it can actually bring in profits – whether that’s today, or in the case of young, fast-growing companies (which Raffles Medical is not), in the future.

For me, there’s not a single best measure of profitability. What we see from one measure can be confirmed or better explained when we look at it in conjunction with another. Sometimes two ratios might even contradict each other and reveal where we need to focus our research on. In short, it’s great to look at more than one measure of profitability. What follows are three key measures for Raffles Medical.

Source: S&P Global Market Intelligence

And, here is another view, this time with the numbers from each of the past five years.

Source: S&P Global Market Intelligence

The two profit margins – the operating margin and net profit margin – help us understand how profitable the business is. That is, how many cents of profit remain of each dollar of revenue after the relevant expenses are deducted. Naturally, the higher they are, the better. Meanwhile, the return on equity tells us efficient the company is in generating a profit with the shareholders’ capital that it has.

Raffles Medical’s debt ratios

Even when we find a company that is growing and is profitable, we still have to pay attention to the risks. And, a heavy debt load can be a big risk – sometimes it could even be a reason to avoid investing in a company.

The absolute value of the debt load is usually not all that helpful to us. So in my analyses, I start with two debt ratios.

The debt-to-equity ratio compares a company’s total debt to its book value and gives us a view on how large the debt burden is in comparison to the size of the company. Next, I look at EBITDA (earnings before interest, taxes, depreciation, and amortisation) versus interest expense. EBITDA is a quick-and-dirty measure of a company’s cash flow, and so the comparison between it and the interest expense helps us to see whether the company is able to easily cover its interest payments.

The average values over multiple years are less helpful to us here, so this time we’ll just look at the values in each of the past few years for Raffles Medical:

Source: S&P Global Market Intelligence

What’s “good” or “not so good”? Of course that depends on the particular company, but my rule of thumb is that a debt-to-equity ratio of more than 100% is when I start to get concerned. Meanwhile, I generally like to see an EBITDA-to-interest ratio of above five – if the ratio’s below three, that’s when I really start to worry.

As with all ratios, the direction of movement is also important. If the ratios are improving over time, that often gives me more confidence in a company even if the current value isn’t where I’d like it to be. At the same time, if the current value is so-so, but has been deteriorating over time, I would likely want to dig in a bit further to see what’s driving that.

What now?

I’ve only focused on a few key ratios and a few areas here. They can give us a good start. But, a few financial ratios can only take us so far. So for each number, it’s important to go further and ask yourself “why?” and “ok, now what?”

We ask “why” because these ratios are a starting point for us to understand a company. As I mentioned above, we need a grasp of both the numbers and the less tangible aspects of a company to get a full understanding.

And we can use the numbers and ratios we’ve studied above as a jumping-off point to ask good “why” questions that will help us get to that understanding. For instance, if we see high profitability, asking why the company is able to earn that can help us figure out whether there’s something temporary that’s padding profits, or if the company has a really great competitive advantage.

And we ask “ok, now what?” because these figures are by their nature, history. As investors, we want to get an idea of what will happen of the next few years. Knowing historical numbers can help us with that, but only when we take them to that next step of “now what?”

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Disclosure: 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 Raffles Medical Group. The Motley Fool Singapore has a recommendation for Raffles Medical Group.