Raffles Medical Group Ltd (SGX: BSL) is one of the largest private healthcare groups in Singapore. Established in 1976, it now operates in a total of 12 cities across Singapore, China, Japan, Vietnam and Cambodia.
Of late, the company’s stock has not been doing well. From an all-time high of S$1.675 seen in May 2016, Raffles Medical’s shares closed at S$1.08 each on 18 May 2018, down by 36%.
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One of the main possible reasons for this poor performance is that Raffles Medical’s business growth has slowed to a crawl. From 2014 to 2017, the company’s earnings per share has stayed at around 4.0 Singapore cents throughout.
However, instead of looking at just the earnings per share alone, there’s another angle to analyse a company, and that would be to look at its return on equity (ROE).
Warren Buffett, one of the best investors in the world, looks for companies that have good ROEs. The ROE reveals a company’s efficiency at generating a profit – it shows how much profit it generates with the money shareholders have invested in it. Generally speaking, the higher the ROE, the better the company’s management is at working shareholders’ capital.
The ROE for Raffles Medical from 2013 to 2017 is shown below:Source: Raffles Medical 2017 annual report
From an ROE of 13.7% in 2013, the figure has come down to 9.6% in the latest financial year, which is not impressive at all. But, there’s a catch.
The calculation of the ROE figures above include the value of the investment properties that Raffles Medical has been developing. These include the Raffles Hospital extension in Singapore (which opened in January this year) and two new hospitals in the Chinese cities of Shanghai and Chongqing that are currently still under development. After adjusting for these three investment properties, Raffles Medical’s ROE from 2013 to 2017 becomes an entirely different picture. Source: Slideshow from Raffles Medical Group’s 2017 annual general meeting
What we see now is that the company’s adjusted ROE has improved from 13.7% in 2013 to 19.3% in 2017. A ROE of above 15% is typically robust. The adjustment to Raffles Medical’s ROE makes sense because the three aforementioned investment properties did not contribute at all to the company’s bottom line from 2013 to 2017. So, removing them gives a better view of the overall profitability of the business.
An improving ROE indicates that the company is increasing its ability to generate a profit, which points to a competitive advantage as well. A rising ROE increases the underlying value of the business, which should eventually be reflected in the stock price. Raffles Medical’s rising adjusted ROE figures over the years show that the company is perhaps not as bad as Mr Market has made it out to be. And a higher ROE is just what the doctor ordered…
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Raffles Medical Group Ltd. The Motley Fool Singapore contributor Sudhan P owns shares of Raffles Medical Group Ltd.