2 Reasons To Dislike Raffles Medical Group Ltd From The Perspective Of A Growth Investor

Growth investors are investors who aim to invest in companies that are able to grow their businesses at high rates in the future. In a previous article, I had pointed out reasons why growth investors may find Raffles Medical Group Ltd (SGX: BSL) to be an interesting candidate for further research. But, the company also has negative traits that investors should be aware of; in this article, I want to discuss two such traits.

A high valuation

Ideally as investors, we should always buy a stock at less than its actual economic value.

One way to gauge whether Raffles Medical has a high, fair, or low valuation is to compare its price-to-earnings (PE) ratio to the market’s. I will be using the SPDR STI ETF (SGX: ES3) as a proxy for the market, since the SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of the Straits Times Index (SGX: ^STI).

At a stock price of $1.01, Raffles Medical is trading at a PE ratio of 25.5 times. This is significantly higher than the SPDR STI ETF’s PE ratio of 10.5. Generally, it’s very difficult to find growth companies trading at P/E ratios below that of the market. Still, we want to make sure that the price we pay is fair to give us a reasonable return.

In the case of Raffles Medical, investors must decide whether paying a 143% premium to the market average is a reasonable price. Personally, I find the price a little too steep.

Declining growth rates

In my previous article, I pointed out that Raffles Medical has demonstrated a positive growth track record. Yet, one thing that we think investors should also pay attention to is the growth trend over the years, as seen below:

Source: Raffles Medical’s annual reports

On one hand, we saw that Raffles Medical has consistently grown its revenue over the last few years. However, sharp-eyed investors will also notice that the growth rate has dropped significantly in 2017.

This might raise an important question among growth investors: Is the recent drop in growth rate temporary or permanent?

If the answer is the former, then investors might see the company growing again in the future. If the answer is the latter, Raffles Medical’s slowing revenue growth rate in 2017 is concerning. This is especially so given the company’s high valuation.

The Foolish takeaway

From the above, we can see that while Raffles Medical has historically demonstrated solid track record of growth, investors should be aware of its current high valuation and its recent decline in revenue growth rate.

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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 Lawrence Nga doesn’t own shares in any companies mentioned. Motley Fool has recommendation for Raffles Medical Group.