In our earlier article on the “The Magic of Compounding” we demonstrated why is time an investor’s best friend. Today we will show you from a financial basis, how compounding helps in identifying companies that have added value to shareholders.
Although the past doesn’t repeat itself, it rhymes. Hence it pays to look out for companies that have been increasing shareholder value over the years!
Let’s Introduce The Following Companies!
The following companies were selected as they are:
1) In relatively easy-to-understand operations;
2) Business not cyclical in nature; and
3) Household names
Old Chang Kee Ltd (SGX:5ML)
Old Chang Kee specializes in the manufacture and sale of food products with the curry puff as their signature product. With over 99% of FY2013’s revenue derived from Singapore, they would be viewed by most Singaporeans as an accessible go-to local snack outlet.
Super Group Ltd (SGX:S10)
Super Group is an integrated instant F&B brand owner of instant F&B that manufactures and distributes food ingredients (Creamer and dried coffee) as well as branded consumer products (Instant coffee, instant cereals and instant teas mixed products) in Southeast Asia and China.
Raffles Medical Group Ltd (SGX:R01)
Raffles Medical is a healthcare company, engaged in the activities relating to the operation of medical clinics and other general services. Founded in 1976 with two clinics, Raffles Medical has grown over the years to serve over 1 mil patients today and 6,500 corporate clients inclusive of local and multi-national corporations and government agencies.
Let’s Get Down To Business!
From the above data, we can see that all of the 3 companies in question have rather solid financials.
Both Raffles Medical and Super Group had rising Operating Profit, Net Income and Operating Cash Flow since 2008! One hit wonders are a dime a dozen but if a company can continue with double digit growth in all of the above profitability metrics, they have to be doing something right.
Taking Raffles Medical as an example, with the low interest environment since the days of the Global Financial Crisis, they have grown at an astounding pace at a CAGR of > 20% in their bottom line across the board. With an average CAGR of > 20%, based on the rule of 72, they would have doubled every 3.6 years which was clearly reflected in the quadrupling of their Asset and Equity since FY2005. This trend in profitability also corresponded with the average Return on Equity and Return on Asset in double figures over the past 8 FY (Fiscal Year) Ends. This was also reflected in the almost linear increase of their net profit over the years. If valued on a P/E basis, even if the P/E multiple remains the same, the market price would rise due to an increase in earnings consistently compounded over the years!
Value In Action
At the end of the day, the author was of the opinion that this exercise works best as a quantitative screening technique. A company that has good financials more often than not has to be doing something right (Considering that they aren’t cooking their books).
Companies that pass this initial screen aren’t necessary always a good investment, but it’s a good start!
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.