Intelligent Investor's Notes

Company listed in BURSA with ROE > 20% and Low Debt

Two days ago, I have filtered out company listed in bursa with ROE > 20%. And, it have a total of 72 companies that met my criteria.
 
From DuPont Analysis, a company able to achieve high ROE from 3 appraoches:-
  1. Higher Net Profit Margin
  2. Higher Asset Turn Over
  3. Increase Financial Leverage
In my opinion (1) and (2) is a more desirable way to achieve a higher ROE compare to (3). There is no doubt leverage amplifies ROE in good time, but in bad times, it can hurt ROE badly. And, too much leverage can make a company becoming risky in time of economic downturn and financial crisis.
 
So, I am more keen to look for company with high ROE and low debt.  And, I manage to find out 14 companies that suite my taste.
 

 
Code
Name
ROE%
ROTA%
Debt Ratio
Leverage
Close Price
F.Y.
1
5182
GWPLAST
50.15
49.97
0
1.00
0.63
31/12/13
2
5204
PRESBHD
43.39
35.81
0.18
1.22
1.8
31/12/13
3
5229
CAP
33.41
28.14
0.16
1.19
0.31
31/12/12
4
5031
TIMECOM
32.01
27.27
0.15
1.18
4.3
31/12/13
5
5168
HARTA
30.55
24.82
0.19
1.23
5.92
31/03/13
6
7231
WELLCAL
29.67
25.17
0.15
1.18
1.5
30/09/13
7
0058
JOBST
24.63
19.48
0.2
1.25
2.44
31/12/13
8
5131
ZHULIAN
24
21.71
0.1
1.11
2.71
30/11/13
9
0008
WILLOW
22.55
18.52
0.18
1.22
0.81
31/12/13
10
0113
MMSV
22.24
18.77
0.16
1.19
0.21
31/12/13
11
6769
KELADI
21.74
19.92
0.06
1.06
0.33
31/01/13
12
0099
SCICOM
21.06
19.13
0.09
1.10
1.04
30/06/13
13
5189
MAXWELL
20.48
17.09
0.17
1.20
0.26
31/12/12
14
7100
UCHITEC
20.47
17.87
0.13
1.15
1.44
31/12/13
 
What to do next?
 
References:-
 
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Discussions
3 people like this. Showing 28 of 28 comments

NOBY

GWPLAST can rule out. Its ROE is very high cause it sold off its stretch film business to SCIENTX. It is now a shell company.
CAP is a China stock. Can be ruled out as well.
PRESBHD just underwent a bonus issue, you calculations took into account the increased share base ?

2014-05-28 15:03

Intelligent Investor

Thanks noby for your feedback.

2014-05-28 15:12

johnny cash

then i think another indicator you can put in that is momentum.. means strength of bullishness

2014-05-28 16:22

Intelligent Investor

hi johnny cash, i don't know how to derrive the momentum. feel free to add in the ratio on the selected stock.

2014-05-28 16:26

kcchongnz

Yes, rule out those red chips like CAP and Maxwell.

Then it will be a good list to explore further.

One thing it is natural to borrow money and make money in the corporate level, not the personal level.

Don't shun debts as you can see leverage (in corporate) can amplify return. Just make sure the debt is not excessive to the extend that there is high bankruptcy risk, say debt not more than equity.

Debts can actually go higher if the business has steady and predictable cash flow, eg cash flow from operations at least 5 times interest payment. And consistent free cash flows.

2014-05-28 18:51

Intelligent Investor

Mr Chong, thanks for your comment.

If the operating cash flow > 5 times interest payment, the financial leverage can be as high as 2?

But, if both ROE is same, do you favor the company with lower financial leverage?

2014-05-28 20:28

kcchongnz

II,

Yes to both questions.

If ROE is higher by certain margin, I prefer company with high ROE with higher leverage. The key is the clever use of leverage by management to enhance shareholder value.

2014-05-28 20:55

profit profits

I remember Australia SeekAsia buys Jobst, so is the ROE is before the selling or after selling ? TQ

2014-05-28 22:20

stockoperator

Two questions always remains:

1. High ROE/Profit Margin still remains a single Digit Number=It can be up trending or Down trending. It can still be down trending like Hartalega.

2. What price do we pay?

2014-05-28 23:01

stockoperator

You still cant invest if you dont know their Business well. Buy One lot each?

2014-05-28 23:05

stockoperator

Remember as well You will gain much more if your investment Now is a single digit ROE company then ONE day it improved to DOUBLE digit ROE.

Isn't it Better?

2014-05-28 23:09

stockoperator

In that sense you will be becoming better Investor because you are NOW Businessman with Business mind. Study some corporate development and Learn how Businessman do Business ya.

2014-05-28 23:14

stockoperator

Correct or Not? IF you know the Business well like KC knows about Pintaras, he knows it will improve from single digit to double digit then from 20 to 30. IF you don't know the Business well, you will never know How come my investment in ROE went down from double digit to single digit OR down trending.

2014-05-28 23:28

Intelligent Investor

Hi stockoperator, I agree that I might lack of business mind and I am not able to predict which company can growth from single digit to double digit.

I will accept the fact and trying to look for good company from the pass performance.

And, I am just aiming a 15% CAGR. I believe a good company with solid track record should able to help me to achieve my goal.

Last but no least, buffett did mentioned that "In the business world, the rearview mirror is always clearer than the windshield."

I start to filter out good company by looking at the ROE and I will further drill down slowly. I remember buffett say "if you want to reduce unforced errors (reduce losing investments), it helps to get familiar with stable, predictable businesses with long histories of producing above average returns on invested capital."

2014-05-28 23:59

Intelligent Investor

Maybe you can share with us how you going to perform the forecast on the business? I would like to hear from you on this and hope that I can improve as well.

Most of the time, I would agree on what Seth Klarman say - "The number of things that can go wrong (in business) greatly exceeds the number that can go right." And, it make the forecast a difficult jobs.

And, John Kenneth Galbraith argue that "We have two classes of forecasters: Those who don't know - and those who don't know they don't know." while Howard Marks did mentioned "In both economic forecasting and investment management, it's worth noting that there's usually someone who gets it exactly right... but it's rarely the same person twice."

2014-05-29 00:06

stockoperator

Now you have much better process of thinking. Remember what you just said and you will be doing well.

2014-05-29 00:18

stockoperator

Since you are with me at this hour and so hard working. Pick a sector you like. Study all the company in that sector. List down all its strength and weakness. Also the latest development of that sector Or company. See if that strength is the Economic Moat that will last for years and years to come.

2014-05-29 00:30

stockoperator

Is it Not every Businessman will do before they invest in a Business?

2014-05-29 00:38

Lance

lol

2014-05-29 10:23

youlee

Yeah, Maxwell!!!Anyone??

2014-05-29 13:47

Intelligent Investor

Hi stockoperator, thanks for your suggestion. I will try to work on this after I finish my current exercise. In this moment, I will focus on rateing the company based on its pass performance.

2014-05-29 13:55

Intelligent Investor

I think most of the retailer do not have confidence on the red stocks. We can only analysts the financial statement if we know that we can trust the financial statement.

There are around 1000 companies listed in bursa, we can find some companies that is suite our own taste. And, for me I like to pratices "When in doubt, just walk away....."

Let's hear what Mr. Chong comments on the red stocks. I would like to hear his advice too.

2014-05-29 13:59

stockoperator

Well compare apple to apple within the same sector Not apple to orange. Then you know today Loser can be tomorrow Winner and today Lower will be tomorrow Winner as well.

2014-05-29 15:39

Intelligent Investor

hi stockoperator, thanks for your comment. I hope that you can share your exercise with us and I can use it as a sample to start mine later.

2014-05-29 16:47

NOBY

II, pick up the book by Pat Dorsey on Little Book that Builds Wealth. There is some detail explanation there on how to identify the sources of economic moats.

2014-05-29 16:56

Intelligent Investor

Hi noby , thanks for the recommendation.

I will take a look if time availalble. There is too much to learn.

In the meantime, I have compiled some note on moat and franchise. Feel free to review and it will be appreciated if you can let me know if I make any mistake or missed out any important point.

http://intelligentinvestor8.blogspot.com/2014/05/moat.html

http://intelligentinvestor8.blogspot.com/2014/05/franchise-value.html

Thanks!

2014-05-29 17:07

stockoperator

Dear Intelligent and NOBI, that is why I ask you all reads tons of Annual Report Only then you will find One which is different.

It is what Mr Fong Siling did through his life, this is what Warren and Charlie did as well through out their lives, reading and reading Annual Report.

And to be good in fundamental analysis like KC, you need to do tons and tons of analysis as well.

There is No short cut around.

2014-05-29 17:35

mk88

interesting topic, any goody, good and cheap?

2014-05-29 18:08

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