Based on my last post, I have provided the net income and revenue trends of companies in my stock portfolio. All the companies show a steady growth in their net income and revenue through a 10 years period except for Parkway Holdings and Tat Hong Holdings which show a lower net income for the most recent year because of individual losses on some exceptional items (see my pevious post). I view these recent losses to their net incomes as non-recurring one-off exceptional losses on items which did not stem from any permanent deteroriation in their business fundamentals. So, it should not affect their future growth in net income.
Recapitulation on the different metrics
Net margin
Net margin shows how much of each dollar of revenue a company keeps as earnings after paying all costs of doing business.
Asset turnover
Asset turnover measures how efficient a company is at generating revenue from each dollar of assets.
Financial leverage
Financial leverage shows how much debt a company has relative to shareholders' equity.
Return on asset (ROA) (%)
Return on assets (ROA) shows the amount of profits a company is able to generate per dollar of assets.
Return on equity (ROE) (%)
ROE shows how much returns a company can generate for its shareholders' equity.
Method of presentation
I shall present the comparison of companies in my portfolio through using charts and provide a short discussion after each metric I use to make the comparison. As usual, I do not guarantee any completeness or accuracy in my discussion, data and charts. Readers are encouraged to do own individual assessment and form independent opinions as well.
Note:- All following charts show trends in the different metrics of comparison over a 10 years period except for Tat Hong Holdings which shows only an 8 years trend. The 1st and 2nd year data for Tat Hong Holdings are shown as '0' on the charts as it was not available.
Net income comparison
Based on the chart, it shows that all companies have steady growth in their net incomes over last 10 years (ignoring most recent year's decrease due to the 2008 financial crisis or one-off exceptional item losses). The winner is Keppel Corp with the most significant rise in net income trend. This shows Keppel Corp's ability to grow its earnings at accelerated pace compared to the rest.
Revenue comparison
All companies show steady rise in their revenues over last 10 years. This shows consistent ability to increase sales. A company has to keep increasing sales to grow its business. Otherwise, the business may stagnate over time if sales remain flat over a long period. Flat sales or decreasing sales over a long period may suggest there is no more potential for growth in the company. As investors, one has to decide carefully whether is it wise to invest in a company without much potential for growth (suggesting the business is either mature or losing its economic moat facing tougher competition or facing a more difficult operating environment e.g. due to tougher business regulations).
Net margin comparison
All companies show a steady increase in their net margins over last 10 years. Ignoring any exceptional items for any years affecting the net margins, only Tat Hong Holdings and Keppel Corp's net margins show the most stable increase over last 10 years. Net margin measures the profitability of a business (how much of each dollar of revenue a company keeps as earnings). It also shows whether a company is able to maintain a low cost of doing business. It seems Tat Hong Holdings and Keppel Corp are able to achieve a slightly higher net margin (suggesting their businesses are more profitable and they are able to maintain a low cost of doing business??).
Asset turnover comparison
From the chart, it suggests that SembCorp and Tat Hong Holdings are able to maintain a higher asset turnover over the rest. SembCorp leads the rest by having the highest asset turnover. Asset turnover measures how efficient a company is at generating revenue from each dollar of asset. It also simply measures how productive is the asset of a company. Thus, SembCorp seems to own assets that are highly productive for its business.
Financial leverage comparison
Parkway Holdings and Tat Hong Holdings have slightly lower financial leverage than the rest. All companies have financial leverages lower than 3 which is still not much cause for concern. This suggest that these companies do not have excessively high amounts of debts compared to shareholders' equity, and their capital structure is sound. A company has to use debts and equity to fund it's business. However, businesses that can maintain low financial leverage and yet is profitable for a long period is commendable suggesting that such businesses are funding their operations mainly through earnings made (since such businesses have good economics), and they only need to employ little amounts of debts or none at all.
Return on asset (ROA) (%) comparison
All companies show steadily rising return on asset (ROA) over last 10 years (ignoring one-off non-recurring exceptional increase shown by Parkway Holdings possibly due to gains from disposal of assets when setting up Parkway Life REIT). ROA measures how much profits a company generates on each dollar of asset. A steadily rising ROA suggests a company is able to continually acquire and own assets that are more productive and is also able to use the productive assets efficiently to generate more profits.
Return on equity (ROE) (%) comparison
All companies show steadily rising return on equity (ROE) over last 10 years. Most companies have managed to grow their ROE to current level of more than 15% which is generating good returns for their shareholders' equity. However, only ROE for Parkway Holdings is consistently below the rest for most years and under 15% benchmark for acceptable good overall profitability for most types of businesses (ignoring one-off exceptional increase in 2007 due to gains from disposal of it's assets).
Discussion points:- It is difficult if not impossible to find really cream-of-the-crop companies that are excellent all-rounder in many measured metrics. It is even more difficult to find companies that can consistently out-perform over a long period of time.
I believe as long as a company shows a general rising trend in many metrics of measurements over a long period (more than 10 years) and is perceived to continue doing so in many years to come, it will make good sense to invest in such companies with consistent excellent economics in their favour.
Past performance of a company may not guarantee future performance. An investor after selecting a good company to invest in has to continually monitor the company's progress and watch for any permanent deteroriation in business economics in future years. As long as the company continues to perform well in it's business, it will continually generate good returns (compounded annually) for it's shareholders the longer the shareholders stay invested with such excellent businesses.
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