Stock picking can be a time consuming activity, but very profitable if done right. Take it from Warren Buffett, who has amassed an investing empire and is personally worth about US$73 billion now. The world's second richest person knows what to look for in companies.
Take for example Ramsay Health Care Limited (ASX: RHC), a leading healthcare provider and the biggest private hospital operator in Australia. The business is successful, but is it the kind of stock that Buffett might like if he were investing on the ASX?
Here are three characteristics about the company that might match Buffett's investing criteria.
1) Steady and growing revenue and earnings
When revenue and earnings steadily rise over the years without big negative changes, it is easier to predict where that company is going in the long term.
In Ramsay Health Care's case, they both keep going up! Revenue has tripled since 2005 and earnings have grown an average 20% annually over the same time.
2) Solid performance and financial strength creates confidence in the business
The company's return on equity (ROE) is regularly in the high teens (17% – 19%) and book value per share has trended upward over the past 10 years. Long-term debt is possibly a little high possibly due to the amount of real estate required in owning hospitals, yet still at manageable levels. Ramsay Health Care is a straightforward business that performs well. That ticks off another box for Buffett.
3) Competitive advantages that last
Hospitals are very expensive to set up and operate. Not to mention, a new hospital would need to meet all kinds of regulations and certifications to operate. That could make it hard for a rival hospital to start up.
As Australia's largest hospital operator, Ramsay Health Care can work on bigger economies of scale. That keeps the costs down and the profits up. The healthcare provider has "protective moats" around the business which give it lasting competitive advantages. That's what Buffett really likes to see.
Ramsay Health Care has a constant stream of patients needing professional healthcare, so the business can grow naturally in the long term. It's the kind of growth stock you could use in your portfolio for reliable returns.
