After we published , two readers posted what they reckoned to be companies that were also "ideal businesses" by Warren Buffett's definition. 

To recap, Buffett said at the AGM of Berkshire Hathaway on 1 May 2016 (Singapore time): 
"The ideal business is one that takes no capital but yet grows. There are a few businesses like that and we own some...  Obviously, if you have a business that grows, gives you a lot of money every year, and it isn’t required in its growth, you get a double-barrel effect from the earnings growth that occurs internally without the use of capital, and then you get the capital it produces to go and buy other businesses." 


Here we highlight three of the companies pointed out by readers and the tables show that indeed they generate a lot of operating cashflow and spend little on capex: 

Net cash from operations 
(2011-2015)
Purchase of Property, Plant, Equipment
(2011-2015)
S$45.2 m S$16.2m

♦ Nordic Group: The table shows five years of data which are commendable.

Even more impressive is the performance in 2014 and 2015 during which Nordic enjoyed operating cashflow of S$26.3 million while spending only S$2.0 million in purchasing PPE (property, plant and equipment).  .

This is likely to stem from MultiHeight Scaffolding (acquired in 2012) and Austin Energy (acquired in 2015).

These are service businesses focusing on petrochemical clients and require relatively low capex but generate a lot of cashflow. 

Austin workshopAustin Energy's workshop where insulation materials are fabricated for use on petrochemical plants. NextInsight file photo.

Net cash from operations 
(2011-2015)
Purchase of Property, Plant, Equipment
(2011-2015)
S$17.5 m S$2.8m

♦ Captii: Captii's investments are primarily concentrated on technology and telecoms businesses that operate under the brands Unifiedcomms (www.unifiedcomms.com) and GlobeOSS (www.globeoss.com).

As a result of its strong cashflow, Captii had S$13.5 million in net cash as at end-2015 while its market cap is S$15.7 million base on the recent share price of 49.5 cents.

It's an illiquid stock, as you would have guessed.

Shareholders find it difficult to sell out but thrive on its 5.1% dividend yield.

Net cash from operations 
(FY2012-2015)
Purchase of Property, Plant, Equipment
(FY2012-2015)
S$24.3 m S$3.98m

♦ ISOTeam: It's the only listed company with a Repairs & Redecorations (R&R) segment -- which is largely painting jobs for the facade of HDB blocks. ISOTeam mostly subcontracts the work out. 

It has another major segment -- Addition & Alteration, which upgrades hawker centres and neighbourhoods.

ISOTeam makes good money on its business and needs to spend little on new equipment.

On its books, ISOTeam's gondolas and other machineries have a net carrying value of only S$2.7 million as at end of FY2015.
 

Stock Operating cashflow over capex (X)
1. Straco Corp 21.2
2. Best World 12.3
3. Boardroom 9.7
4. Captii 6.3
5. ISOTeam 6.1
6. Vicom 5.7
7. Nordic 2.8

As we have said in the previous article, we have covered only two metrics, core though they are to Buffett's idea of an ideal business.

T
here are several other important considerations for investors to examine, including the companies' dividend payouts, sustainability of business performance, industry dynamics going forward, etc. 


Operating cashflow minus capex gives rise to free cash flow. Instead of calculating the absolute free cash flow, we calculate the ratio derived from dividing the operating cashflow by the capex, so that we can compare the 7 companies highlighted in our 2 stories.

Straco is No.1, having generated 21.2X more operating cashflow than its capex. This is an amazing aspect of its business. See the table for the rest of the 7 companies.

If you wish to highlight stocks that are just as 'good', post them in the Comments below. 


Share Prices

Counter NameLastChange
AEM Holdings1.070-0.010
Alliance Mineral0.170-
Anchor Resources0.018-
AusGroup0.029-
Avi-Tech Electronics0.290-
Best World Int.1.890-0.040
China Sunsine1.2300.020
CSE Global0.520-
Food Empire0.5550.010
Geo Energy0.1800.003
Golden Energy0.220-0.005
GSS Energy0.1010.001
HMI0.545-0.005
ISDN Holdings0.2300.005
KSH Holdings0.530-0.015
Miyoshi0.0560.004
Moya Asia0.088-
Nordic Group0.3250.005
Oxley Holdings0.295-0.005
REX International0.0790.001
Riverstone1.080-0.030
Roxy-Pacific0.410-
Sing Holdings0.405-
SingMedical0.460-0.010
Sino Grandness0.055-0.001
Straco Corp.0.780-
Sunningdale Tech1.3400.010
Sunpower Group0.525-0.010
The Trendlines0.0860.001
Tiong Seng0.2450.005
Uni-Asia Group1.180-
XMH Holdings0.185-
Yangzijiang Shipbldg1.580-0.020

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