Finding good quality growth companies

 Finding good quality growth companies.

Elaboration of Section 17

This section introduces a powerful and simple visual technique for identifying the hallmark of a superior investment: a good quality growth company. It moves beyond complex financial ratios and provides a clear, at-a-glance method to assess a company's fundamental health and consistency.

The core of this section is the use of a logarithmic (log) scale chart to plot a company's key financial metrics over time.

1. The "Tramline" Chart: A Picture of Quality
The ideal chart for a good quality growth company displays two parallel, upward-sloping lines:

• Line 1: Revenue (The Top Line): This represents the total amount of money the company is bringing in from its business activities.

• Line 2: Earnings Per Share - EPS (The Bottom Line): This represents the company's profit after all expenses, taxes, etc., divided by the number of shares. It's what ultimately belongs to the shareholders.

2. What the Chart Reveals
When these two lines are parallel and sloping upwards on a log scale, it tells a compelling story about the company:

• Consistent and Predictable Growth (>15%): The upward slope indicates the company is growing. A log scale shows compound growth rates. A straight line on a log chart means a consistent percentage growth year after year. The section specifies a target of >15% per year.

• Quality of Growth: The fact that the lines are parallel is critically important. It means that as revenue grows, earnings are growing at the same rate. This indicates that the company is maintaining or even improving its profit margins. It is becoming more efficient, not just bigger.

• Management Excellence: Maintaining parallel lines requires skilled management to control costs and scale the business effectively without sacrificing profitability.

3. How to Use This Tool
This visual method serves as an incredibly efficient initial screening tool.

• A "Yes" Signal: A chart showing two clean, parallel, upward-sloping tramlines immediately flags a company as a potential high-quality candidate worthy of deeper investigation (the QMV analysis from Section 16).

• A "No" Signal: The section provides examples of charts to avoid—those with erratic, flat, or declining lines, or where the revenue and earnings lines are not parallel (indicating shrinking margins).

4. Evaluating Management: The Financial Ratios
The section also briefly touches on the quantitative side of assessing "Quality of Management," linking back to Buffett's criteria:

• Profit Margins: Must be better than competitors and, more importantly, must be maintained or improving over time.

• Return on Equity (ROE): This is a key metric. The section highlights that Buffett looks for consistent ROEs of >15% yearly.

  • ROE = Earnings / Shareholders' Equity. It measures how efficiently a company generates profits from every dollar of shareholders' capital.

  • A high and stable ROE is a strong indicator of a durable competitive advantage and capable management.

5. The Malaysian Context
The section concludes with an encouraging note that while such companies are rare, they do exist in the Malaysian market (Bursa Malaysia). The challenge for the enterprising investor is to find them.

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Summary of Section 17

Section 17 provides a simple yet powerful visual technique for identifying good quality growth companies by plotting their revenue and earnings per share on a log scale chart to reveal consistency, predictability, and fundamental health.

• The Ideal Pattern: Look for a chart where the revenue and EPS lines are parallel and slope upwards at a consistent rate (ideally >15% per year). This "tramline" pattern signifies strong, profitable, and well-managed growth.

• What It Indicates:

  • Consistent Growth: The company is expanding predictably.

  • Maintained Profitability: The company is controlling costs as it grows, preserving its profit margins.

  • A Well-Oiled Business: It is a sign of a durable competitive advantage and excellent management.

• Supporting Metrics: Management quality is further confirmed by a consistently high Return on Equity (ROE >15%).

In essence, this section teaches that you can often "see" quality before you calculate it. This visual filter allows an investor to quickly separate the exceptional, compounding machines from the average or struggling businesses, focusing their deep analytical efforts only on the most promising candidates. It is a practical application of looking for the "Great" businesses Buffett describes.