In a previous article, I had run through the return on invested capital (ROIC), an important financial metric that can give us insight on the quality of a business. Here’s the formula for the ROIC number that I had shared in the article:
In general, if a company can showcase a high ROIC, it will mean that it’s in possession of a high-quality business. The reverse is also true – a low ROIC is a signal that a company’s business is of low quality. Now, this is important for investors as a stock’s performance over the long-term is often tethered to how its business performs.
The simple idea behind the ROIC is that since a business with a high ROIC requires less capital to generate a profit, it thus gives investors a high return per dollar that is invested in the business.
Searching for high ROIC businesses
I thought it can be a good idea to compare companies in Singapore’s stock market based on the ROIC metric. So far, I have thrown mail and logistics services provider Singapore Post Limited (SGX: S08) into the ring to compete against Singapore Airlines Ltd (SGX: C6L), Singapore Telecommunications Limited (SGX: Z74), and Sembcorp Industries Limited (SGX: U96).
SingPost has come out tops in all three bouts (see here, here, and here). As I continue looking at the ROICs of the companies across Singapore’s stock market, I’m turning my attention to Singapore Technologies Engineering Ltd (SGX: S63), a conglomerate with a few engineering business segments that include Aerospace, Electronics, Land Systems, and Marine.
With that, let’s look at the ROICs for both SingPost and ST Engineering (I’ll be using numbers from both companies’ last completed fiscal years):
The table above shows that both SingPost and ST Engineering’s ROICs are high at 23.6% and 22.2% respectively. But ROIC is only one of the many important financial ratios for an investor to take into consideration.
While all that we’ve seen above can be important and insightful, they should be used only as a starting point for further research and shouldn’t be taken to be the final word on the investment merits of any of the aforementioned companies.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.