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A Search for High-Quality Businesses in Singapore’s Stock Market

Over the past few weeks, I have been comparing the return on invested capital (ROIC) of various companies in Singapore’s stock market.

The purpose of doing so is to find quality businesses. You see, the ROIC metric can be used to evaluate the quality of a business and I had explained how that’s done in a previous article. For convenience, I’ve reproduced the formula for the ROIC below:

ROIC table

The simple idea behind the ROIC is that a business that has a higher number for the metric requires less capital to generate a profit and is thus of a higher-quality. The reverse is true as well – a low ROIC would correspond to a low-quality business.

This is important for stock market investors to know because a stock’s business is often the driver of the stock’s price over the long-term.

So far, I have looked at the ROICs of eight companies, which include Singapore Exchange Limited (SGX: S68), Singapore Post Limited (SGX: S08), Singapore Telecommunications Limited (SGX: Z74), Sembcorp Marine Ltd (SGX: S51), Singapore Technologies Engineering Ltd (SGX: S63), Keppel Corporation Limited (SGX: BN4), Singapore Airlines Ltd  (SGX: C6L) and Sembcorp Industries Limited (SGX: U96).

Here’s how they stack up based on my past articles (you can see them herehere, here, here, here, and here):

ROIC table for SGX, SingPost, Singtel, SembMarine, ST Engineering, Kep Corp, SIA, Sembcorp Industries
Source: S&P Global Market Intelligence

In here, it’s obvious to see that Singapore Exchange is the clear leader with its unusually high ROIC. The company can produce such a high return because there is no real need for tangible capital to run its business.

As I continue to compile the ROICs of other companies and compare them with what I already have, I’d slowly be able to develop a mental database of companies that are likely to have quality businesses.

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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.