The Better Business: Singapore Telecommunications Limited vs. StarHub Ltd

A useful way to compare the quality of two businesses can be the return on invested capital, or ROIC for short. Here’s the math needed:

ROIC table

I’ve explained the ROIC metric in greater detail in an earlier article that can be found right here, but the basic idea is that a business with a high ROIC requires less capital from shareholders to generate a profit compared to one with a low ROIC.

As such, the high-ROIC business is of higher quality than the lower ROIC business. This is important for stock market investors because a stock’s long-term price performance is often linked to how its underlying business does.

With this in mind, how would Singapore Telecommunications Limited (SGX: Z74) and StarHub Ltd (SGX: CC3) stack up? Both companies are in the business of providing telecommunications services and so, investors in Singapore who would like exposure to that space may wonder which of the two would be the stronger company.

Here’s how their ROICs look like (I had used data from the companies’ last completed fiscal years):

Singtel and StarHub ROIC table
Source: S&P Global Market Intelligence

Based solely on the ROIC metric, we can see that StarHub is the superior business when compared to Singtel.

But, Singtel is the company with the diversified income base as it has exposure to foreign markets such as Australia, India, Thailand, and more. In fact, 74% of Singtel’s EBITDA (earnings before interest, taxes, depreciation, and amortisation) in its fiscal year ended 31 March 2015 had come from outside Singapore’s shores. StarHub, on the other hand, is a Singapore-centric business. Singtel’s diversity, in my opinion, allows it to have a higher chance of remaining profitable over the long-term.

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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.