Is SATS or QAF A Better Business According To ROIC

In a previous article, I had explained how to use the return on invested capital (or ROIC) to evaluate the quality of a business. For convenience, the math needed to calculate the ROIC is given below:

ROIC table

Generally speaking, a high ROIC will mean a high-quality business while a low ROIC will point to a business of low quality. This is important for investors as a stock’s performance is often tied to the performance of its underlying business over the long-term.

The simple idea behind the ROIC is that, a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business.

In this article, we will compare the ROIC of airport services company, SATS Ltd (SGX: S58), and food processor, QAF Limited (SGX: Q01).

S$ million SATS QAF
Revenue 1753.2 998.3
Profit before interest and tax 177.994 71.4
Operating profit margin 10% 7%
Net current asset 447 142
Cash 411 109
Tangible non-current asset 597 356
Tangible capital employed 633 389
ROIC 28.1% 18.3%

Here, we can see that SATS’s business generates a higher ROIC of 28.1%.

Nevertheless, ROIC is only one of the many metrics that intrepid investors need to consider.

Readers can also click here for a summary of the ROIC of a few other companies such as Singapore Exchange Limited (SGX: S68), Singapore Post Limited (SGX: S08) and Singapore Telecommunications Limited (SGX: ZY4).

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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 Director David Kuo doesn’t own shares in any companies mentioned.