An Investor’s Look at Riverstone Holdings Limited and Dairy Farm International Holdings Ltd from the Bottom Up

In a previous article, I had explained how the return on invested capital (ROIC) metric can be used to estimate the quality of a business.

For convenience, the math needed to calculate the ROIC is given below:

ROIC table

In general, a high ROIC will correspond to 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 price is often driven by 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 here, I want to compare the ROICs of Riverstone Holdings Limited (SGX: AP4) and of Dairy Farm International Holdings Ltd (SGX: D01). You may wonder why I’m comparing two very different businesses – after all, Riverstone is a rubber gloves manufacturer while Dairy Farm is a pan-Asian retailer.

Thing is, a comparison of the ROICs from companies of different industries can help provide us with perspectives on the economic characteristics of the industries in question.

The following table shows how Riverstone and Dairy Farm stack up:

Riverstone and Dairy Farm ROIC table
Source: S&P Global Market Intelligence

From the table above, we can see that Dairy Farm’s ROIC of 414% is much higher than RIverstone’s ROIC of 37.2%. The reason for Dairy Farm’s better showing here is due to the nature of its business of having negative working capital.

But, it should be noted that the ROIC is only one of the many financial figures that investors need to consider.

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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.