An Important Investing Perspective On Raffles Medical Group Ltd And Straco Corporation Ltd

Raffles Medical Group Ltd (SGX: BSL) and Straco Corporation Ltd (SGX: S85) are companies in very different businesses.

The former runs a hospital in Singapore in addition to a network of medical centres and clinics in here as well as other territories such as Hong Kong, China, Japan, Vietnam, and Cambodia. The latter owns tourism assets in China and Singapore; these include two aquariums in China and the Singapore Flyer in Singapore.

But, the two companies do have something in common: Both have been big winners in the Singapore stock market over the past five years. Since 22 June 2011, Raffles Medical’s shares have gained 99% in price alone while Straco’s share price has climbed by 339%.

Their strong performance made me curious to see which has the higher return on invested capital (ROIC).

A gauge of quality

In a previous article, I had explained how the ROIC metric can be used to estimate the quality of a business. Here’s the math needed to calculate the ROIC:

ROIC table

Generally speaking, a high (low) ROIC will correspond with a high-quality (low-quality) business. 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.

This is important for investors to know as a stock’s price is often tied to the performance of its underlying business over the long-term.

It’s competition time

The table below shows the ROICs for Raffles Medical and Straco (I’m using data from the companies’ last completed financial years):

Raffles Medical and Straco ROIC table
Source: S&P Global Market Intelligence

We can see that Raffles Medical has a decent ROIC of 14.7%, although Straco’s ROIC of 40.9% is much higher. But before you conclude that Straco is the better investment choice when compared to Raffles Medical, it’s worth noting that the ROIC is only one of the many things about a business 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.