An Important Investing Perspective On Straco Corporation Ltd And Hour Glass Ltd

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

In general, a high-quality business will have a high ROIC while the reverse is true: A low-quality business will have a low ROIC. The simple idea behind this is that a business with a higher ROIC will require less capital to generate a profit. It thus gives investors a higher return per dollar that is invested in the business.

These are things investors may want to know as a stock’s business performance is often the primary driver of its price over the long-term.

Here’s the math needed to calculate the ROIC:

ROIC table

A comparison of the ROICs of Straco Corporation Ltd (SGX: S85) and Hour Glass Ltd (SGX: AGS) will be made in this article.

It seems odd that I’d be placing two very different businesses side-by-side (Straco owns tourism assets in China and Singapore while Hour Glass is a pan-Asia luxury watch retailer). But, doing so could actually provide us with useful insights on the economic characteristics of different industries.

The following table shows Straco and Hour Glass’s ROIC (I’m using data from their last completed fiscal years):

Straco and Hour Glass ROIC table
Source: S&P Global Market Intelligence

The table above shows that Straco’s ROIC of 40.9% is over twice Hour Glass’s still respectable 16.8%. A reason for the difference in the ROICs of the two companies could be Hour Glass’s need for a high amount of inventory in its business (you need inventory if you’re running a retail operation) – in comparison, Straco hardly has any inventory.

Anyway, it’s worth noting that the ROIC is one of many other important parts of 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.