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An Important Investing Perspective on Vicom Limited

In an earlier article, I had shone light on the return on invested capital (ROIC) metric and explained how it could be used to estimate the quality of a business.

The idea behind the ROIC is simple: A company with a higher ROIC requires less capital to generate the same level of profit as one with a lower ROIC. It gives investors a higher return per dollar that is invested in the business.

The logic thus follows that a high-quality business often carries a high ROIC while a low-quality business has a low ROIC attached. Here’s the math needed to calculate the ROIC:

ROIC table

I want to look at the ROIC of inspection and testing outfit Vicom Limited (SGX: V01) in here. Here’s how the company’s ROIC looks like (data from last completed fiscal year):

Vicom ROIC table
Source: S&P Global Market Intelligence

We can see that Vicom has a ROIC of nearly 100%. While the following’s not entirely an apples-to-apples comparison, the median ROIC for companies in the US stock market from 1963 to 2004 has averaged at 10%. This gives us perspective on the level of Vicom’s ROIC.

It may be worth understanding why Vicom’s ROIC is flirting with the triple-digit range. That’s because the company has almost no inventory. Based on its 2015 financials, the company only has S$19,000 in inventory out of S$176.7 million in total assets.

Despite Vicom’s high ROIC, it’s worth noting that the metric is just one of many others that investors need to consider with a business.

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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.