An Important Investing Perspective On ARA Asset Management Limited

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

The simple idea behind the ROIC is that a business with a higher ROIC would requires lesser capital to generate a profit. It thus gives investors a higher return per dollar that is invested in the business. High-quality businesses tend to have high ROICs whereas low ROICs tend to be associated with low-quality businesses.

Here’s the simple formula needed to calculate the ROIC:

ROIC table

I want to have a look at real estate fund management company ARA Asset Management Limited’s (SGX: D1R) ROIC. This is how the company’s ROIC looks like (I’m using data only from its last completed fiscal year):

ARA Asset Management ROIC table
Source: S&P Global Market Intelligence

Turns out, ARA Asset Management has a ROIC of around 20% or so. For some perspective, the median ROIC for companies in the US stock market from 1963 to 2004 has averaged at just 10%. It’s not an apples-to-apples comparison, but it still is useful information for understanding just where ARA Asset Management’s ROIC stands.

Despite ARA Asset Management having a strong 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.