1 Important Number That Investors Should Know About Dutch Lady Milk Industries Bhd

Dutch Lady Milk Industries Bhd (KLSE: 3026.KL) is a dairy company that is based and listed in Malaysia.

The company may be familiar to consumers as some of its products include specialised milk powders for young children, different types of liquid milk products, and yoghurt. What investors may not know is that Dutch Lady has been a great stock in Malaysia’s market over the past five years, gaining nearly 230%.

I thought it’d be interesting to have a look at the return on invested capital (ROIC) of Dutch Lady given its strong share price appreciation.

In a previous article, I had explained how the ROIC metric can be used to estimate the quality of a business. The math needed to calculate the ROIC is given below:

ROIC table

The simple idea behind the ROIC is that a business with a higher ROIC requires lesser capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business. Generally speaking, businesses that are high (low) quality tend to have high (low) ROICS.

The following’s a table showing how Dutch Lady’s ROIC looks like (I used figures from the company’s last-completed fiscal year, which is 2015):

Source: S&P Global Market Intelligence

Here, the ROIC calculation shows a rather unusual number – a negative one, as a result of Dutch Lady having tangible capital employed of less then zero.

In other words, Dutch Lady is funding its business using its supplier’s capital. For perspective, the company had trade payables of RM231 million in 2015 and this covers its total tangible capital requirement. This is not often seen in the world of business and is a sign of strength.

Nonetheless, it is important to note that looking at just one year’s worth of the ROIC is not enough to come to an investing decision with Dutch Lady. There are many other aspects of the company’s business to study.

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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.