One Important Number that Investors Should Know About Raffles Education

Raffles Education Corporation Limited (SGX: NR7) is an education provider that operates 30 colleges in 28 cities across 14 countries in Asia-Pacific, Europe and the US.

The company is also an owner and manager of education assets and facilities.

Recently, Raffles Education appeared on my screen as one of the companies that is trading at close to its 52-week low.

As investors or potential investors of this company, we might want to know whether Raffles Education is a good business. But how can we tell?

There is no single answers. We can look at market share, growth potential or margins, return on capital and others.

In this article, we will look at one important number that may shed some light about the attractiveness of this business – the return on invested capital (ROIC).

A brief recap of ROIC

In a previous article, I had explained how to use the return on invested capital (or ROIC) to evaluate the quality of a business. For convenience, the math needed to calculate the ROIC is given below:

ROIC table

Generally speaking, a high ROIC could mean a high-quality business, while a low ROIC could point to a business of lower quality. This is important because a stock’s performance is often tied to the performance of its underlying business over the long-term.

The simple idea behind the ROIC is that, a business with a higher ROIC requires less capital to generate a profit. Thus it could give investors a higher return per dollar invested in the business. 

So how does Raffles Education perform in this ROIC test?

S$ Million Raffles Education
Revenue 119.9
Profit before interest and tax 34.8
Operating profit margin 29%
Net current asset -100.3
Cash 80.9
Tangible non-current asset 760.8
Tangible capital employed 579.5
ROIC 6.0%

Here, we can see that the ROIC of 6% means that for every S$1 dollar of capital invested in the business, Raffles Education earns 6 cents in profit.

One point that investors should pay attention to is that Raffles Education has significant short-term borrowings of S$266 million which is excluded in the ROIC calculation. Including that will give a lower ROIC.

At ROIC of 6%, Raffles Education is performing below the market average. But one number alone tells us little about a company. Investors will need to look at other aspects of the business to form a better idea of the quality of this 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.