One Important Number that Investors Should Know About Genting Singapore

Genting Singapore PLC (SGX: G13) is the operator of the integrated resort, Resorts World Sentosa.

Among the resort’s many attractions are one of Singapore’s two casinos and the Universal Studios Singapore theme park.

The company has also entered into a joint venture in South Korea to develop Resorts World Jeju. The resort is expected to open by the end of 2017.

Recently, Genting stock price surged after releasing a rather positive quarterly result. Consequently, investors who are getting a little more interested are asking more questions. One of those is whether Genting Singapore a good business?

As we all know, there are many ways to look at the quality of a business, both quantitatively and qualitatively.

In this article, we will look at it from a simple quantitative perspective – return on invested capital (ROIC) which should give us an overview of the quality of Genting’s business.

But first, 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 will mean a high-quality business, while a low ROIC will point to a business of low quality. This is important, as 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, and so it gives investors a higher return per dollar that is invested in the business. 

So how does Genting Singapore perform in this ROIC test? Let’s see below:

$ Million Genting Singapore
Revenue 2400.9
Profit before interest and tax 337.6
Operating profit margin 14.1%
Net current asset 5203.6
Cash 5002.1
Tangible non-current asset 5945.1
Tangible capital employed 6146.6
ROIC 5.5%

Here, we can see that the ROIC for Genting Singapore is 5.5%. This means that for every $1 of capital invested in the business, the company earns 5.5 cents in profit.

Nevertheless, investors should note that the company generates significant amount of operating cash flow – $1.26 billion in 2015, much higher than the operating profit. This is due to the significant amount of non-cash items that were reported in the income statement. If cash flow is used instead in our analysis, the ROIC would have been triple.

So it is a good business based on ROIC? Well, if we judge the company solely on this metric, then Genting Singapore’s ROIC is below average.

Nevertheless, we should consider other factors, such as the one pointed out above, in assessing the quality of Genting Singapore’s business. After all, one metric from one single year cannot show us the overall picture of a business as complex and diverse as Genting.

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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.