1 Important Number Investors Should Know About Keppel Corporation Limited

Keppel Corporation Limited (SGX: BN4) is a bona-fide conglomerate with three main business segments: Offshore & Marine; Property; and Infrastructure.

Over the last 12 months, one of the most hated industries amongst investors is oil and gas. That’s due to the sharp fall in oil prices from over US$100 per barrel in mid-2014 to around US$55 today. Keppel Corp has heavy exposure to the oil and gas industry due to its Offshore & Marine business segment, which is one of the largest oil rig builders in the world.

The collapse in oil prices has affected Keppel Corp’s business badly, resulting in its stock price being punished. Over the last two years, Keppel Corp’s shares have fallen by 33%.

In here, I want to look at Keppel Corp’s return on invested capital (ROIC).

A brief recap of ROIC

In a previous article, I had explained how the ROIC can be used to evaluate the quality of a business. For convenience, 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 less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business. High-quality businesses tend to have high ROICs while the reverse is true – a low ROIC is often associated with a low-quality business.

Keppel Corp’s ROIC

You can see how Keppel Corp’s ROIC looks like in the table below (I had used numbers from the company’s last completed fiscal year):

Source: Company earnings releases

We can see that the ROIC for Keppel Corp is 11.3%. For every dollar of capital invested in the business, the company earns 11.3 cents. This 11.3% ROIC for Keppel Corp appears to be average based on the many companies I have studied in the past.

One other thing that investors should pay attention to here is that the above analysis does not include the results from Keppel Corp’s associates. The thing about the associated companies is that they are a pretty significant chunk of Keppel Corp’s business, so it may also be useful for investors to include those investments in their analysis.

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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.