How Is Singapore Post Limited’s Business Transformation Doing? Here’s 1 Simple Number To Help

Singapore Post Limited (SGX: S08) has been facing challenges in its legacy mail services business over the past few years. But it has been trying to transform its business by building its logistics services in an attempt to take advantage of the growth of eCommerce.

One way for investors to keep track of how well this change is happening is to look at a simple investing number: Singapore Post’s return on invested capital (ROIC). In this article, I want to compare Singapore Post’s ROICs in its FY2015/16 (fiscal year ended 31 March 2016) and FY2014/15.

An overview of the ROIC

The ROIC is a metric that can help investors gauge the quality of a business.

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.

ROIC table

You can see how the math works for the ROIC in the formula above. If we track changes in Singapore Post’s ROIC, we can have a sense of how the quality of the company’s business is evolving.

Singapore Post’s ROIC

Here’s a table showing the ROIC for Singapore Post in FY2015/16 and FY2014/15:

Singapore Post ROIC change table
Source: Singapore Post’s earnings releases

We can see that the ROIC for Singapore Post had improved from 24.1% in FY2014/15 to 27.3% in FY2015/16.  To put the above into perspective, for every dollar of capital invested in the business, Singapore Post earned 24.1 cents and 27.3 cents in profit for FY2014/15 and FY2015/16, respectively.

At first glance, the ROIC study suggests that Singapore Post’s business performance has strengthened. Yet, there are a few things that investors should note about the company’s FY2015/16’s numbers.

Firstly, the increase in the operating profit margin is due to a one-off gain of S$112.1 million from the sale of subsidiaries, stakes in associated companies, and investments. Without the one-off gain, the operating profit in FY2015/16 would be lower than FY2014/15.

Secondly, there was an increase in short term debt of S$54 million in FY2015/16, which is not included as part of the capital employed. If that were included, it will also reduce the ROIC number for FY2015/16.

Thirdly, as Singapore Post expands its acquisition activities, the amount of goodwill and/or intangible assets on its balance sheet will likely increase. And in FY2015/16, Singapore Post had made some significant acquisitions such that its intangible assets had increased from S$316.6 million to S$583.2 million. As such, excluding goodwill and intangibles from the ROIC – as I had done above – may not give a complete picture of the overall business performance of Singapore Post.

When we put everything together, I think it’s fair to conclude that the increase in Singapore Post’s ROIC in FY2015/16 may be driven more by accounting measures than business performance. In other words, Singapore Post’s transformation isn’t going that smoothly at the moment.

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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.