1 Simple Number To Help Investors Better Understand The Quality Of StarHub Ltd’s Business

StarHub Ltd (SGX: CC3) is one of the main providers of telecommunications services in Singapore.

The company’s stock price has dropped by over 20% in the last 12 months, likely due in part to an increasingly competitive landscape in its industry. StarHub’s big price decline may have attracted the attention of investors who are out looking for potential bargains.

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

A brief recap of ROIC

In a previous article of mine, I had explained how the ROIC can be used to evaluate 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.

StarHub’s ROIC

The table below shows how StarHub’s ROIC looks like (I had used figures from the company’s results for 2016):

StarHub ROIC table 2016
Source: StarHub earnings release

We can see that the ROIC for Starhub is 75.1%. This means that for every S$1 of capital invested in the business, the company earns 75.1 cents. This ROIC of 75.1% for StarHub appears to be way above average based on the ROICs of many companies I have studied in the past.

It’s worth noting though that StarHub’s ROIC has been falling. For instance, in 2015, the company achieved a ROIC of 151%. Nonetheless, the telco still manages to operate a profitable business despite heightened competitive pressure.

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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.