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1 Simple Number To Help Investors Better Understand The Quality Of M1 Ltd’s Business

M1 Ltd (SGX: B2F) should be a company recognisable by many in Singapore given that it is one of the three operational telcos here.

Over the last 12 months, M1’s stock price has fallen by around 20% due to poor results in 2016 that were brought on by the increasingly competitive business landscape the company is operating in.

The big decline in M1’s share price has brought the company’s price-to-earnings (PE) ratio near to a five-year low. As such, investors may be enticed by the company as an investment opportunity. If you are such an investor, it is useful to be reminded that valuation is only one of the many important factors we should study before any investment decision can be made. One such factor is the quality of a company’s business.

And this brings me to the main question to be addressed here: Does M1 have a high quality business? One simple metric that can be help shed some light on the question would be the return on invested capital (ROIC).

A brief introduction to the 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.

M1’s ROIC

The table below shows how M1’s ROIC looks like (I had used figures from the company’s results for 2016):

M1 ROIC table
Source: M1’s earnings release

We can see that the ROIC for M1 is 30.7%. This means that for every dollar of capital invested in the business, the company earns 30.7 cents in profit. M1’s ROIC of 30.7% is higher than average based on the ROICs of many other companies I have studied in the past, which suggests that M1 has a high quality business.

Investors should note that the above calculation does not include any intangible assets, such as licenses and spectrum rights (which has a value of S$139 million on M1’s balance sheet as of 31 December 2016). If the license and spectrum rights are included, M1’s ROIC number would be lower at about 25%, which is still very respectable.

Although competition within Singapore’s telco industry has increased – and may increase further when the new fourth telco, Australia’s TPG Telecom, eventually releases its services in Singapore in the near future – M1 still has a highly profitable business operation.

That said, the economics of M1’s business is less attractive now as compared to the past few years. Moreover, an important question needs to be answered: Can M1’s ROIC be sustained at the current high level?

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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.