MENU

Kingsmen Creatives Ltd Is Trading Near A 52-Week Low: Is It A Good Quality Business?

Kingsmen Creatives Ltd (SGX: 5MZ) is a company that provides services such as exhibition setups, interior design for retailers and corporates, and more.

When I recently ran a screen to find stocks in Singapore’s market that are trading near 52-week lows, Kingsmen Creatives appeared. This got me interested in finding out a little bit more about the company. What I want to do here is to understand the quality of Kingsmen Creatives’ business. Does it have a good or poor quality business?

There’s no easy answer, but a simple metric can help shed some light on the question: The return on invested capital (ROIC).

A brief introduction to the ROIC

In a previous article of mine, I 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.

Kingsmen Creatives’ ROIC

The table shows how Kingsmen Creatives’ ROIC looks like (I had used figures from the company’s year ended 31 December 2016):

Kingsmen Creatives ROIC
Source: Company 2016 full year earnings release

In 2016, Kingsmen Creatives achieved a ROIC of 40.7%. This means that for every dollar of capital invested in the business, the company earns 40.7 cents in profit. Kingsmen Creatives’ ROIC of 40.7% is higher than average based on the ROICs of many other companies I have studied in the past, which suggests that the company has a high quality business.

The reason for the company’s high ROIC is the low requirement for capital investment (for both fixed assets and inventory) to run its business. And although Kingsmen Creatives has a significant amount of trade receivables, this is largely covered by its trade payables.

In sum, Kingsmen Creatives has a profitable business model due to the little reliance it has on physical assets to run its business. But, given that the company’s business is project-based, its future profitability will depend on its ability to continuously secure new projects.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.