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Keong Hong Holdings Ltd Is Trading Near A 52-Week Low: Is It A Good Quality Business?

Keong Hong Holdings Ltd (SGX: 5TT) is a provider of building construction services to the public and private sectors. The company works on a range of projects spanning residential, commercial, industrial, and institutional.

When I recently ran a screen to find stocks in Singapore’s market that are trading near 52-week lows, Keong Hong 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 Keong Hong’s 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.

Keong Hong’s ROIC

Here’s a table showing how Keong Hong’s ROIC looks like (I had used numbers from the company’s fiscal year ended 30 September 2016):

Keong Hong ROIC table
Source: Keong Hong full year earnings release

In its FY2016 (fiscal year ended 30 September 2016), Keong Hong achieved a ROIC of 25.8%. This means that for every dollar of capital invested in the business, the company earned 25.8 cents in profit. Keong Hong’s ROIC of 25.8% 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 high ROIC for the company is due to its low requirement for capital investment in fixed assets. Though Keong Hong has a significant amount of trade receivables, this is significantly funded by its trade payables.

In sum, Keong Hong appears to have a rather profitable business model due to its low reliance on physical assets. Yet, given that its business is project-based, its future profitability will depend on its ability to continuously secure new projects.

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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.