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800 Super Holdings Ltd’s Stock Price Is Up 154% In 12 Months: Does It Have A High Quality Business?

800 Super Holdings Ltd (SGX: 5TG) is an established environmental services provider for both the public and private sectors in Singapore. The company’s services include waste disposal, cleaning and conservancy, and landscaping. In other words, 800 Super helps keep Singapore clean and green.

In the last 12 months, 800 Super’s share price is up by 154% whereas Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has gained just 10.4%.

800 Super’s huge stock price gain got me interested to know more about the quality of its underlying business. This will help me evaluate whether or not the company’s price advance is sustainable over the long term.

Now, there are many ways to look at the quality of a company’s business. There are both numerical as well as qualitative measures. In here, I will use a simple metric which can help shed some light on the matter: The return on invested capital, or 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.

800 Super’s ROIC

The table below shows how 800 Super’s ROIC looks like (I had used figures from the company’s fiscal year ended 30 June 2016):

800 Super ROIC table
Source: 800 Super’s earnings release

We can see that the ROIC for 800 Super in its FY2016 is 23%. This means that for every dollar of capital invested in the business, the company earns 23 cents in profit. Based on my studies of the ROICs of many other companies, 800 Super’s ROIC can be said to be above average.

But there’s one thing to note. 800 Super had around S$11 million in short term debt as of 30 June 2016. That’s not included in the ROIC calculation above. But if it was, 800 Super’s ROIC would be reduced to around 20%.

Although this study of 800 Super’s ROIC can provide us with some useful insight, it is certainly not a holistic overview of the quality of the company’s business. Other factors – such as the ability of management – should be studied before any firm conclusion can be reached.

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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.