Q & M Dental Group (Singapore) Limited Is Trading Near A 52-Week Low Now: Does It Have A High Quality Business?

Q & M Dental Group (Singapore) Limited (SGX: QC7) primarily operates a network of private dental clinics in Singapore, Malaysia, and China.

Over the past five years, the company’s stock price has climbed by 108%. But at the current level of S$0.695, Q & M’s stock price is near a 52-week low of S$0.65.  The fact that the company’s stock price has made a significant long-term stride even when it is near a yearly low got me interested to dig in further.

One thing I would like to address here is whether Q & M has a good business. Now, there are many ways to look at the quality of a company’s business. In here, I will use a simple metric which can help shed some light on the matter: 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.

Q & M’s ROIC

The table below shows how Q & M’s ROIC looks like (I had used figures from the company’s fiscal year ended 31 December 2016):

Q&M ROIC table
Source: Q & M earnings release

In 2016, Q & M generated a ROIC of 52.5%. So, for every dollar of capital invested in the business, it earns 52.5 cents in profit. Based on my studies of the ROICs of many other companies in the past, Q & M’s ROIC of 52.5% is considered to be great.

The reason for Q & M’s high ROIC is the company’s low requirement for capital investment, both in fixed assets and inventory. Although Q & M has relatively significant amounts of trade receivables, this is largely covered by its trade payables.

Nevertheless, there is a huge amount of intangible assets within Q & M’s capital structure (some S$75.2 million as of end-2016), which is more than double its tangible capital employed. If the intangible assets are included, it would materially lower the ROIC of Q & M.

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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.