1 Simple Number To Help Investors Better Understand Hour Glass Ltd’s Business Performance In Its Last Financial Year

Hour Glass Ltd (SGX: AGS) is a retailer of luxury watches with over 40 boutiques scattered across six regions in Asia Pacific, namely, Singapore, Australia, Hong Kong, Thailand, Japan, and Malaysia.

The company carries over 50 high end watch brands in its boutiques, some of which are Audemars Piguet, Patek Philippe, Richard Mille, and IWC Schaffhausen.

The company has been facing some challenges in recent times due to a downturn in the market for consumer discretionary goods. In its FY2016 (fiscal year ended 31 March 2016), the company reported a lower net profit.

In this article, I want to take a closer look at Hour Glass’s business performance by studying its return on invested capital (ROIC).

An overview of the ROIC

The ROIC is a metric that can help investors gauge 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. If we track changes in Hour Glass’s ROIC, we can have a sense of how the quality of the company’s business is evolving.

Hour Glass’s ROIC

The following table shows the ROIC for Hour Glass in FY2015 and FY2016:

Hour Glass FY2016 and FY2015 ROIC table
Source: Hour Glass’s earnings releases

We can see that the ROIC for Hour Glass had declined from 21.4% in FY2015 to 17.3% in FY2016.  The lower ROIC in FY2016 was driven primarily by lower revenue, a lower operating margin, and also an increase in the tangible capital employed (this is mainly due to new store openings and the need for working capital for the new stores).

In sum, Hour Glass’s lower ROIC in FY2016 as compared to FY2015 indicates that the quality of the company’s business has declined.

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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.