This Simple Number Can Help Investors Understand Whether Bumitama Agri Ltd Has A High Or Low Quality Business

Bumitama Agri Ltd (SGX: P8Z) is a palm oil producer. Its primary business activities include cultivating oil palm trees, harvesting fruits from the trees, and processing the fresh palm fruit bunches (FFB) into palm oil and palm kernel.

Its operations are located mainly in three provinces in Indonesia, namely, Central Kalimantan, West Kalimantan, and Riau. As of March 2017, the company controls plantations that total 175,712 hectares in size.

As investors or potential investors of this company, it’s important to determine the quality of its business. But how can we do that? One way is to look at Bumitama Agri’s 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.

You can see how the math works for the ROIC in the formula above.

Bumitama Agri’s ROIC

The table shows the ROIC for Bumitama Agri using its financials for its fiscal year ended 31 December 2016:

Source: Bumitama Agri 2016 annual report

We can see that Bumitama Agri has a ROIC of 12.1%. That’s merely average, based on the ROICs of many different Singapore-listed stocks I’ve studied in the past. Even more insight can be gleaned if investors compare Bumitama Agri’s ROIC to its competitors’. But, that’s something I did not do here.

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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.