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Duty Free International Ltd Is Close To A 52-Week Low Now: Is It A Quality Business?

Duty Free International Ltd (SGX: 5SO) is the largest multi-channel duty free and duty paid retailing group in Malaysia. The company’s ZON brand of retail shops are found in all major entry and exit points in Malaysia, such as airports, seaports, border towns, and more. Duty Free International has over 40 outlets right now.

The company has been trading close to a 52-week low in recent times, a situation which captured my attention.

As part of my study of Duty Free International, I want to find out if it has a high or low quality business. It’s not an easy question to answer, but we can get some clues from the company’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.

Duty Free International’s ROIC

The table below shows the ROIC for Duty Free International for its financial year ended 28 February 2017 (FY2017):


Source: Duty Free International FY2017 full year earnings

We can see that the Duty Free International has a high ROIC of 38.6%. In fact, the retailer’s ROIC is higher than average, based on the ROICs of many other companies I have studied in the past.

The main reason for the company earning its high ROIC is the low need for capital expenditures. Moreover, Duty Free International funds a significant amount of its working capital with trade payables. In FY2017, the retailer’s trade payables was RM 144.8 million while its non-cash current assets totalled RM 272.2 million.

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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.