Raffles Medical Group Ltd Is Trading Close To Its 52 Week-Low Price – Is It A Good Business?

Raffles Medical Group Ltd (SGX: R01) runs hospital and healthcare services in Singapore. It also has a network of clinics in five countries and thirteen cities. It has two hospitals under development in China that are expected to be completed by 2018.

 The company has recently captured my attention since its shares are trading close to their 52-week low.

As investors or potential investors of this company, we should want to know whether Raffles Medical International is a good business.

Yet, there is no quick answer to this question.

In this article, we will look at one important number that may shed some light on the business – the return on invested capital (ROIC).

A brief recap of ROIC

In a previous article, I had explained how to use the return on invested capital (or ROIC) to evaluate the quality of a business. For convenience, the math needed to calculate the ROIC is given below:

Generally speaking, a high ROIC should mean a high-quality business, while a low ROIC could point to a business of low quality. This is important for investors as a stock’s performance is often tied to the performance of its underlying business over the long-term.

The simple idea behind the ROIC is that, a business with a higher ROIC requires less capital to generate a profit. So, it should give investors a higher return per dollar invested.

So how does Raffles Medical perform in terms of its ROIC test?

$ Million FY 2016
Revenue 474
Profit before interest and tax 82
Operating profit margin 17.3%
Net current asset 39
Cash 112
Tangible non-current asset 647
Tangible capital employed 574
ROIC 14.3%

Source: Raffles Medical 2016 Full Year Result

Here, we can see that the ROIC of 14.3% means that for every S$1 of capital invested in the business, Raffles Medical earns 14.3 cents in profit.

To put the above into perspective, 14.3% is around the average quartile of the ROIC that we have looked at in the past. In other words, if ROIC is the only basis used to evaluate the attractiveness of this business, Raffles Medical would have scored an average.

Yet, ROIC should not be the only metric used in evaluating the attractiveness of this company as this only shows on aspect of the company. Thus, investors might also want to look at other aspects, which include sustainability of income, growth, competitive advantage and others to make an informed judgement of the quality of this business.

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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. Motley Fool Singapore has a buy recommendation for Raffles Medical.