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Starhub Ltd Share Price Is Down By 29% In The Last 12 Months – Is It A Bad Business?

StarHub Ltd (SGX: CC3) is one of the three companies in the telecommunication industry. The other two are Singapore Telecommunications Limited (SGX: Z74) and M1 Ltd (SGX: B2F). Starhub has five business segments and they are Mobile, Pay TV, Broadband, Fixed Network Services, and Handset Sales.

The company’s share price had declined by 29% in the last 12 months, mainly due to the structural changes in the teleco industry.

Given the drastic price decline, many might wonder whether Starhub has become a lousy business. There is no quick answer to the question. However, there is a quick way to help us shed some light. That is done by calculating the return on invested capital (ROIC) for the company.

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 formula needed to calculate the ROIC is given below:

Generally speaking, a high ROIC will mean a high-quality business and vice versa. 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, and it thus gives investors a higher return per dollar that is invested in the business.

So how does Starhub perform in this ROIC test? Let’s see the table below:

Source: Starhub FY2016 Full Year Earnings Release

Here, we can see that the ROIC for Starhub is 75.1%, one of the highest I have seen thus far in the local stock market. This means that for every S$1 of capital invested in the business, the company earns 75.1 cents in profit.

Due to the high ROIC, it is hard to argue that Starhub is a bad business. In fact, it’s one of the best businesses that is listed in Singapore, based solely of the ROIC.

But if Starhub is a good business, why then did its share price decline by such a magnitude?

It is probably due to the reason that the ROIC for the prior year was 150.9%, as compared to the latest ROIC of 75.1%. Having said that, ROIC on its own is insufficient to provide the full picture. Other factors, both quantitative and qualitative, should be considered as well.

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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.