Advancer Global Ltd Shares Are Near A 52-Week Low: Does The Company Have A Quality Business?

Advancer Global Ltd (SGX: 43Q) is a company that provides employment services, facilities management services, and security services.

At its current stock price, the company is just 7% higher than a 52-week low of S$0.275. This captured my attention and got me interested in finding out more about the company. In particular, I want to understand: Does it have a high quality business?

There’s no easy answer, but a simple metric can help shed some light on the question: The return on invested capital (ROIC).

A brief introduction to the ROIC

In a previous article of mine, I explained how the ROIC can be used to evaluate 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.

Advancer Global’s ROIC

Here’s a table showing how Advancer Global’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2016):

Source: Advancer Global 2016 full year earnings release

In 2016, Advancer Global generated a ROIC of 75.4%. This means that for every dollar of capital invested in the business, Advancer Global earned 75.4 cents in profit. The company’s ROIC of 75.4% is very much on the high end of things, based on the ROICs of many other companies I have studied in the past. This suggests that Advancer Global has a high quality business.

It might be useful to next understand how the company achieved such a high ROIC.

The main reason I see is that Advancer Global is a service business that requires little capital investment in hard assets such as property and equipment. Moreover, it has very little need to hold inventory. Even though the company has high receivables (S$11.1 million at end-2016), this was partly offset by the company’s payables (S$6.9 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.