Hour Glass Ltd Is Trading Close To Its 52-Week Low Price – Is It A Good Business?

Hour Glass Ltd (SGX: AGS) is in the business of selling luxury watches. It has a network of over 40 stores in Singapore, Malaysia, Thailand, Japan, Hong Kong, and Australia.

The company is an official retailer of some of the world finest brands, such as Audemars Piguet, Cartier, Hublot, IWC, Patek Philippe, Richard Mille, Rolex, Sinn, TAG Heuer and more.

The company has recently captured my attention, since its trading close to its 52-week low price.

As investors or potential investors of this company, we might want to know whether Hour Glass 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 about the attractiveness of Hour Glass’s 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 can 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 gives investors a higher return per dollar that is invested in the business.

So how does Hour Glass perform in this ROIC test? Let’s see below:

S$ Million FY 2017
Revenue 704.0
Profit before interest and tax 61.3
Operating profit margin 8.7%
Net current asset 346
Cash 125
Tangible non-current asset 117
Tangible capital employed 338
ROIC 18.1%

Source: Hour Glass FY2017 Full Year Result

Here, we can see that the ROIC of 18.1% means that for every S$ 1 of capital invested in the business, Hour Glass earns 18.1 cents in profit.

To put the above into perspective, 18.1% falls is above 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, Hour Glass would be above average of normal businesses.

Yet, investors should note that the above calculation of tangible capital employed does not include short-term debt of $51.2 million. Including such debt will reduce the ROIC to about 15.7%.

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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.