SATS Ltd Is Trading Close To Its 52 Week Low – Is It A Good Business?

Sats Ltd (SGX: S58) is a company that provides food solutions and gateway services.

The Food Solutions covers airline catering, food distribution, industrial catering, whereas Gateway Solutions is involved in ground-handling services of passengers, flights and cargo.

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

As investors or potential investors of this company, we want to know whether Sats is a good business.

But there is no quick answer.

In this article, we will look at one important number that may shed some light about the attractiveness of Sats’ 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 could mean a high-quality business, while a low ROIC could point to a business of lower 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 profit, so it gives investors a higher return per dollar invested.

So how does Sats International perform in this ROIC test?

Source: Sats 2016/17 Full Year Result

We can see that the ROIC of 43.1% means that for every S$ 1 of capital invested in the business, Sats earns 43.1 cents in profit.

To put the above into perspective, 43.1% falls into the upper 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, Sats would be a good business.

One thing that investors should note is that Sats has significant investments in joint ventures and associates and other intangibles, which are not included in the above calculation. As such, it might be useful for investors to include those to give a more complete view of the attractiveness 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 SATS.