Soilbuild Construction Group Ltd Is Trading Close To Its 52-Week Low Price. Is It A Good Business?

 Soilbuild Construction Group Ltd. (SGX: S7P) is a builder of residential properties and business space. The company offers a full spectrum of real estate services that include Design and Build, Construction, Turnkey Construction, Project Management Consultancy, Procurement and Mechanical & Electrical.

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

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

But 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 Soilbuild’ 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 maths needed to calculate the ROIC is given below:

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

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

Source: Soilbuild 2016 Annual Report

Here, we can see that the ROIC of 22.6% means that for every S$1 of capital invested in the business, Soilbuild earns 22.6 cents in profit.

To put the above into perspective, 22.6% falls into the above-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, Soilbuild would have ranked above average.

Despite its relative “high” ROIC, investors should note that Soilbuild is a cyclical company exposed to the construction industry. As such, there is no guarantee that the company can replenish its order book on a consistent basis. Moreover, the company’s venture into Myanmar exposes it to other risks such as political and social risks, foreign exchange risks and others. As investors, we must take these factors into account when evaluating Soilbuild.

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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.