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

SIA Engineering Company Ltd (SGX: S59) provides aircraft maintenance, repair, and overhaul (MRO) services to over 80 international airlines around the world.

Right now, the company’s stock price is just 2% higher than a 52-week low of S$3.35, after falling by 8% over the last 12 months. This captured my attention and got me interested in finding out if SIA Engineering has 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.

SIA Engineering’s ROIC

Here’s a table showing how SIA Engineering’s ROIC looks like (I had used numbers from its fiscal year ended 31 March 2017):

Source: SIA Engineering earnings announcement

In its fiscal year ended 31 March 2017 (FY16/17), SIA Engineering generated a ROIC of 16.7%. This is average, based on the ROICs of many other companies I have studied in the past. In other words, SIA Engineering has a business of average quality.

One point that investors should pay attention to here is that SIA Engineering derives a significant amount of profit from its various associates and joint ventures, which are excluded from the ROIC calculation. Thus, it may be useful to consider these investments separately to give a more holistic view of the quality of its 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.