MENU

Sheng Siong Group Ltd Shares Are Near A 52-Week Low: Does The Company Have A Quality Business?

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore with its network of 42 heartland-centric stores.

Right now, the company’s stock price is just 2.8% higher than a 52-week low of S$0.89, after falling by 14.8% over the last 12 months. This captured my attention and got me interested in finding out if Sheng Siong 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.

Sheng Siong’s ROIC

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


Source: Sheng Siong earnings announcemnet

In 2016, Sheng Siong generated a ROIC of 39.0%. This is above average, based on the ROICs of many other companies I have studied in the past

One reason why Sheng Siong was able to achieve such a strong ROIC is that it finances its business with trade payables. To illustrate my point, total inventories and receivables was S$72.3 million in 2016 while trade payables was S$117.5 million.

Going forward, it will be useful to monitor whether Sheng Siong can maintain its current working capital strength as that will have a strong effect on its ROIC in the future.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.