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IHH Healthcare Berhad is Trading Close To Its 52-Week Low Price: Is it a Good Business?

IHH Healthcare Berhad (SGX: Q0F) is an international provider of premium healthcare services in markets where the demand for quality healthcare is growing rapidly – specifically in Asia and Central & Eastern Europe, the Middle East and North Africa region.

It is one of the leading private healthcare players in Singapore, Malaysia and Turkey, and the key markets of China and India. The group operates its hospitals under brands like Mount Elizabeth, Gleneagles, Pantai and Acibadem.

The company recently appeared on my radar as its trading close to its 52-week low price.

Thus, as investors or potential investors of this company, we want to know whether the company is a good business. If the answer is yes, then this might be a good opportunity to invest in the company.

Nevertheless, there is no quick and simple answer to the question. To assess the quality of a business, we need to examine both the qualitative, as well as the quantitative factors.

In this article, we will look at one important number – the return on invested capital (ROIC) that may shed some light on the quality of the business.

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 sake, the formula needed to calculate 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 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.

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

Source: IHH Healthcare FY16 Annual Report

Here, we can see that the ROIC of 7.9% means that for every RM1 of capital invested in the business, IHH Healthcare earned 7.9 cents in profit.

To put the above into perspective, 7.9% falls in the lower quartile of the ROIC that we have looked at in the past. In other words, if ROIC is the only metric used to evaluate the attractiveness of this business, IHH Healthcare would have ranked below average.

One further point to note is that IHH Healthcare has a significant amount of goodwill on its balance sheet (RM11 billion) as a result of its past acquisitions. This number is excluded from the calculation of ROIC above. Yet, it might be relevant to include the goodwill into the overall consideration given that capital is required to acquire those goodwill.

If goodwill is included, the revised ROIC would be about 4.8%.

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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.