Yeo Hiap Seng Ltd Shares Are Near A 52-Week Low: Does The Company Have A Quality Business?

Yeo Hiap Seng Ltd (SGX: Y03) is a food & beverage manufacturer. Some of its popular beverage brands are Yeo’s, H-TWO-O, and Pink Dolphin.

At its current stock price, the company is just 0.8% higher than a 52-week low of S$1.25. This captured my attention and got me interested in finding out more about the company. In particular, I want to understand: Does it have 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.

Yeo Hiap Seng’s ROIC

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

Source: Yeo Hiap Seng 2016 annual report

In 2016, Yeo Hiap Seng generated a ROIC of 6.0%, which is way below average, based on the ROICs of many other companies I have studied in the past. This suggests that Yeo Hiap Seng has a low quality business.

One point to note here is that Yeo Hiap Seng had S$166.7 million in available-for-sale financial assets on its balance sheet as of 31 December 2016; this was related to its ownership of shares of instant coffee maker Super Group after it received a buyout offer in late 2016. Subsequently, the financial asset was converted into cash when Super Group was taken private earlier this year. This is reflected in Yeo Hiap Seng’s latest balance sheet – as of 30 June 2017, the company held S$242 million in cash.

In my calculation of the ROIC, cash is subtracted from the tangible capital employed number. So, Yeo Hiap Seng’s ROIC would have improved slightly to around 8% if I had treated the S$166.7 million in available-for-sale financial assets at end-2016 as cash. But, 8% is still a low ROIC.

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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.