Vicom Limited Is Trading Close To Its 52-Week Low Price: Is It A Good Business?

Vicom Limited (SGX: V01) is a leading provider of technical testing and inspection services with operations primarily in Singapore.

The company is majority-owned by land-transport giant, ComfortDelGro Corporation Ltd (SGX: C52).

The company recently appear 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.

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

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

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

Source: Vicom 2016 Annual Report

Here, we can see that the ROIC of Vicom is 91.8%. This means that for every $1 of capital invested in the business, Vicom earns 91.8 cents in profit.

To put the above into perspective, 91.8% falls into the highest quartile of the ROIC that we have looked at in the past. In other words, if ROIC is the only criterion used to evaluate the attractiveness of this business, Vicom would have ranked among the top.

The high ROIC is due to the low capital investment required in this business. Furthermore, Vicom requires very little working capital such as receivables to run its business. Even these are all funded by the trade and income tax payables, resulting in a negative working capital position.

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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.