Choo Chiang Holdings Ltd’s Stock Price Is Near A 52-Week Low: Does The Company Have A Quality Business?

Choo Chiang Holdings Ltd (SGX: 42E) is a retailer and distributor of electrical products and accessories in Singapore. It has been in this business for over 20 years, and currently has 10 retail branches in our Garden City. In addition, it also has 12 investment properties that it rents out for rental income.

At its current stock price of S$0.30, the company is right smack at its 52-week low. 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?

This question is important. If Choo Chiang has a high quality business, its current low stock price could be an investment opportunity. Unfortunately, there’s no easy answer to the question. 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.

  Choo Chiang’s ROIC

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

Source: Choo Chiang 2016 annual report

In 2016, Choo Chiang generated a ROIC of 18.7%. This means that for every dollar of capital invested in the business, Choo Chiang earned 18.7 cents in profit. The company’s ROIC of 18.7% is above-average, based on the ROICs of many other companies I have studied in the past. This suggests that Choo Chiang has a high quality 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.