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Top Glove Is the World’s Largest Glove Manufacturer, But Does It Have a Quality Business?

Photo: Images Money. Cropped. Licence: https://creativecommons.org/licenses/by-sa/2.0/

The Malaysia-based Top Glove (SGX: BVA)(KLSE:7113.KL) is the largest gloves maker in the world with a market share of about 25%. The company, which has a primary listing on Malaysia’s stock market, Bursa Malaysia, was dual-listed here in Singapore in June 2016.

Clearly, Top Glove is a dominant force in its industry. But does this mean that it has a quality business 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.

Top Glove’s ROIC

Here’s a table showing how Top Glove’s ROIC looks like (I had used numbers from its fiscal year ended August 2017):


Source: Top Glove earnings announcement

In its last completed fiscal year, Top Glove produced a ROIC of 23.3%. This is definitely above average, based on the ROICs of many other companies I have studied in the past. This suggests that Top Glove has a quality business.

One thing that investors should note here is that Top Glove had about RM 314.6 million in short-term debt as of 31 August 2017, which was not included in my calculation of the tangible capital employed. Including this amount would result in a lower but still very respectable ROIC of 19.6%.

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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.