Singapore Technologies Engineering Ltd’s Stock Price Is Near A 52-Week Low: Does The Company Have A Quality Business?

Singapore Technologies Engineering Ltd (SGX: S63) is an engineering conglomerate with four main business segments: Aerospace, Electronics, Land Systems, and Marine.

At its current stock price of S$3.24, the company is near a 52-week low of S$3.17. 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 ST Engineering 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.

ST Engineering’s ROIC

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

Source: ST Engineering 2016 earnings

In 2016, ST Engineering generated a ROIC of 26.3%. This falls into the top quartile among the list of many other companies that I have studied in the past, and suggests that ST Engineering has a high quality business.

Nevertheless, there are two points worth noting.

Firstly, ST Engineering has significant investments in associates and joint ventures, and these investments are excluded in the calculation of its ROIC seen above. Secondly, there is a significant amount of intangible assets on the company’s balance sheet (S$1.02 billion at end-2016), mainly due to its acquisitions. The intangible assets are also not included in the the calculation of the ROIC. As such, it may be useful to take both factors into consideration in a separate analysis.

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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.