Old Chang Kee Ltd Is Trading Close To Its 52-Week Low Price: Is It A Good Business?

Old Chang Kee Ltd (SGX: 5ML) has been around since 1956, growing from a single stall outside Rex Cinema to 87 outlets now (as of 30 September 2017). Old Chang Kee may be best known for its signature Curry’O puff, a popular Singapore snack.

The company recently appeared 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.

Nevertheless, there is no quick and simple answer to the question. To assess the quality of a business, we need to examine both the qualitative – such as market share, growth potential and the quantitative factors – margins, return on capital and so on.

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

A brief recap of ROIC

In a previous article, I had explained how to use 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 Old Chang Kee’s ROIC looks like (I had used numbers from its fiscal year ended March 2017):

Source: Old Chang Kee 2017 Annual Report

Here, we can see that the ROIC of 14.1% means that for every $1 of capital invested in the business, Old Chang Kee earns 14.1 cents in profit.

To put the above into perspective, 14.1% falls into the average quartile of the ROIC that we have looked at in the past. In other words, if ROIC is the only basis used to evaluate the attractiveness of this business, Old Chang Kee would have ranked amongst the average.

Nevertheless, there is one point that investors should note here. In 2017, the company recorded a $3 million deficit in property revaluation in its expenses, which is a one-off event. Removing this one-off transaction will result in profit before interest and tax more than doubling to $5.6 million, which in turn, increases the ROIC to about 30.3%.

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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.