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

QAF Limited (SGX: Q01) is a food production company. It is involved in bakery operations, pork production, food processing and distribution, feed milling, food trading and distribution, food manufacturing, and wine distribution. In addition, the company also owns warehouses which it leases out.

Some of the more prominent brands the company has in its portfolio are Gardenia, Cowhead and Farmland.

The company recently appeared on my radar as it is 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 it 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 aspects (such as market share, growth potential) and the quantitative factors (like margins and return on capital).

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 the 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 QAF Limited’s ROIC looks like (I had used numbers from its fiscal year ended December 2016):

Source: QAF Limited 2016 Annual Report

Here, we can see that the ROIC of 15.9% means that for every $1 of capital invested in the business, QAF Limited earned 15.9 cents in profit.

To put the above into perspective, 15.9% falls in the above average quartile among companies 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, QAF Limited’s business quality would rank in the above average group.

Nevertheless, there are two points that investors should note here. Firstly, QAF Limited has a 50% interest in Gardenia Malaysia, which was excluded in the above calculation of ROIC. Also, the company has $32.6 million in short-term borrowings which is also excluded in the above calculation. Thus, it might be useful to include those two factors in the next step of the analysis of the company’s business quality.

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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.