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

Singapore Post Limited (SGX: S08), or SingPost, is a mail and logistics company, organised into three major segments of Mail/Postal, Logistics, and Retail & eCommerce.

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 might 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 factors 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 return on invested capital (or 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 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 SingPost’s ROIC looks like (I had used numbers from its fiscal year ended March 2017):

Source: SingPost Year Ended March 2017 Financial Statement

Here, we can see that the ROIC of 5% means that for every $1 of capital invested in the business, SingPost earned 5 cents in profit.

To put the above into perspective, 5% falls into the below 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, SingPost would have ranked among the weakest group.

Nevertheless, there are a few points that investors should take note here.

First of all, SingPost reported an exceptional item of $89 million loss during the year, mainly due to impairments of its various acquisitions. Given that exceptional items are generally one-off in nature, it might be useful to adjust them when calculating profit before interest and tax. Secondly, the postal outfit had about $149 million in short-term borrowings, which is not included in the above calculation of ROIC.

Adjusting both items, the “adjusted” ROIC would have been about 10.8%.

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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.