Dutech Holdings Ltd Is Trading Close To Its 52-Week Low Price: Is It A Good Business?

Dutech Holdings Ltd (SGX: CZ4) is the largest producer of high-security products in Asia in terms of sales and production capacity. As part of its business, it makes ATM and banking safe boxes.

The company’s production is mainly based in China and Germany while its sales are made across the world in China, Europe, North and South America, and Asia Pacific.

At a price of S$0.34 as of the time of writing, it is just 1.5% higher than its 52-week low price of S$0.32. This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand if it has a high-quality business.

This question is important. If Dutech 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 that can help shed some light is the return on invested capital (ROIC).

A brief introduction on 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 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.

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

 Source: Dutech Annual Report

In its fiscal year ended 31 December 2016 (FY2016), Dutech generated a ROIC of 29.8%. This means that for every RMB of capital invested in the business, Dutech earned 29.8 RMB cents in profit.

The company’s ROIC of 29.8% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Dutech has a high-quality business. Yet, there are two points that investors should note about the firm that might affect its ROIC.

Firstly, it had about RMB 107 million in short-term debt at the end of FY2016, which was excluded from the above ROIC calculation. Secondly, it has high intangible assets on its balance sheet of about RMB 81 million, which was also excluded from the above calculation.

Therefore, including both factors will result in an adjusted ROIC of about 22%.

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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.