Maxi-Cash Financial Services Corp Ltd’s Stock Price Is Near A 52-Week Low: Does The Company Have a Quality Business?

Maxi-Cash Financial Services Corp Ltd (SGX: 5UF), which is a subsidiary of Aspial Corporation (SGX: A30), has two main businesses: Pawnbroking; and the retail and trading of pre-owned jewellery, watches, and branded bags. The company has a network of 41 pawnshops and retail stores in in Singapore which are located near transport hubs such as bus interchanges and MRT stations.

At the current price of S$0.16, the company’s stock is just 6.7% higher than a 52-week low of S$0.15. 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 Maxi-Cash 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.

Maxi-Cash’s ROIC

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

Source: Maxi-Cash 2016 annual report

In 2016, Maxi-Cash generated a ROIC of 20.5%. This means that for every dollar of capital invested in the business, Maxi-Cash earned 20.5 cents in profit. The company’s ROIC of 20.5% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Maxi-Cash has a high quality business.

As investors, we also need to understand just how a company manages to generate a high ROIC.  There is one point that investors should note about Maxi-Cash that may affect its ROIC.

At the end of 2016, Maxi-Cash had about S$173.5 million in short-term loans, which is not included in the calculation of its ROIC above. These short-term loans are used as capital to fund Maxi-Cash’s business, so investors may want to include this amount into the calculations; after adjusting for the short-term loans, Maxi-Cash’s ROIC drops to a low 6.8%.

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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.