Singapore Telecommunications Limited’s Stock Price Is Near A 52-Week Low: Does The Company Have A Quality Business?

Singapore Telecommunications Limited (SGX: Z74) is Singapore’s largest operational telco.

At the current price of S$3.52, the company’s stock is just a hair’s breadth higher than a 52-week low of S$3.51. This captured my attention and got me interested in finding out whether Singtel has a quality business.

This question is important. If Singtel 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.

Singtel’s ROIC

The table below shows how Singtel’s ROIC looks like. I had used numbers from its fiscal year ended 31 March 2017(FY2017).

Source: Singtel FY2017 annual report

In FY2017, Singtel generated a ROIC of 24.7%. This means that for every dollar of capital invested in the business, Singtel earned 24.7 cents in profit. The company’s ROIC of 24.7% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Singtel has a high quality business.

As investors, we also need to understand just how a company manages to generate a high ROIC. There are two important points about Singtel’s ROIC that investors should note.

Firstly, Singtel had S$3.05 billion in short-term debt at the end of FY2017 that was excluded from the ROIC calculation above. Moreover, the telco had S$13.1 billion in intangible assets on its balance sheet, which was again excluded from my calculations. If both numbers were included, Singtel’s ROIC would have fallen to just 10.1%.

Secondly, Singtel has significant investments in associates and joint ventures that span multiple countries. This category of assets is huge relative to Singtel’s balance sheet (these investments were S$14.24 billion at end-2017; this compares with Sintel’s total assets of S$48.29 billion). My calculations of Singtel’s ROIC excludes the value of these investments, as well as the share of the company’s profits that come from the associates and joint ventures. The inclusion of these numbers can provide another useful lens to understand the quality of Singtel’s business.

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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.