Bumitama Agri Ltd (SGX: P8Z) is a plantation company. Its primary business activities are cultivating oil palm trees, as well as harvesting and processing fresh palm fruit bunches (FFB) into palm oil and palm kernel. Its operations are located in three provinces in Indonesia, namely, Central Kalimantan, West Kalimantan and Riau.
At the current price of S$0.71, the company’s stock is trading just slightly above its 52-week low intraday price of S$0.685. 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 Bumitama Agri has a high quality business, its current low stock price could be an investment opportunity. Unfortunately, there’s no easy answer to the question above. However, a simple metric –the return on invested capital (ROIC) – can help shed some light on the question.
A brief introduction 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 Bumitama Agri’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2016):
Source: Bumitama Agri Annual Report
For 2016, Bumitama Agri generated a ROIC of 12.6%. This means that for every IDR 1 of capital invested in the business, Bumitama Agri earned IDR 0.126 in profits. The company’s ROIC of 12.6% is around the average, based on the ROICs of many other companies I have studied in the past. This suggests that Bumitama Agri has an average business in terms of 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.