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Thai Beverage Ltd Is Trading Close To Its 52-Week Low Price: Is It A Solid Business?

Thai Beverage Public Company Limited (SGX: Y92) is a company operating in four different segments, namely, Spirits, Beer, Food, and Non-Alcoholic Beverages.

At the current price of S$0.835, the company is trading close its 52-week low price of S$0.83. 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.

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This question is important. If Thai Beverage has a high-quality business, its 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 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.

In its fiscal year ended September 2017 (FY2017), Thai Beverage generated a ROIC of 55.1%. This means that for every 1 baht of capital invested in the business, Thai Beverage earned 0.551 baht in profit. The company’s ROIC of 55.1% is around the average range, based on the ROICs of many other companies I have studied in the past. This suggests that Thai Beverage has a quality business.

Nevertheless, there is one thing that investors should be aware of when using ROIC. As at September 2017, Thai Beverage had about 31 billion baht in short-term borrowings on its balance sheet, which was not included in the computation of capital employed. Adjusting for the short-term debt, the ROIC would be lower at 34.5%.

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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.