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

First Resources Ltd (SGX: EB5) is an integrated palm oil producer, managing more than 200,000 hectares of oil palm plantations across the Riau, East Kalimantan and West Kalimantan provinces of Indonesia.

At the current price of S$1.77, the company is trading slightly above its 52-week low price of $1.72. This has captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does First Resources have a high-quality business?

This question is important. If First Resources has a high quality business, its low stock price could be an investment opportunity. Unfortunately, there’s no easy answer to that question. However, a simple metric, which is the return on invested capital (ROIC), can help shed some light.

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 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 lesser 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 First Resources’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2016):

 Source: First Resources Annual Report

In its fiscal year ended 31 December 2016 (FY2016), First Resources generated a ROIC of 22.3%. This means that for every US$1 of capital invested in the business, First Resources earned 22.3 cents in profit. The company’s ROIC of 22.3% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that First Resources has a quality business.

Nevertheless, there is one thing that investors should be aware of when using the above ROIC number. As at 31 December 2016, First Resources had about US$222.5 million in short-term borrowings and US$101.3 million of financial liabilities on its balance sheet. These were not included in the above computation of capital employed. If adjusted for those numbers, First Resources’ ROIC would be 17%.

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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.