# CEI Ltd’s Stock Is Trading Near A 52-Week Low: Does The Company Have A Quality Business?

CEI Ltd (SGX: AVV) provides printed circuit board and box-build assembly, equipment design, cable harness assembly, and manufacturing services. Its customers are in Asia Pacific, USA, and Europe.

At the current price of S\$1.00, the company’s stock is just 5.3% higher than a 52-week low of \$0.95. 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 CEI 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.

CEI’s ROIC

Here’s a table showing how CEI’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2017):

Source: CEI earnings update

In 2017, CEI generated a ROIC of 23.6%. This means that for every dollar of capital invested in the business, CEI earned 23.5 cents in profit. The company’s ROIC of 23.5% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that CEI has a quality business.

But how did CEI manage to chalk up an above average ROIC? From the table above, we can see that the company has low tangible non-current assets of just S\$5.6 million, indicating that it has little requirement for tangible capital investments to run its business. The bulk of the company’s investments are for working capital, mainly inventories (S\$25.06 million) and receivables (S\$28.75 million), which in turn was partially funded by its payables (S\$20.82 million).

So, CEI’s high ROIC was due to the low requirement for tangible assets to run its 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.