Singapore O&G Ltd’s Stock Is Trading Near A 52-Week Low: Does The Company Have A Quality Business?

Singapore O&G Ltd (SGX: 1D8) is a healthcare company that was listed on June 2015. It has four main operating business segments at the moment, namely, Obstetrics and Gynaecology, Cancer-related, Dermatology, and Paediatrics.

At the current price of S$0.365, Singapore O&G’s stock is 7.4% higher than a 52-week low of S$0.34. 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 Singapore O&G 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.

Singapore O&G’s ROIC

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

Source: Singapore O&G earnings update

In 2017, Singapore O&G generated a ROIC of a staggering 3,898%. This means that for every S$ 1 of capital invested in the business, Singapore O&G earned nearly S$39 in profit. The company’s ROIC of 3,898% is way above average, based on the ROICs of many other companies I have studied in the past. This suggests that Singapore O&G has a very high quality business.

But how did Singapore O&G manage to achieve such a high ROIC?

It turns out that the company has a very low level of tangible capital employed (just S$0.3 million as of 31 December 2017) due to the nature of its business, which is services-oriented. Moreover, Singapore O&G has significant goodwill (S$26.93 million) within its balance sheet which was not included in my calculation for the tangible capital employed above.

In cases like these, I will usually include the goodwill to calculate an adjusted ROIC to better reflect the capital light and acquisitive-nature of the business. Interestingly, even with goodwill included, Singapore O&G’s adjusted ROIC came up to 36.3%, which is still excellent.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.