LY Corporation Ltd Is A New Stock In Singapore’s Market: Does The Company Have A Quality Business?

LY Corporation Ltd (SGX: 1H8), which was listed in Singapore’s stock market less than three months ago in late January 2018, is a Malaysia-based manufacturer and exporter of wooden bedroom furniture.

As a new company in the market, I want to understand this about LY Corporation: Does it have a high quality business?

This question is important. If LY Corporation has a high quality business, then it 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.

LY Corporation’s ROIC

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

Source: LY Corporation earnings update

In 2017, LY Corporation generated a ROIC of 41%. This means that for every dollar of capital invested in the business, LY Corporation earned 41 cents in profit. The company’s ROIC of 41% is way above average, based on the ROICs of many other companies I have studied in the past. This suggests that LY Corporation has a high quality business.

But how did LY Corporation achieve an above-average ROIC? The answer lies in its high ratio of revenue to tangible capital employed (which indicates a high efficiency in capital employed), strong operating margin (18.4%), and the use of RM 30.56 million in trade payables to fund its RM 70.85 million in working capital at the end of 2017.

Meanwhile, there are 28 surprising and important things we think every Singaporean investor should know—and we’ve laid them all out in The Motley Fool Singapore’s new e-book. Packed with information and insights, we believe this book will help you be a better, smarter investor. You can download the full e-book FREE of charge—simply click here now to claim your copy.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.