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Fraser and Neave Limited’s Stock Is Trading Near A 52-Week Low: Does The Company Have A Quality Business?

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Fraser and Neave Limited (SGX: F99), or F&N for short, is a consumer company with expertise in the food and beverage, and publishing and printing sectors.

At the current price of S$2.09, the company’s stock is just 2.5% higher than a 52-week low of S$2.04. 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 F&N 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 of 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.

  Fraser and Neave’s ROIC

Here’s a table showing how F&N’s ROIC looks like (I had used numbers from its fiscal year ended 30 September 2017):


Source: F&N earnings update

In its fiscal year ended 30 September 2017 (FY2017), F&N generated a ROIC of nearly 660%. This means that for every dollar of capital invested in the business, F&N earned over $6.60 in profit. This is a really high ROIC, based on the ROICs of many other companies I have studied in the past, and it suggests that F&N has a high quality business.

But, it’s worth noting that the high ROIC is due to the use of short-term debt (S$785.6 million) in the company’s capital structure. This short-term debt was excluded in the calculation of the tangible capital employed number above. Including the short-term debt number can give us a more relevant ROIC number. So, if I adjust for the short-term debt, F&N’s adjusted ROIC comes to 15%, significantly lower than before, but still respectable.

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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.