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Q & M Dental Group (Singapore) Limited’s Stock Is Trading Near A 52-Week Low: Does The Company Have A Quality Business?

Q & M Dental Group (Singapore) Limited (SGX: QC7) is a private dental care services provider with operations in Singapore, Malaysia, and China.

At the current price of S$0.605, the company’s stock is just 3.4% higher than a 52-week low of S$0.585. 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 Q & M Dental 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.

  Q & M Dental’s ROIC

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


Source: Q & M Dental earnings update

In 2017, Q & M Dental generated a ROIC of 67.0%. This means that for every dollar of capital invested in the business, Q & M Dental earned 67 cents in profit. The company’s ROIC of 63% is way above average, based on the ROICs of many other companies I have studied in the past. This suggests that the company has a high quality business.

But it’s worth noting that my calculation of Q & M Dental’s ROIC had excluded the company’s intangible assets, which were worth S$53.5 million at the end of 2017. It could also be useful to include the intangible assets, since these assets represent the majority of Q & M Dental’s capital investment – the company is a serial acquirer, and the intangible assets are largely in the form of goodwill from the acquisitions).

After adjusting for its intangible assets, Q & M Dental’s adjusted ROIC would be 26.7%. It’s much lower than 67.0%, but still very 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.