Singapore Technologies Engineering Ltd Grew Its Earnings By A Strong 18% In 2018’s First Quarter: Is It Actually A Good Business?

In mid-May, the engineering conglomerate Singapore Technologies Engineering Ltd (SGX: S63), released its 2018 first quarter earnings update.

During the reporting quarter, the company reported strong top line and bottom line growth. Revenue was up 9.0% year-on-year to S$1.65 billion, while profit attributable to shareholders jumped by 17.8% to S$117.7 million.  These growth numbers captured my attention and got me interested in finding out more about the company. In particular, I want to understand: Does ST Engineering have a high quality business?

This question is important. If ST Engineering has a high quality business, it might be a good idea to carry on a detailed study on the company. 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.

ST Engineering’s ROIC

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

Source: ST Engineering earnings update

In 2017, ST Engineering generated a ROIC of 27.2%. This means that for every dollar of capital invested in the business, ST Engineering earned over 27 cents in profit. This is a high ROIC, based on the ROICs of many other companies I have studied in the past, and suggests that ST Engineering has a high quality business.

But there is also one important point to note. ST Engineering’s business model depends on significant investments in intangible assets (S$1.087 billion as of 31 December 2017) in order to sustain or grow its business in the future. Thus, it may be useful to include these investments into the ROIC calculation to improve the relevance of the metric. After adjusting for the intangible assets, ST Engineering’s ROIC becomes 17.7%. This is lower than the previously calculated figure, 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.