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SATS Ltd Is Up Nearly 60% In The Last 5 Years: Is It A Good Business?

SATS Ltd (SGX: S58) is a company that provides food solutions and gateway services. In its food solutions business, SATS is involved with airline catering, food distribution, and industrial catering. As for gateway services, this is where SATS provides ground handling services for passengers, flights, and cargo.

Over the past five years, SATS’s stock price has increased by 56.7% to S$5.17 currently. This is impressive, considering that the Straits Times Index (SGX: ^STI) is up by just 8% in the same time frame. SATS’s stock market performance captured my attention and got me interested in finding out more. In particular, I want to understand: Does it have a high quality business?

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.

SATS’s ROIC

Here’s a table showing how SATS’s ROIC looks like (I had used numbers from its fiscal year ended 31 March 2018):


Source: SATS earnings update

In the year ended 31 March 2018 (FY2018), SATS generated a ROIC of 40.0%. This means that for every dollar of capital invested in the business, SATS earned 40 cents in profit. This is an impressive number, based on the ROICs of many other companies I have studied in the past, and suggests that SATS has a high quality business.

But how did SATS manage to achieve its high ROIC? That’s partly because the company funded most of its working capital (consisting of receivables and inventories) with its payables. In fact, its payables of S$389.0 million at the end of FY2018 far exceeded its working capital requirements of S$321.0 million. The difference between SATS’s payables and working capital meant that the company was able to fund its capital requirements without funding costs, and helped in generating the high ROIC.

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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. The Motley Fool Singapore has a recommendation for SATS.