Sembcorp Industries Limited (SGX: U96), is a conglomerate with four major business segments: Utilities; Marine; Urban Development; and Others. The Marine segment’s contribution mainly comes from Sembcorp Industries’ 61% ownership stake in Sembcorp Marine Ltd (SGX: S51).
At the current price of S$2.93, the company’s stock is just 1.4% higher than its 52-week low of S$2.89. 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 Sembcorp Industries 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.
Sembcorp Industries’s ROIC
Here’s a table showing how Sembcorp Industries’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2017):
Source: Sembcorp Industries earnings update
In 2017, Sembcorp Industries generated a ROIC of 5.5%. This means that for every dollar of capital invested in the business, Sembcorp Industries earned just 5.5 cents in profit. The company’s ROIC of 5.5% is way below average, based on the ROICs of many other companies I have studied in the past. This suggests that Sembcorp Industries has a low quality business.
But one thing that investors should note here is that Sembcorp Industries’s ROIC was significantly impacted by the weak performance of its Marine segment, which faced significant challenges over the past two years due to the fall in oil prices. As such, Sembcorp Industries may see its ROIC improve going forward if the oil and gas industry recovers.
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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.