MM2 Asia Ltd (SGX: 1B0) is a content and media company. It is involved with the production and distribution of film, TV, and online content; post-production services; cinema operations; events production; and concert promotions. The company counts Singapore, Malaysia, Hong Kong, Taiwan, China, and the U.S. as its geographical markets.
At the current price of S$0.455, the company’s stock is just 9.6% higher than a 52-week low of S$0.415. 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 MM2 Asia 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.
MM2 Asia’s ROIC
The table below shows how MM2 Asia’s ROIC looks like. I had used numbers from its fiscal year ended 31 March 2018 (FY2018).
Source: MM2 Asia earnings update
In FY2018, MM2 Asia generated a ROIC of -39.1%, which is an unusual number, given that the company was profitable for the year. To put MM2 Asia’s negative ROIC into perspective, the company was actually funding its business with capital from its suppliers. Its trade and other payables of RM 281.69 million at the end of FY2018 more than covered the total tangible capital requirement of the company.
Another thing that investors should note here is that most of MM2 Asia’s assets are in intangible formats, such as goodwill, brands, and film rights. These intangible assets (at S$300.7 million) are indispensable in running a media business such as MM2 Asia. As such, it would be more relevant to calculate an “adjusted” ROIC that takes into account the intangible assets. After this adjustment, MM2 Asia’s ROIC becomes a respectable 22.7%.
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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.