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Health Management International Ltd’s Stock Is Trading At A 52-Week Low: Is It A Good Business?

Health Management International Ltd (SGX: 588) is a healthcare services provider with a presence in Singapore, Malaysia, and Indonesia. It owns and operates the Mahkota Medical Centre in Malacca, and the Regency Specialist Hospital in Iskandar, Malaysia 500. It also owns and operates the HMI Institute of Health Sciences in Singapore.

At the current price of S$0.595, the company’s stock is trading at a 52-week low of S$0.595. 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 Health Management International 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.

Health Management Institute’s ROIC

The table below shows how Health Management Institute’s ROIC looks like. I had used numbers from its fiscal year ended 30 June 2017 (FY2017). 

Source: Health Management International earnings update

In FY2017, Health Management International generated a ROIC of 34.8%. This means that for every dollar of capital invested in the business, Health Management International earned 34.8 sen in profit. The company’s ROIC of 34.8% is high and above average, based on the ROICs of many other companies I have studied in the past. This suggests that Health Management International has a high quality business.

One thing that investors should note here is that the company had RM 74.1 million in short-term debt (as of the end of FY2017), which was excluded from the calculation of tangible capital employed. It could also be relevant to include the company’s short-term debt to calculate an adjusted-ROIC since the debt was used to finance the business. After adjusting for the short-term debt, Health Management International’s adjusted-ROIC falls to a still-very-healthy 25.0%.

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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.