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TalkMed Group Limited Is Trading Close To Its 52-Week Low Price: Is It A Good Business?

TalkMed Group Limited (SGX: 5G3) is a healthcare company providing medical oncology and palliative care health care services in Singapore.

At the current price of S$0.61, the company’s stock is trading at just 3 cents above its 52-week low price of S$0.58. This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does Talkmed have a high quality business?

This question is important. If Talkmed 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 of ROIC

In a previous article, I had explained how to use the return on invested capital (or ROIC) to evaluate the quality of a business. For convenience, the formula needed to calculate ROIC is given below:

Generally speaking, a high ROIC will mean a high-quality business while a low ROIC will point to a business of low quality. This is important for investors as a stock’s performance is often tied to the performance of its underlying business over the long-term.

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.

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

 

Source: Talkmed Group Financial Results

In its fiscal year ended 31 December 2017 (FY2017), Talkmed generated a ROIC of -2194%, an unusual number is given that Talkmed was profitable for the year.

To put the above into perspective, Talkmed Group funded its low capital requirement (less than S$10 million) with its payables (such as income tax payables and trade payables of more than S$11.5 million).

In sum, we could argue that Talkmed has a good quality business due to its extremely low capital requirement, which in turn, was fully funded by its payables.

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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.