Cityneon Holdings Limited (SGX: 5HJ) is a company that specialises in “crafting quality customer and brand experiences.” It has four business segments: Events & Exhibitions; Thematic Attractions; Interior Architecture; and Intellectual Property Experiences.
At the current price of S$0.93, the company’s stock is just 4.4% higher than a 52-week low of S$0.89. 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?
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This question is important. If Cityneon 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.
The table below shows how Cityneon’s ROIC looks like. I had used numbers from its fiscal year ended 31 December 2017.
Source: Cityneon 2017 annual report
In 2017, Cityneon generated a ROIC of 34.0%. This means that for every dollar of capital invested in the business, Cityneon earned 33 cents in profit. The company’s ROIC of 34.0% is high and above average, based on the ROICs of many other companies I have studied in the past, and suggests that Cityneon has a high quality business.
But, there are two important points about Cityneon’s ROIC that investors should know. Firstly, my ROIC calculation above excludes S$66.5 million in short-term debt on Cityneon’s balance sheet as of end-2017. Secondly, Cityneon’s balance sheet also contained S$31.3 million in intangible assets (licenses to use brands such as Transformers, Marvel’s Avengers, and Jurassic World) as of the same date. I think it is necessary to include both numbers to give a more relevant ROIC calculation, since both look to me to be necessary capital components of Cityneon’s business model. After adjusting for both numbers, Cityneon’s ROIC becomes a much more pedestrian 13.7%.
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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.