Koufu Group Limited (SGX: VL6) was listed on the local stock exchange last week. It is an operator and manager of food courts and coffee shops in Singapore. Its brands include the namesake Koufu, CookHouse, and Rasapura Masters. The firm also has a presence in Macau.
Since the company just went public, it captured my attention and got me interested in finding out more about it. In particular, I wanted to understand: Does it have a high-quality business?
This question is important. If Koufu has a high-quality business, it might be worth carrying out further research on it. Although there is no easy answer to the question, 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 Koufu’s ROIC looks like. I had used numbers from its fiscal year ended 31 December 2017 (FY2017).
Source: Koufu Group’s Financial Statements
In FY2017, Koufu Group generated a ROIC of 30700%. This means that for every dollar of capital invested in the business, Koufu Group earned S$ 307 in profit. Sharp-eyed investors will quickly point out that such number is rather unusual.
Putting the above into perspective, Koufu is funding most of its capital requirements using trade payables and tax liabilities. Thus, the equity or debt capital employed in the business is very low (around S$100,000).
This is a highly-attractive business model since Koufu does not need to incur interest cost as most of its capital requirements are funded by its suppliers. Nevertheless, I will be inclined to find out more on the sustainability of such arrangements.
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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.