At the current level of S$1.10, China Sunsine Chemical Holdings Ltd‘s (SGX: CH8) share price has increased by an impressive 464% over the past five years. As a quick introduction, China Sunsine is a specialty chemicals producer that sells rubber accelerators, insoluble sulphur, and antioxidants that are used to produce rubber tyres.
The company’s strong share price gains captured my attention and got me interested in finding out more. In particular, I want to understand: Does China Sunsine have a high quality business?
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.
China Sunsine’s ROIC
Here’s a table showing how China Sunsine’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 20187):
Source: China Sunsine 2017 annual report
In 2017, China Sunsine generated a ROIC of 39.7%, which means that for every dollar of capital invested in its business, China Sunsine earned a profit of nearly 40 cents. The chemicals producer’s ROIC is also significantly above average, based on the ROICs of many other companies I have studied in the past. So, what we’ve seen suggests that China Sunsine has a high quality business.
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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.