SIA Engineering Company Ltd (SGX: S59), or SIAEC for short, specialises in aircraft maintenance, repair, and overhaul (MRO) services for over 80 international airlines around the world.
At the current price of S$2.95, the company’s stock is trading at four cents above its 52-week low of S$2.91. This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does it have a high-quality business?
This question is important. If SIA Engineering 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 ROIC
In a previous article of mine, I explained how ROIC can be used to evaluate the quality of a business.
The simple idea behind 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.
SIA Engineering’s ROIC
The table below shows how SIA Engineering’s ROIC looks like. I had used numbers from its fiscal year ended 31 March 2018 (FY2018).
Source: SIA Engineering’s Annual Report
In FY2018, SIA Engineering generated a ROIC of 16.6%. This means that for every dollar of capital invested in the business, SIA Engineering earned 16.6 cents in profit. The company’s ROIC of 16.6% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that SIA Engineering has a high quality business.
One thing here that investors should note is that SIA Engineering has significant investment in associates and joint ventures. These investments, totalled about S$544 million on its balance sheet, contributing about S$110 million in profit (net of tax) for FY2018. As such, it might be useful to take these investments into consideration when evaluating the company.
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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.