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Venture Corporation Ltd’s Share Price Is Down 41% From Its Peak: Is There An Investment Opportunity?

Venture Corporation Ltd (SGX: V03) is an electronics manufacturing services provider with expertise in a wide range of activities.

At the current price of S$17.45, the company’s stock is trading at 41% below its 52-week intraday high of S$29.65. 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?

This question is important. If Venture Corporation 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 ROIC in the formula above.

Venture Corporation’s ROIC

The table below shows how Venture Corporation’s ROIC looks like. I had used numbers from its fiscal year ended 31 December 2017 (FY2017).

Source: Venture Corporation’s Annual Report

In FY2017, Venture Corporation generated an ROIC of 54.8%. This means that for every dollar of capital invested in the business, Venture Corporation earned 54.8 cents in profit. The company’s ROIC of 54.8% is above the average, based on the ROICs of many other companies I had studied in the past. This suggests that Venture Corporation has a high-quality business.

One thing investors should note is that Venture Corporation has significant assets in goodwill, totalling about S$640 million, as at 31 December 2017. Given the size of the goodwill, it will be more relevant to include goodwill into our evaluation. After adjusting for the goodwill, the adjusted ROIC would be 30%.

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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.