At the current price of S$0.415, United Global Ltd‘s (SGX: 43P) share price is down 13.5% from a 52-week high of S$0.48. This captured my attention and got me interested in finding out more about the company. In particular, I want to understand: Does United Global have a high quality business?
This question is important. If United Global has a high quality business, its current low share price could make the company an investment opportunity. Unfortunately, there’s no easy answer to the question. But, a simple metric can help shed some light: The return on invested capital (ROIC).
As a quick introduction, United Global is a lubricant manufacturer that serves mainly the automotive, industrial, and marine industries. It has a distribution network covering over 30 countries.
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.
United Global’s ROIC
The table below shows how United Global’s ROIC looks like. I had used numbers from its fiscal year ended 31 December 2017.
Source: United Global’s annual report
In 2017, United Global generated a ROIC of 47.3%. This means that for every dollar of capital invested in the business, United Global earned 47.3 cents in profit. The company’s ROIC of 47.3% is also above-average, based on the ROICs of many other companies I have studied in the past. This suggests that United Global has a high quality business.
There are a number of factors that contribute to the company’s high ROIC. Firstly, United Global generates a high level of sales over capital employed despite an average operating margin of 10.9%. Next, it has low capital investments, while most of its investments are in working capital needs such as inventories and receivables. Lastly, United Global had US$8.9 million in short-term borrowings at the end of 2017 which is excluded from the ROIC calculation above; if the short-term debt was included, the company’s adjusted ROIC would drop to a still-excellent 34.1%.
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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.