Straco Corporation Ltd (SGX: S85) is a tourism asset operator with operation in China and Singapore. In China, the company owns the Shanghai Ocean Aquarium, Underwater World Xiamen, and Lintong Lixing Cable Car attractions. As for Singapore, Straco bought a majority stake in the iconic Singapore Flyer – one of the largest observation wheels in the world – in late 2014.
At the current price of S$0.72 (at time of writing), the company’s stock is trading at 20% lower from its 52-week high of S$0.90. This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does Straco have a high-quality business?
This question is important. If Straco 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.
The table below shows how Straco’s ROIC looks like. I had used numbers from its fiscal year ended 31 December 2017 (FY2017).
Source: Straco’s Annual Report
In FY2017, Straco generated a ROIC of 48.6%. This means that for every dollar of capital invested in the business, Straco earned 48.6 cents in profit. The company’s ROIC of 48.6% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Straco has a high-quality business.
With the low price and high ROIC, there could be an investment opportunity with Straco. Potential investors would want to research more on the company for their portfolio.
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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. Motley Fool has a recommendation for Straco Corporation Ltd.