Right now, Riverstone Holdings Limited‘s (SGX: AP4) share price is at S$1.19, which is more than three times higher than where it was five years ago at S$0.37. The strong appreciation in Riverstone’s share price 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?
The question is important because if Riverstone has a high quality business, then its share price may continue climbing to new heights in the years ahead. Unfortunately, there’s no easy answer. But, a simple metric can help shed some light on the question: The return on invested capital (ROIC).
Quick overview of Riverstone’s business
Riverstone is a Malaysia-based company that produces rubber gloves that are used in cleanroom as well as medical settings. The company’s focus is on nitrile rubber gloves instead of natural rubber.
In 2017, Europe was the most important geographical market for Riverstone as the continent accounted for 33.6% of the company’s total revenue of RM 817.4 million in the year. The USA and Malaysia were next in line, with revenue contributions of 19.4% and 18.8%, respectively.
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.
Here’s a table showing how Riverstone’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2017):
Source: Riverstone annual report
In 2017, Riverstone generated a ROIC of 27.3%. This means that for every dollar of capital invested in its business, Riverstone earned 27.3 cents in profit. The company’s ROIC of 27.3% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Riverstone 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. The Motley Fool Singapore has a recommendation for Riverstone Holdings Limited.