Micro-Mechanics (Holdings) Ltd (SGX: 5DD) designs, manufactures, and markets high precision parts and tools that are used in the semiconductor industry.
At the current price of S$1.78 (at the time of writing), the company’s stock is trading at 28% lower than its 52-week intraday high of S$2.48. 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 Micro-Mechanics 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 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 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.
The table below shows how Micro-Mechanics’ ROIC looks like. I had used numbers from its fiscal year ended 30 June 2018 (FY2018).
Source: Micro-Mechanics’ Financial Statements
In FY2018, Micro-Mechanics generated a ROIC of 51%. This means that for every dollar of capital invested in the business, Micro-Mechanics earned 51 cents in profit. The company’s ROIC of 51% is on the top quartile, based on the ROICs of many other companies I have studied in the past. This suggests that Micro-Mechanics 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. Motley Fool has a recommendation for Micro-Mechanics (Holdings) Ltd.