Singapore Exchange Limited’s Stock Is Down 16% From Its 52-Week High: Is It A Good Business?

Singapore Exchange Limited (SGX: S68), or SGX for short, is the only stock exchange in Singapore.

At the share price of S$7.18 (at the time of writing), the company’s stock is trading 16% lower than its 52-week intra-day high of S$8.50. 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 Singapore Exchange 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 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.

Singapore Exchange’s ROIC

The table below shows how Singapore Exchange’s ROIC looks like. I had used numbers from its fiscal year ended 30 June 2018 (FY2018).

Source: Singapore Exchange’s Annual Report

Here, the ROIC calculation is shows a rather unusual number – negative. To put the above calculation into perspective, we need to understand two things.

First of all, Singapore Exchange is funding the business using significant amount of trade and other payables. In this case, trade payables of around $ 891 million has exceeded the total tangible capital requirement of the business.

Secondly, Singapore Exchange is an asset-light business, with significant capital invested into intangibles like software and goodwill. As such, it might be useful that investors perform a different ROIC calculation that includes these assets. Adjusted for intangible assets, the new ROIC would be about 143%.

In sum, both the negative ROIC and adjusted ROIC of 143% suggest that Singapore Exchange has a good 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 Singapore has a recommendation for Singapore Exchange Limited.