Top Glove Corporation Berhad (SGX: BVA) is the largest rubber gloves maker in the world with about 25% market share. The company is based in Malaysia. Up to its recent debut in Singapore, it has always been listed on the Malaysia stock exchange.
At the current price of RM 5.78 (at time of writing), the company’s stock is trading at 300% higher than its price of RM 1.44 five years ago (note that I’m using the stock price as per the company’s listing in Malaysia since it did not list its shares in Singapore until 2016). This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does Top Glove have a high-quality business?
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This question is important. If Top Glove has a high-quality business, it might be a good long-term 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.
Top Glove’s ROIC
The table below shows how Top Glove’s ROIC looks like. I had used numbers from its fiscal year ended 31 August 2018 (FY2018).
Source: Top Glove’s Annual Report
In FY2018, Top Glove generated a ROIC of 23%. This means that for every dollar of capital invested in the business, Top Glove earned 23 sen in profit. The company’s ROIC of 23% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Top Glove has a high-quality business.
Yet, investors should note that the company has about RM 883 million in short-term borrowings, which was not included in the above calculation of capital employed. Given that such borrowings are used to fund the capital requirements of the business, it would be relevant to include the figure into our calculation. If adjusted for the short-term borrowings, the adjusted ROIC would be 17%.
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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 Top Glove.