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Valuetronics Holdings Limited Is Up More Than 200% In The Last 5 Years: Is It A Good Business?

Valuetronics Holdings Limited (SGX: BN2) is an integrated electronic manufacturing service provider headquartered in Hong Kong. It offers a combination of design, engineering, manufacturing, and supply chain support services for electronic and electro-mechanical products.

At the current price of S$0.68 (at the time of writing), the company’s stock is trading at 209% higher than its price of S$0.22 five years ago.This 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?

This question is important. If Valuetronics 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.

Valuetronics’s ROIC

The table below shows how Valuetronics’s ROIC looks like. I had used numbers from its fiscal year ended 31 March 2018 (FY2018).

Source: Valuetronics’ Annual Report

In FY2018, Valuetronics generated a ROIC of 58%. This means that for every dollar of capital invested in the business, Valuetronics earned 58 cents in profit. The company’s ROIC of 58% is above the average, based on the ROICs of many other companies I have studied in the past. This suggests that Valuetronics has a high-quality business.

There are two reasons that contributed towards the high ROIC of Valuetronics. Firstly, the company has high sales turnover for every dollar of tangible capital invested in the business. This allows it to have high ROIC, even though the profit before interest and tax margin is low at 8.1%. Secondly, it funds a significant amount of its working capital (around HK$ 1 billion) with trade and other payables (about HK$ 900 million). This reduces the capital that Valuetronics needs to invest in its 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.