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Hour Glass Ltd Is Trading Close To Its 52-Week Low Price: Is It A Good Business?

Hour Glass Ltd (SGX: AGS) is in the business of retailing luxury watches. It has a network of over 40 stores in Singapore, Malaysia, Thailand, Japan, Hong Kong, and Australia.

At the current price of S$0.64 (at the time of writing), the company’s stock is trading at just two cents higher from its 52-week low price of S$0.62. 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 Hour Glass 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 ROIC

In a previous article of mine, I explained how 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.

Hour Glass’ ROIC

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

Source: Hour Glass Annual Report

In FY2018, Hour Glass generated a ROIC of 20.5%. This means that for every dollar of capital invested in the business, Hour Glass earned 20.5 cents in profit. The company’s ROIC of 20.5% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Hour Glass 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.