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Samurai 2K Aerosol Ltd’s Stock Is Trading Close To Its 52 Weeks-Low Price. Is It A Good Business?

Samurai 2K Aerosol Ltd (SGX: 1C3) is an aerosol coating specialist with a focus on high performance coating solutions for the automotive refinishing and refurbishing industry, focusing on selling its own brands such as Samurai, Kurobushi, Khameleon and a few others. Its products are distributed mainly in including Malaysia, Indonesia, Thailand , Philippines and United States.

At the current price of RM1.05 (at time of writing), Samurai 2k Aerosol’s stock price is 5 cents higher than its 52-week low of RM1.00. 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 Samurai 2K 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 we 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.

Samurai 2K’s ROIC

The table below shows how Samurai 2K’s ROIC looks like. I had used numbers from its fiscal year ended 31 March 2018 (FY2018).

Source: Samurai 2K’s Annual Report

In FY2018, Samurai 2K generated a ROIC of 51.3%. This means that for every ringgit of capital invested in the business, Samurai 2K earned 51.3 Sen in profit. The company’s ROIC of 51.3% is above the average, based on the ROICs of many other companies I have studied in the past. This suggests that Samurai 2K is a high-quality business.

A number of factors contributed towards the high ROIC. This includes a relatively low capital asset investment, low working capital (which is partially funded by its trade payables) and relatively high operating profit margin. All those factors contributed to the high ROIC of 51.3%.

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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.