BreadTalk Group Limited (SGX: 5DA) has three main business segments, namely, Bakery, Restaurant, and Food Atrium.
At the current price of S$0.86 (at time of writing), the company’s stock is down 32% from its 52-week high of S$1.26. If Breadtalk has a high-quality business, its current low stock price could be an investment opportunity. One simple metric can help us value its business: return on invested capital (ROIC).
A brief introduction to ROIC
In a previous article, 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, too — a low ROIC is often associated with a low-quality business.
You can see how the math works for ROIC in the formula above.
The table below shows Breadtalk’s ROIC and related metrics, using numbers from its fiscal year ended 31 December 2017 (FY2017).
Source: Breadtalk’s Annual Report
In FY2017, Breadtalk generated a ROIC of 39.6%. This means for every dollar of capital invested in the business, Breadtalk earned 39.6 Singapore cents in profit. The company’s ROIC of 39.6% is in the top quartile, based on the ROICs of many other companies I have studied in the past. This suggests Breadtalk does have a high-quality business.
One thing to note here is that Breadtalk has about S$57 million in short-term borrowings on its balance sheet, which was excluded from the above calculation. It will be useful to include that into our calculation of ROIC since such debt is used in financing Breadtalk’s operation.
In sum, adjusting for the S$57 million in short-term debt will give us an adjusted ROIC of 26.6%.
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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.